Professional Documents
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LESSON 1:
INTRODUCTION TO LAW AND THE
MEANING AND ESSENTIALS OF
CONTRACT
branches of mercantile law. The enactments relating to sale of set of promises, forming the consideration for each other,
goods, negotiable instruments, insurance, partnership and is an agreement.” Thus it is clear from this definition that a
insolvency are all founded upon the general principles of ‘promise’ is an agreement. What is a ‘promise’? the answer
contract law. That is why the study of the law of contract to this question is contained in section 2 (b) which defines
precedes the study of all other sub-division of mercantile law. the term.” When the person to whom the proposal is
The Indian contract act was enacted from the 1st day of Septem- made signifies his assent thereto the proposal is said to be
ber; 1872.it is applicable to the whole of India except the state accepted. A proposal, when accepted, becomes a promise.”
of Jammu and Kashmir. There may be some occasions where An agreement, therefore, comes into existence only when
Indian law disagrees with the English laws. In such cases, the one party makes a proposal or offer to the other party and
Indian law will prevail. that other party signifies his assent (i.e., gives his
acceptance) thereto. In short, an agreement is the sum total
Now we will move on to the definition and concept of the
of ‘offer’ and ‘acceptance’.
contract.
On analyzing the above definition the following
The Indian Contract Act, 1972 characteristics of an agreement become evident:
The law of contract in India is contained in the Indian Contract
(a) At least two persons. There must be two or more
Act 1872. This Act is based mainly on English common law,
persons to make an agreement because one person
which is to a large extent made up of judicial precedents. (there
cannot inter into an agreement with himself.
being a separate contract act in England). It extends to the
whole of India except the state of Jammu and Kashmir and (b) Consensus-ad-idem. Both the parties to an agreement
came into force on the first day of September 1872(Sec.1 Indian must agree about the subject matter of the agreement
Contract Act 1872). The act is not exhaustive. It does not deal in the same sense and at the same time.
with all the branches of the law of contract. There are separate 2. Legal obligation. As stated above, an agreement to become
acts, which deal with contracts relating to negotiable instru- a contract must give rise to a legal obligation i.e., a duty
ments, transfer of property, sale of goods, partnership, enforceable by law. If an agreement is incapable of creating
insurance, etc. Again the act does not affect any usage or custom a duty enforceable by law. It is not a contract. Thus an
of trade (Sec.1). agreement is a wider term than a contract. “ All contracts are
Scheme of the Act. agreements but all agreements are not contracts,”
The scheme of the Act may be divided into two main groups. Agreements of moral, religious or social nature e.g., a
promise to lunch together at a friend’s house or to take a
1. General principles of the law of contract (Secs. 1-75). walk together are not contracts because they are not likely to
2. Specific kinds of contracts, Viz; create a duty enforceable by law for the simple reason that
(a) Contracts of indemnity and Guarantee (Secs. 124-147). the parties never intended that they should be attended by
(b) Contracts of Bailment and pledge (Secs. 148-181). legal consequences.
(c) Contracts of Agency (Secs. 182-238). I shall give you a very simple example to explain this point.
Before 1930 the Act also contained provisions relating to An agreement to sell a car may be a contract but an agreement to
contracts of sale of goods and partnership. Sections 76-123 go for lunch may be a mere agreement not enforceable by law.
relating to sale of goods were repealed in 1930 and a relating to Thus all agreements are not contracts. In business agreements
partnership were repealed in 1932 when the Indian separate Act the presumption is usually that the parties intend to create legal
called the Sale of Goods Act was enacted. Similarly, sections relations. Thus an agreement to buy certain specific goods at an
239-266 partnership Act was passed. agreed price e.g., 200 bags of rice at Rs.100 per bag is a contract
because it gives rise to a duty enforceable by law, and in case of
But we will not study the specific kinds of contracts for the time default through a court provided other essential elements of a
being but only concentrate on contracts generally. contract was made by free consent of the parties competent to
Before we take up the discussion of the various provisions of contract, for a lawful consideration and with a lawful object .
the Indian contract Act. It will be proper to see some of the Thus it may be concluded that the Act restricts the use of the
basic assumptions underlying the Act. word contract to only those agreements, which give, rise to legal
Definition of contract obligations between the parties.
According to section 2(h) of the Indian Contract Act: “ An It will be appropriate to point out here that the law of contract
agreement enforceable by law is a contract.” A contract therefore, deals only with such legal obligations which arise form
is an agreement the object of which is to create a legal obligation agreements, obligations which are not contractual in nature are
i.e., a duty enforceable by law. outside the purview of the law of contract.
From the above definition, we find that a contract essentially Before moving further we must know the conditions which
consists of two elements: (1) An agreement and (2) Legal must be satisfied for the contract to become valid.
obligation i.e., a duty enforceable by law. We shall now examine
these elements detail.
also necessary that the parties to an agreement must agree purchase a ticket for B and waits for him outside the
for a lawful object. The object for which the agreement has cinema hall. B does not turn up has A any cause of action
been entered into must not be fraudulent or illegal or against B. [Hint: No]
immoral or opposed to public policy or must mot imply 4. A agrees with B to murder C for Rs. 10,000. Is this a valid
injury to the person or the other of the reasons mentioned contract?
above the agreement is void. Thus, when a landlord
[Hint: No]
knowingly lets a house to a prostitute to carry on
prostitution, he cannot recover the rent through a court of 5. X agrees to pay Y Rs. 1000 if Y writes 100 pages for him
law or a contract for committing a murder is a void contract in one minute. Is it a valid contract? [Hint: No]
and unenforceable by law. 6. State whether there is any valid contract in the following
7. Writing and registration. According to the Indian contract cases?
Act, a contract to be valid, must be in writing and 7. (i) X boards a DTC bus at Mayur Vihar for Shalimar
registered. For example, it requires that an agreement to pay Bagh.
a time barred debt must be in writing and an agreement to (ii) X and Y agree to go for fishing
make a gift for natural love and affection must be in
(iii) X buys an evening paper
writing and registered to make the agreement enforceable
by law which must be observed. (iv) X a minor borrows Rs. 5000 from Yand agreed to
repay back the same within a week.
8. Certainty. Section 29 of the contract Act provides that “
Agreements, the meaning of which is not certain or capable References
of being made certain, are void.” In order to give rise to a • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
valid contract the terms of the agreement must not be Sultan Chand and Sons, New Delhi.
vague or uncertain. It must be possible to ascertain the • http://www.indialawinfo.com/bareacts/soga.html
meaning of the agreement, for otherwise, it cannot be
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
enforced
House Pvt. Ltd, Delhi.
Illustation. A, agrees to sell B “ a hundred ton of oil” there is
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
nothing whatever to show what kind of oil was intended. The
Pvt. Ltd, Delhi.
agreement is void for uncertainly.
9. Possibility of performance. Yet another essential feature of
a valid contract is that it must be capable of performance. Notes:
Section 56 lays down that “An agreement to do an act
impossible in itself is void”. If the act is impossible in
itself, physically or legally, the agreement cannot be enforced
at law.
Illustration. A agrees with B, to discover treasure by magic. The
agreement is not enforceable.
10. Not expressly declared void. The agreement must not have
been expressly declared to be void under the Act. Sections
24-30 specify certain types of agreements that have been
expressly declared to be void. For example, an agreement in
restraint of marriage, an agreement in restraint of trade,
and an agreement by way of wager have been expressly
declared void under sections 26, 27 and 30 respectively.
Before dealing with the various essentials of a valid contract one
by one in detail, it will be appropriate to discuss the ‘kinds of
contracts’. First, because we shall be using the terms like
‘voidable contract’, ‘void contract’, ‘void agreement’, etc. very
often in the course of our discussion.
Here we end our discussion on essentials of a valid contract.
Now attempt the following questions for a better understand-
ing:
1. Comment that the all contracts are agreements but all
agreements are not contract.
2. What are the essential elements of a valid contract?
• Unenforceable contract (ii) When a party to the contract promises to do a certain thing
within a specified time, but fails to do it, then the contract
• Illegal or unlawful contract
becomes voidable at the option of the promisee. If the
From the point of view of enforceability a contract may be intention of the parties was that time should be of the
valid, voidable, void, unenforceable or illegal. essence of the contract. (sec.55)
1. Valid contract. According to section 2(i), it is”an agreement Illustration. X Agrees to sell and deliver 10 bags of wheat to Y
enforceable by law”, an agreement becomes enforceable by for Rs. 2,5000 within one week. But X does not supply the
law when all the essential elements of a valid contract as wheat within the specified time. The contract becomes voidable
were enumerated in the last lesson are present. at the option of Y.
If one or more of these elements is/are missing the contract is Consequences of rescission of voidable contract. Section 64 lays
either void, voidable, illegal or unenforceable. down the rights and obligations of the parties to a voidable
2. Voidable contract. According to section 2(i), “an agreement contract after it is rescinded. The section states that when a
which” is enforceable by law at the option of one or more person at whose option a contract has become has received any
of the parties thereto, but not at the option of the other benefit from another party to such contract, he must restore
or others, is a voidable contract.” Thus, a voidable contract such benefit. If an amount has been received as a security for
is one which is enforceable by law at the option of one of the due performance of the contract, such earnest money
the parties only. Until it is avoided or rescinded by the party deposit is not to be returned if the contract becomes voidable
entitled to do so by exercising his option in that behalf, it under section 55 on account of the promisor’s failure to
is a valid contract. complete the contract at the time agreed and has been rescinded
Usually a contract becomes voidable when the consent of one by the promisee because it is not a benefit received under the
of the parties to the contract is obtained by coercion, undue contract.
influence, misrepresentation or fraud. Such a contract is voidable 3. Void contract. Literally the word ‘void’ means ‘not binding
at the option of the aggrieved party i.e., the party whose in law’. Accordingly the term. ‘void contract’ implies a
consent was so caused (secs. 19 and 19A). but the aggrieved useless contract which has no legal effect at all. Such a
party must exercise his option of rejecting the contract (i) within contract is a nullity, as for there has been no contract at all.
a reasonable time, and (ii) before the rights of third parties Section 2(j) defines: A contract which ceases to be
intervene, otherwise the contract cannot be repudiated. enforceable by law becomes void, when it ceases to be
enforceable.” It follows form the definition that a void
Illustration.
contract is not void from its inception and that it is valid
(a) A : threatens to shoot B if he does not sell his new and binding on the parties when originally entered but
Bajaj scooter to A for Rs. 2,000. B agrees. The contract subsequent to its formation it becomes invalid and
has been brought about by coercion and is voidable at destitute of legal effect because of certain reasons.
the option of B.
The reasons which transform a valid contract into a void
(b) A. intending to deceive B. falsely represents that five contract, as given in the contract Act. Are as follows.
hundred quintals of indigo are made annually at A’s
(a) Supervening impossibility (sec. 56) A contract becomes
factory, and thereby induces B to buy the factory. The
void by impossibility of performance after the formation
contract has been caused by fraud and is voidable at the
of the of contract for example, A and B contract to marry
option of B.
mad. The contract to marry becomes void. dead at the time of the bargain, through neither party was
(b) Subsequent illegality (sec, 56) A contract also becomes void aware of the fact. In this case the agreement is discovered
by subsequent illegality. For example, A agrees to sell B 100 to be void and B must repay to A Rs. 1,000. it should,
hags of wheat at Rs. 650 per bag. Before delivery the however, be noted that agreements which are known to be
government bans private trading in wheat. The contract void or illegal, when they are entered into, are excluded
becomes void. from the purview of this section. Thus, if L pays Rs.
10,000 to M to murder Z, the money cannot be recovered.
(c) Repudiation of a voidable contract. A voidable contract
Similarly, nothing can be recovered in the case of expressly
becomes void, when the party, whose consent is not free,
declared void agreements, of course, subject to the
repudiates the contract. For example, M by threatening to
following exceptions.
murder B’s son, makes B agree to sell his car worth Rs.
30,000 for a sum of Rs. 10,000 only. The contract, being (i) In the case of an agreement caused by bilateral mistake of
the result or coercion, is voidable at the option of B. B may essential fact (although it is expressly declared void under
either affirm or reject the contract. In case B decides to section 20) restitution is allowed as it comes under the
rescind the contract, it becomes void. category of ‘an agreement discovered to be void.’
(d) In the case of a contract contingent on the happening of (ii) In the case of an agreement with a minor who commits
an uncertain future event, if that event becomes fraud by misrepresenting his age (although agreement with
impossible. A contingent contract to do or not to do a minor is known to be void.) restoration is allowed in
something on the happening of an uncertain future event, specie on equitable grounds because a minor cannot be
becomes void, when the event becomes impossible allowed to cheat people, and also because the other party
(sec.32).” for example, A contracts to give Rs. 1,000 as loan has not lost his title to the thing in question.
to B marries C. C dies without being married to B. the (b) When a contract becomes void, restitution is also allowed
contract becomes void. in the case of a void contract. For example, A agrees to sell
Void agreement- “An agreement not enforceable by law is said B after one month 10 quintals of wheat at Rs. 625 per
to be void” [sec.2 (g)]. Thus, a void agreement does not give quintal and receives Rs. 500 as advance. Soon after the
rise to any legal consequences and is void agreement does not contract, private sales of wheat becomes void but A must
give rise to any legal consequences and is void ab-initio. In the return the sum of Rs. 500 to B. Similarly, where after
eye of law such an agreement is no agreement at all from its very accepting Rs. 1,000 as advance for singing at a convert for B,
inception. There is absence of one or more essential elements A is too ill to sing. A is not bound to make compensation
of a valid contract, except that of ‘free consent,’ in the case of a to B for the loss of the profits which B would have made
void agreement. Thus, an agreement with a minor is void ab- if A would have been able to sing, but A must refund to B
initio as against him, because a minor lacks the capacity to the 1,000 rupees paid in advance.
contract. Similarly, an agreement without consideration is void 4. Unenforceable contract. An unenforceable contract is one
ab-initio, of course with certain exceptions as laid down in which is valid in itself, but is not capable of being enforced
section 25. Certain agreements have been expressly declared void in a court of law because of some technical defect such as
in the contract act e.g., agreements which are in restraint of trade absence of writing, registration, requisite stamp, etc., or
or of marriage or of legal proceedings or which are by way or time barred by the law of limitation. For example, an oral
wager. arbitration agreement is unenforceable because the law
A ‘void’ agreement should be distinguished from a ‘void requires an arbitration agreement to be in writing. Similarly,
contract’. A ‘void agreement ‘ never amounts to a contract as it a bill of exchange or promissory note, though valid in
is void ab-initio. A ‘void contract’ is valid when it is entered itself, becomes unenforceable after three years from the date
into, but subsequent to its formation something happens the bill or note falls due, being time barred under the
which makes it unenforceable by law, notice that a contract limitation act.
cannot be void ab-initio and only an agreement can be void ab- 5. Illegal or unlawful contract. The word ‘illegal’ means
initio. ‘contrary to law’ and the term ‘contract’ means ‘an
Obligation of person who has received advantage under void agreement enforceable by law’. As such to speak of an
agreement or contract that becomes void. In this connection ‘illegal contract’ involves a contradiction in terms, because it
section 65 lays down that when an agreement is discovered to means something like this an agreement enforceable by law
be void or when a contract becomes void, any person who has and contrary to law. There is apparent contradiction in
received any advantage under such agreement or contract is terms. Moreover, being of unlawful nature, such an
bound to restore it. Thus, this section provides for restitution agreement can never attain the status of a contract. Thus, it
of the benefit received. Thus both parties may stand un- will be proper if we use the term ‘illegal agreement’ in place
effected by the transaction in the following two cases. of ‘illegal contract’ an illegal agreement is void ab-initio.
Some important comparisons
(a) When an agreement is discovered to be void. In other
words, when an agreement is void being discovered at a
later stage. For example, A pays B Rs. 1,000 for B’s agreeing
Similarities
A void agreement cannot create any legal rights. It is a A void contract cannot create any legal rights. It is a
total nullity. total nullity.
Differences
It is an agreement. It never takes form of a contract. It is a contract.
It is a nullity since very beginning. When it is formed it is perfectly valid.
Subsequently it becomes a nullity.
Kinds of contracts from the point of view of mode example, and A says to B, If you dig my garden next Sunday, I
of creation will pay you Rs. 500.’ B makes no commitment, but says, I am
From the point of view of mode of creation a contract may be not sure that I shall be able to, but if I do, I shall be happy to
express or implied or constructive. take Rs. 500. This arrangement is not bilateral. A has committed
1. Express contract. Where both the offer and acceptance himself to pay Rs. 500 in certain circumstances, but B has made
constituting an agreement enforceable at law are made in no commitment at all. He is totally free to decide whether he
words spoken or written, it is an express contract. For wants to dig A’s garden or not. If B does not turn up on
example. A tells B on telephone that he offers to sell his car Sunday to dig the garden, A cannot do anything about is. If,
for Rs. 20,000 and B in reply informs A that he accepts the however, B reaches to A’s place on Sunday to do the work, it will
offer, there is an express contract. amount to his acceptance a contract will be formed where both
parties will be bound by their performance.
2. Implied contract. Where both the offer and acceptance
constituting an agreement enforceable at law are made Before I end the discussion on kinds of contracts I would like
otherwise than in words i.e., by acts and conduct of the to discuss another kind of contract called the Standard Form
parties, it is an implied contract. Thus, where A, a coolie in Contract
uniform takes up the luggage of B to be carried out of the When a large number of contracts have got to be entered into
railway station without being asked by B, and B, allows by a person, from a practical point of view and for the sake of
him to do so, then the law implies that B agrees to pay for convenience, a standard form for the numerous contracts may
the services of A, and there comes into existence an be used. An insurance policy, shares or a railway ticket are few
implied contract and N is under obligation to pay to M. examples of such standardized contracts. The “special terms
It is relevant to state in respect of mode of creation, certain and conditions” become binding as part of the contract only if
contracts may be a mixture of the ‘express’ and ‘implied’ types they are brought to the notice of the acceptor before or at the
of contracts, that is, where out of the two components of an time of the contract. In view of the unequal bargaining power
agreement, namely, offer and acceptance, one is expressed in of the two parties, the courts and the legislature have evolved
words and the other is implied from acts and circumstances. certain rules to protect the interest of the weaker party:-
Such contracts may be called as contracts of mixed character. For (1) Reasonable notice – e.g. by printing on a ticket, “For
example, A offers to buy B’s scooter for Rs. 4,000 and B accepts conditions see back”, or obtaining signatures on the
the offer by sending the scooter itself. Here A’s offer is expressed document containing terms, or otherwise explaining the
in words and B’s acceptance is implied form his conduct. It is a the terms,. Where an adequate notice is not given the
contract of mixed character. offeree is not bound by the terms.
1. Constructive or quasi contract. The term ‘constructive or (2) Notice should be contemporaneous with the contract – if a
quasi contract is a misnomer, the cases grouped under this party to the contract wants to have exemption from liability
type of contracts have little or affinity with contract. Such a he must give a notice about the exemption while the
contract does not arise by virtue of any agreement, express contract is being entered into and not thereafter ( Olley Vs.
or implied between the parties but the law infers or Marlborough Court. Ltd.)
recognizes a contract under certain special circumstances. (3) Terms of contract should be reasonable – if the terms of
For example, obligation to finder of lost goods to return the contract are unreasonable and opposed to public policy,
them to the true owner or liability or person to whom they will not be enforced.
money is paid under mistake to repay it back cannot be said (4) Fundamental breach of contract – no exemption clause is
to arise out of a consent, but these are very mush allowed to permit the non-compliance of the basic
conversed under quasi contracts as per sections 71 and 72 contractual obligation i.e. obligation which is fundamental
respectively. The contract act has rightly named such or core of the contract. Thus, the dry cleaner has to be
contracts as “ certain relations resembling those created by answerable , even if the contract contains all sorts of
contract”. exemption clauses, if the cloth is altogether lost.
A quasi contract is based upon the equitable principle that a (5) Strict construction – a strict construction shall be applied to
person shall not be allowed to retain unjust benefit at the exemption clause, and any ambiguity is to be resolved in
expense of another. Sections 68-72 of the contract act describe favour of the weaker party.
the cases which are to be deemed ‘quasi contracts’”.
(6) Statutory protection – The English Unfair Contract Terms
Now we come to- Act, 1977 severely limits the right of the contracting parties
LESSON 3:
ACCEPTANCE
Learning Outcomes The person making the ‘proposal’ or ‘offer’ is called the
After todays class you should be able to answer the following ‘promisor’ or ‘ offeror’, the person to whom the offer is made
questions: is called the ‘offeree’, and the person accepting the offer is called
• The meaning of offer and acceptance the ‘promisee’ or ‘acceptor’.
• The communication of offer and acceptance Legal Rules Regarding a Valid Offer
• The revocation of offer and acceptance A valid offer must be in conformity with the following rules:
1. An offer may be’ express’ or ‘implied’. An offer may be
Introduction
made either by words or by conduct. An offer which is
By now you must be aware of the essentials of a contract. In
expressed by words, spoken or written is called an ‘express
today’s lecture we shall do a detailed study of the concept of
offer’ and the one which is inferred form the conduct of a
offer
person or the circumstances of the case is called an ‘implied
The four basic elements of a contract are offer, acceptance, offer.’ Thus stepping into a taxi and consuming eatables at
consideration and contractual capacity out of which we shall a restaurant both create implied promise to pay for benefits
study the first one in this lesson. employed. In Upton Rural District Council v Powell, a fire
While discussing the essential elements of a valid contract in the broke out in the defendant’s farm . believing that he was
preceding chapter we observed that as a first step in the making entitled to the free service of Upton Fire Brigade (which he
of a contract there must be a ‘lawful offer’ by one party and a was not) he summoned it. Upton claimed compensation
‘lawful acceptance’ of the offer by the other party, thus where A, for its services. Held services were rendered on an implied
offers to sell a wrist watch to B for Rs. 200 and B accepts the promise to pay for them.
offer, a contract comes into being provided other essentials of a I will give a few more illustrations in this regard.
valid contract like that of competency of parties to contract, etc.
are present. We propose to discuss now the legal rules relating Illustration
to a ‘lawful offer’. (a) M says to N that he is willing to sell his motorcycle to him
for Rs. 20,000. this is an express offer.
The Proposal or Offer
The words ‘ proposal’ and ‘offer’ are synonymous and are used (b) X writes to Y he offers to sell his house to him for Rs.
interchangeably. Section 2 (a) of the Indian contract act defines a 80,000. there is an express offer.
‘proposal’ as, “ when one person signifies to another his (a) The Delhi Transport Corporation runs omnibuses on
willingness to do or to abstain form doing anything, with a different routes to carry passengers at the scheduled fare.
view to obtaining the assent of that other to such act or This is an implied offer by the D.T.C.
abstinence, he is said to make a proposal”. This definition (b) A shoe shiner starts shining some one’s shoes, without
reveals the following three essentials of a ‘proposal’. being asked to do so, in such circumstances that any
(i) One person signifies to another; it must be an expression reasonable man could guess that he expects to be paid for
of the willingness to do or to abstain from doing this, he makes an implied offer.
something. According to section 3 to signify means that The second essential of a valid offer is intention.
the proposal must be communicated to the other party.
2. An offer must contemplate to give rise to legal
(ii) The expression of willingness to do or to abstain form consequences and be capable of creating legal relations.
doing some thing must be to another person. There can be
If the offer does not intend to give rise to legal consequences, it
no ‘proposal’ by a person to himself
is not a valid offer in the eyes of law. An offer to a friend to
(iii) The expression of willingness to do or to abstain from dine at the offeror’s place, or an offer to one’s wife to show her a
doing some-thing must be made with a view to obtaining movie is not a valid offer and as such cannot give rise to a
the assent of the other person to such act or abstinence. binding agreement, even though it is accepted and there is
Thus a casual enquiry “ do you intend to sell your consideration, because in social agreements or domestic
motorcycle?” is not a ‘proposal’. Similarly, a mere statement arrangements the presumption is that the parties do not intend
of intention” I may sell my motorcycle if I can get Rs. legal consequences to follow the breach of agreement. But in
14,000 for it” is not a ‘proposal’. But if M says to N, “ will the case of agreements regulating business agreements it is
you buy my motorcycle fro Rs. 14,000,” or “ I am willing taken for granted that parties intend legal consequences to
to sell my motorcycle to you for Rs. 14,000”, we have a follow. Even in the case of a business agreement if the parties
‘proposal’ as it has been made with the object of agree that the breach of the agreement would not confer on
obtaining the assent of N. either of the parties a right to enforce the agreement in a court
number of persons. In case of general offer of reward for some no acceptance of each other’s offer.
information or restoration of a missing thing, the offer is open You all must be thinking about the contracts which are entered
for acceptance to only one individual who performs the required into a by large number of people at the same time. These are
condition first of all, and as soon as the condition is first called standard form contracts we have already discussed them
performed the offer is closed. in brief but now I would like to take up a few examples of
6. An offer must be communicated to the offeree. The such contracts.
communication of a proposal is complete when it comes Communication of special terms (Standard Form Contracts)
to the knowledge of the person to whom it is made (Secn Regarding the communication of the special terms of the
4). An offer is effective only when it is communicated to contract as contained in a ticket, receipt, or, ‘standard form
the offeree. Until the offer is made known to the offeree, documents’, the more important rules adopted by the courts
there can be no acceptance and no contract. Doing anything are as follows.
in ignorance of the offer can never be treated as its
(i) If the acceptor or the promisee had no knowledge of
acceptance, for there was never a consensus of wills. This
special terms. Before or at the time of the contract, they are
applies to both ‘specific’ and ‘general’ offers.
not binding upon the acceptor.
Illustrations (a) A. without knowing that a reward has been
Illustration In Handerson vs. Stevenson. “ the plaintiff bought
offered for the arrest of a particular criminal, catches the criminal
a steamer ticket which bore on its face the words. ‘Dublin to
and gives the information to the superintendent of police. A
white haven’ on the back of the ticket certain special terms were
cannot recover the reward as he cannot be said to have accepted
printed one of which excluded the liability of the company for
the offer when he was not at all aware of it.
loss, injury or delay to the passenger or his luggage. The
In Lalman Shukla vs. Gauri Datt. “ the defendant’s nephew plaintiff never looked at the back of the ticket bore no reference
absconded from home. He sent his servant, the plaintiff, in to the back. The plaintiffs luggage was lost in the shipwreck
search of the boy. After the servant had left. The defendant caused by the fault of the company’s servants. He claimed
announced a reward of Rs. 501 to anybody giving information damages for its loss. It was held that the plaintiff was entitled
relating to the boy. The servant, before seeing the announce- to recover his loss from the company as there was not sufficient
ment, had traced the boy and informed the defendant. Later, on communication of the terms and conditions contained on the
reading the notice of reward, the servant claimed it. His suit was back of the ticket.
dismissed on the ground that he could not accept the offer,
(ii) If the acceptor or the promisee had the knowledge or may
unless he had knowledge of it.
be presumed to have the knowledge; because a reasonably
The court observed: “ where an offer has been accepted with sufficient notice has been given to him by suitable words
knowledge of the reward the fact that the informer was on the document; of special terms, before or at the time of
influenced by motives other than the reward will be immate- the contract, the terms are binding upon the acceptor
rial.” In Williams vs. Carwardine where information was given whether he has read them or not is immaterial. The leading
about the murderers of her husband of a woman, not so much case on the point is Parker vs. South Eastern Railway co.
for reward, but to assuage her feelings, she was allowed to
Illustration. in the above case P deposited his bag at the cloak –
recover. The court further observed that in the case of public
room at a railway station and received a ticket containing on its
advertisements offering a reward, the performance of the act
face the words, ‘see back’. On the back of the ticket there was a
raises an inference of acceptance. But in the case of Lalman
condition that, “ the company will not be responsible for any
Shukla vs Gauri Dutt , the plaintiff being a servant was already
exceeding the value of £10 unless extra charge was paid”. A
under an obligation to do what he did and therefore the
notice to the same effect was hung up in the cloak- room P’ s
performance of act cannot be regarded as a consideration for
bag was lost and he claimed the actual value of the lost bag. £
defendant’s promise.
24 sh 10 P, admitted knowledge of the printed matter on the
7. Cross offers – when two parties make identical offers to ticket, but denied having read it. It was held that, even though
each other, in ignorance of each other’s offer, the offers are he had not read the exemption clause, he was bound by it. As
cross offers. Such offers do not constitute acceptance of the defendants had done what was reasonably sufficient to give
one’s offer by the other and as such there is no completed him notice of its existence, and therefore P was entitle the
agreement. For eg. A wrote to B offering to sell him certain recover only £ 10.
goods. On the same day, B wrote to A offering to buy the
Again, where the terms are printed in a language which the
same goods. The letters crossed in the post. There is no
acceptor does not understand, he cannot set up this fact as a
concluded contract between A and B.
reason for not being bound by the terms, provided his
Let me give you an example so that you can understand it attention is drawn to them by suitable words on the document.
better. Suppose on 15 October, 1989 A wrote to B offering to It is the acceptor’s duty to ask for a translation of the terms
sell him 100 tons of iron at Rs. 8,800 per ton. On the same day, before he actually accepts the offer and if he did not ask, he
B wrote to A offering to buy 100 tons of iron at Rs. 8,800 per must suffer for his ignorance (MacKillican vs. the Compagnie
ton. The letters crossed in the post. There is no concluded Markemas de France.) similarly, the acceptor cannot plead that he
contract between A and B, because the offers were simulta- was illiterate or blind, provided the notice is reasonably
telephones his acceptance. There would be a contract C and the nature of an open or continuing offer. An acceptance of
D and the rejection shall not be effective. such an offer merely amounts to an intimation that the offer
It is worth noting that a rejection is effective only when it comes will be accepted from time to time by placing order for specified,
to the knowledge of the offeror. For example, C makes an offer quantities. Each successive order given, while the offer remains
to D by letter. Immediately on receiving the letter D writes a in force, is an acceptance of the standing offer as to the quantity
letter rejecting the offer. Before the rejection reaches C, D ordered, and creates a separate contract. In view of this legal
changes his mind and telephones his acceptance. There would position, the offeror is free to revoke the standing offer with
be a contract between C and D and the rejection shall not be regard to further supply, at any time, by giving a notice to the
effective. offeree, except where consideration is given for it.
4. An offer lapses by the death or insanity of the offeror or 6. Revocation by non- fulfillment of a condition precedent
the offeree before acceptance. If the offeror dies or becomes to acceptance. An offer stand revoked if the offeree fails to
insane before acceptance, the offer lapsed provided that the fulfill a condition precedent to acceptance [sec. 6 (3)]. Thus,
fact of his death or insanity comes to the knowledge of the where A, offers to sell his scooter to B for Rs. 4,000. if B
acceptor before acceptance [sec. 6 (4)]. From the language of joins the lions club within a week the offer stands revoked
the section, it may be inferred that an acceptance in and cannot be accepted be B if B fails to join the lions
ignorance of the death or insanity of the offeror, is a valid club.(in default of payment of earnest money.)
acceptance, and gives rise to a contract. Thus the fact of 7. An offer lapses by subsequent illegality or destruction of
death or insanity of the offeror would not put an end to subject matter. An offer lapses if it becomes illegal after it is
the offer until it comes to the notice of the acceptor before made, and before it is accepted. Thus, where an offer is
acceptance. An offeree’s death or insanity before accepting made to sell 10 bags of wheat for Rs. 6,500 and before it is
the offer puts an end to offer and his heirs cannot accept accepted, a law prohibiting the sale of wheat by private
for him (Reynolds vs. Atherton). individuals is enacted, the offer comes to an end. In the
5. An offer lapses by revocation. An offer is revoked when it same manner, an offer may lapse if the thing, which is the
is retracted back by the communication of notice of subject matter of the offer, is destroyed or substantially
revocation by the offeror to the other party [sec. 6(1). For impaired before acceptance.
example, at an auction sale, A makes the highest bid. But Practice Questions
he withdraws the bid before the fall of the hammer. There I. Comment on the following statements
cannot be a concluded contract because the offer has been
revoked before acceptance; (1) Offer must be communicated to the offeree.
Further, an offer, agreed to be kept open for a definite period, (2) Terms of an offer must be certain.
may be revoked even before the expiry of that period, unless (3) An offer must be distinguished from an invitation to
there is some consideration for so keeping it open. The effect of offer.
facing a time for acceptance is merely to fix a tie beyond which (4) A proposal cannot be revoked otherwise than by
the offer cannot be accepted. Where no time limit is set, the communication.
offer open for a definite period, unsupported by consideration, II. Define the term offer. Explain the legal rules regarding the
is regarded as a ‘bare pact,’ and hence not offer open, supported term offer.
by consideration, is called an ‘option’ an ‘option’ is in effect a
III. How does an offer get terminated?
separate contract making the promisor liable for breach if he
revokes the offer before the expiry o f agreed time. IV. Distinguish between
Illustration. M. offers to sell his house to N for Rs. 1,40,000. N (1) General offer and specific offer
says to M that if he agree the offer open for 10 days he (N) will (2) Offer and an invitation to offer
pay him Rs. 1,000. M agrees M cannot revoke the offer before (3) Cross offer and counter offer
the expiry of 10 days, as N has obtained an option to purchase
V. Solve the following problems giving reasons
the house within 10 days. If M revokes the offer before the
expiry of 10 days. He can be sued for breach of option contract. (1) A garment store gave a following advertisement in the
newspaper :
Revocation of an offer must be communicated or made known
to the offeree, otherwise the revocation does not prevent “ Special sale for tomorrow only. Men’s nightsuits reduced from
acceptance. Revocation of a ‘general offer’ must be made Rs.200 to Rs.100 only” is it a valid offer or not.
through the same channel by which the original offer was (2) A sees a rare book displayed in a shop. It is labelled ‘ First
made. Again, revocation must always be express and must be Edition Rs.15’. a enters the shop and puts Rs.15 on the
communicated by the offeror himself or his duly authorized counter and asks for the book. The bookseller does not
agent to the other party. agree to sell saying that the real price of the book is
Revocation of standing offer or tender. Where a person offers Rs.50and that it had been marked as Rs.50 by mistake. Is
to another to supply specific goods, up to a stated quality or in the bookseller bound to sell the book for Rs.15?
any quality which may be required, at a certain rate, during a
Notes:
LESSON 4:
ACCEPTANCE OF AN OFFER
when the letter of revocation is received by him. August and revocation of offer is communicated to him
on 5th August, his acceptance is valid and there shall be a
Illustration
binding contract. A cannot revoke his offer after 4th August,
(a) In the illustration (i) given above. A revolves his offer by when the communication of acceptance is complete as
letter on 8th instant. The letter reaches B on 10th instant. against him.
The revocation is complete as against A on 8th, when the
Effect of delay or loss of letter of acceptance in postal transit.
letter of revocation is received by him.
So for as the offeror is concerned, he is bound by the acceptance
(b) In the illustration (ii) given above, B revokes his acceptance the moment the letter of acceptance is posted. Although the
by letter on 10th instant. The letter reaches A on 12th instant. letters delayed or wholly lost through an accident of the post
The revocations complete as against B on 10th, the date on and the letter never in fact reaches him. But in order to bind the
which the letter of revocation is posted and as against A on offeror, the letter of acceptance must be correctly addressed,
12th, the date on which the letter reaches him. properly stamped and actually posted. If the letter of acceptance
Time during which an offer or acceptance can be revoked. In the is misdirected because it has not been addressed correctly, there
illustrations (a) and (b) given above, there arises a question. would in law, be no communication of the acceptance; but if
Whether the revocation of offer by A is operative or not, or the wrong address is furnished by the offeror himself, he will be
whether the revocation of acceptance by B is operative or not? bound. So far as the acceptor is concerned. He is not bound by
For answering this question, it is necessary to know the limit of the letter of acceptance till it reaches the offeror, the contract
time within which an offer or acceptance can be revoked. Section remains voidable at the instance of the acceptor. He can compel
5 deals with this question and provides as follows. the offeror to enforce the contract or he may revoke his accep-
“A proposal may be revoked at any time before the communica- tance by communicating his revocation at any time before the
tion of its acceptance is complete as against the proposer, but letter reaches the offeror. Thus the acceptor is at an advantage if
not afterwards. An acceptance may be revoked at any time before the letter is delayed or lost in transit.
the communication of the acceptance is complete as against the Accidental formation of contract. There remains yet another
acceptor but not afterwards. query; what happens if both the letter of acceptance’ and the
Applying section 5 to our illustrations given above. A may ‘telegram of revocation of acceptance’ are delivered to the to the
revoke his offer at any time before or at the moment when B offeror at the same time? In such a situation the formation of
posts his letter of acceptance i.e., 9th, but not afterwards. B may contract will depend on a matter of chance. If the offeror reads
revoke his acceptance at any time before or at the moment when the letter of acceptance first and then the telegram, a binding
the letter of acceptance reaches A. i.e., 11th, but not afterwards. contract will arise. But if the offeror reads the telegram of
While discussing the rule regarding communication of accep- revocation of acceptance first and then the letter of acceptance,
tance is complete as against A on the day of posting itself i.e., there will be no binding contract because the communication of
9th, A’s revocation of his offer, which is complete as against B on revocation comes to the offeror’s notice first than the communi-
10th is inoperative. B’s acceptance is valid and there shall be a cation of acceptance. It will be seen that the formation of
binding contract. contract in the aforesaid circumstance depends on a matter of
For the sake of practice of the rules regarding communication chance and therefore such contracts are called ‘ accidental form of
of offer, acceptance and revocation discussed above, we take contracts,’
another illustration. Contracts Over the Telephone
Illustration External manifestation or overt act
(i) A offers, by letter, to sell his car to B for Rs. 75,000 on 1st The definition clearly require that the assent should be signified,
August B receives the letter on 3rd august. it may be signified or expressed by an act or omission by which
the party accepting intends to communicate his assent or which
(ii) B puts the letter of acceptance in post on 4th August, which
has the effect of communicating it. A very common instance of
reaches A on 6th.
an act amounting to acceptance is the fall of the hammer in the
(iii) A write a letter of revocation of his offer and posts it on case of an auction sale. The principle is that there should be
3rd August i.e., which reaches B on 5th August. some external manifestation of acceptance. A mere mental
Rules Applied determination to accept unaccompanied by any external
indication will not be sufficient.
(i) Communication of offer is compete on 3rd August i.e.,
when it comes to the knowledge of B. Such manifestation may be in the form of express words,
written or spoken or may be signified through conduct. An
(ii) Communication of acceptance is complete as against the
illustration of acceptance by conduct is the decision of the
proposer i.e.,. A when the letter of acceptance reaches the
House of Lords in Brogden v. Metropolitan Railway Co.
proposer i.e., on 6th August.
B had been supplying coal to a railway company without any
(iii) Revocation of offer is complete as against A on 3rd August,
formal agreement. B suggested that a formal agreement should
when the letter or revocation is posted, and as against B on
be drawn up. The agents of both the parties met and drew up a
5th August, when the letter of revocation is received by him.
draft agreement. It had some blanks when it was sent to B for
contract at that moment. The other man may not know the performance of the contract. Will he succeed?
precise moment when the line failed. But he will know that the [Hint. No. B’s offer comes to an end by the counter offer
telephonic conversation was abruptly broken off, because of A, and there, was no offer available for acceptance
people usually say something to signify the end of the conver- subsequently.]
sation. If he wishes to make a contractor, he must, therefore,
4. P sold his business to Q disclosing this to his customers.
get through again so as to make sure that I heard. Suppose next
M, an old customer sent an order for goods to P by name.
that the line doesn’t go dead but it is nevertheless so indistinct
Q, the new owner, executed the order. Is M bound to
that I do not catch what he says and I ask him to repeat it. He
accept the goods?
then repeats it and I hear, but only the second time when in do
hear. If he does not repeat it, there is no contract. The contract [Hint. No. M is not bound to accept the goods because a
is only complete when I have his answer accepting the offer.” specific offer made to P can be accepted only by P and none
else (Boulton vs. Jones.]
In Kanhialal vs. Dineshchandra it has been so held in India as
well that where a contract is effected by telephonic conversation, 5. X wrote to Y, his would be son-in-law, that his daughter
the contract is not complete till acceptance of the offer by the would have a share of what he left after the death of his
offeree is clearly heard and understood by the offeror. wife. Is the letter a valid offer by X to Y?
No question of revocation. When the parties negotiate a Solution: The letter was a mere statement of intention and not
contract over telephone, no question of revocation can possibly an offer at all. [Farina v. Fickus]
arise, for in such instantaneous communication, a definite offer 6. A notice that the goods stated in the notice will be sold by
is made and accepted at one and the same time. An offer when tender. Is the notice a valid offer to sell?
accepted, explodes into a contract and cannot be revoked. In the Solution: The notice was mere a statement of intention and not
words of sir Anson’ “ Acceptance is to an offer what a lighted an offer to seen. [Spencer v. Harding]
match is to a train of gunpowder. It produces something which
7 X and Mrs X hired a room in a hotel for a week. When
cannot be recalled or undone.
they entered the room, they found a notice on the wall
Here we end our discussion on acceptance of an offer. disclaiming the owner’s liability for damages; loss or theft
Test Questions of articles. Some of their items were stolen. Discuss the
Comment on the following legal position.
1. Offer must be communicated to the offeree. Solution: The owner of the hotel was liable because the special
terms (i.e. notice) were communicated after the formation of
2. Terms of an offer must be certain
the contract. [Leading case: Olley v. Marlborough Court Ltd.]
3. Counter offer to an offer lapses the offer
8. X sold his business to Y but this fact was not known to an
4. An invitation to an offer is not an offer old customer Z. Z placed an order for certain goods to X
Practical Problems by name. Y supplied the goods to Z.
Answer the following problems, giving reasons for your Is there a valid contract?
answers. Solution: There was no contract at all between Y and Z because
1. Harish says in conversation to suresh that he will give Rs. Z’s offer was a specific offer to X and X alone could accept it.
10,000 to a person whosoever marries his daughter. Alok [Leading case: Boulton v. Jones]
marries Harish’s daughter and files a suit to recover Rs. 9. X offered to sell his .car for Rs 1,00,000 to Y. Y replies “I
10,000 will he succeed? will pay Rs 90,000 for it.” X refuses to sell at this price. Y
[Hint. No, Harish has expressed his wish only, and has then attempts the original offer but X refuses to sell his
never made an offer with a view to obtaining the assent of car. Discuss the legal position.
the other party.] Solution: Y’s first reply is a counter offer and not an acceptance
2. X sees a book displayed in a shelf of a book shop with a of X’ s offer and has put an end to the original offer. After
price tag of Rs. 85. X tenders Rs. 85 on the counter and having made the counter offer, Y cannot accept the original offer
asks for the book. The bookseller r3fuses to sell saying that which has already come to an end. Hence, X is not bound to sell
the book has already been sold to someone else and he his car to Y. [Leading case: Nihal Chand v. Amar Nath]
does not have another copy of that book in the stock. Is
10. X offered to sell two plots of land to Y at a certain price. Y
the bookseller bound to sell the book to X?
accepted the offer for one plot. Is there a valid contract?
[Hint. No. a display of goods with prices marked thereon
Solution: This is not a contract at all because the acceptance was
is only an invitation for offer, and not an offer itself. Hence
not valid as it
the bookseller is free to accept the offer or not.]
was not for the whole of the offer. [Bhawan v. Sadula]
3. B offered to sell his car to A for Rs. 95,000. A accepts to
purchase it for Rs. 94,500. B refused to sell the car Rs. 11. F offered by a letter to buy his nephew’s horse for Rs 100
94,500. subsequently A agree to purchase the car for Rs. saying “If I hear
LESSON 5:
CONSIDERATION
Learning Outcomes “When at the desire of the promisor, the promisee or any other
After todays class you should be able to answer the following person has done or abstained from doing, or does or abstains
questions: from doing, or promises to do or to abstain from doing
• The meaning of consideration something, such act or abstinence or promise is called a
consideration for the promise. “An analysis of the above
• The essentials of consideration
definition will show that it consists of the following four
• The exceptions to the doctrine of consideration components:
Introduction (a) The act or abstinence or promise which forms the
By now you all must have understood the concept and consideration for the promise, must be done at the desire
definition of contract and its essentials. Our next topic of study of the promisor:
shall be consideration. Consideration constitutes the very (b) It must be done by the promisee or any other person
foundation of the contract. As you all know that as per section
10 of the Indian Contract Act there must be a consideration for (c) Tt may have been already executed or is in the process of
an agreement to become a contract and that consideration must being done or may be still executory;
also be lawful. An agreement not supported by consideration is (d) Tt must be something to which the law attaches a value.
void. The concept of consideration will become more clear to you
Consideration is one of the essential elements of a valid after reading these illustrations.
contract (Sec. 10). The fact. of its existence serves to distinguish Illustrations
those promises by which the promisor intends to be legally
(i) A agrees to sell his house to B for Rs 10,000. Here B’s
bound from those which are not” seriously meant.
promise to pay the sum of Rs10,000 is the consideration
In the words of Blackstone: “A consideration of some sort or for A’s promise to sell the house, and A’s promise to sell
other is so necessary to the forming of a contract, that a nudum the house is the consideration for B’s promise to pay the
pactum, or agreement to do or pay something on one side, sum of Rs10,000.
without any compensation on the other, will not at law support
(ii) A promises to maintain B’s child and B promises to pay A
an action; and a man cannot be compelled to perform it. The
Rs 1,000 yearly for the purpose. Here the promise of each
law supplies no means nor affords any rem-edy to compel the
party is the consideration for the promise of the other
performance of an agreement made without consideration. If I
party.
promise a man £ 100 for nothing, he neither doing nor
promising anything in return or to compensate me for my (iii) A promises to pay B Rs 1,000 at the end of six months, if
money, my promise has no force in law.” C, who owes that sum to B, fails to pay it. B promises to
grant time to C accordingly. Here the promise of each party
Anson said that the offer and acceptance bring the parties
is the consideration for the promise of the other party.
together and constitute the outward semblance of a contract
but most systems of law require some further evidence of the (iv) A promises his debtor B not to file a suit against him for
intention of the parties, which is provided by consideration and one year on B’s agreeing to pay him Rs.100 more. The
form. It may be noted that consideration is a cardinal necessity abstinence of A is the consideration for B’s promise to pay.
for the formation of a contract., but no consideraion is (v) A promises to type the manuscript ‘of B’s book, and in
necessary for the discharge or modification of a contract. return B promises to teach A’s son for a month. The
The breach of a gratuitous promise cannot be redressed by legal promise to each party is the consideration for the promise
remedies. It is only when a promise is made in return of of the other party.
‘something’ from the promisee, that such promise can be (vi) A person had a. daughter to marry and in order to raise
enforced by law against the promisor. This ‘something’ in funds for her marriage he intended to sell a property. His
return is the consideration for the promise. In the language of son promised that if the father would forbear to sell, he
purchase and sale Pollock has observed: “Consideration is the would pay the father Rs. 50,000. The father accordingly
price for which the promise of the other is bought”. Anson forbore. The abstinence of the father is the consideration
said that an offer and acceptance bring the parties together and for son’s promise to pay. -
constitute the outward semblance of a contract. Essentials of Valid Consideration
Definition The four component parts of the definition of consideration
Section 2(d) of the Indian Contract Act defines consideration as (given above) may well be described as the essentials of valid
follows consideration. We shall now discuss these essentials one by one
in detail.
• Marriage settlement, partition or other Family from A who shall be regarded. as the agent of C (Surjan vs
arrangements Nanat)
• Acknowledgement or Estoppel (iv) In case of agency. Where a contract is entered into by an
agent, the principal can sue on it.
• Covenants running with land
(v) In case of assignment of rights under a contract in favour
• Agency
of a third party either voluntarily or by operation of law,
• Assignment the assignee can enforce the benefits of the contract, e.g.,
Now let me discuss them in detail the assignee of an insurance policy or the official assignee
(i) Where an express or implied trust is created. A trust is the on the insolvency of a person can sue on the contract even
property held and managed by one or more persons for though originally they were not parties to it
another’s benefit as in Chinnaya case. In case of a trust, the (vi) Covenants running with land. A person who purchases a
beneficiary can sue in his own right to enforce his rights land with notice that the owner of the land is bound by
under the trust, though he was not a party to the contract certain duties created by an agreement or covenant affecting
between the settler and the trustees. the land, shall be bound by them although he was not a
Illustrations party to the agreement.
(a) A transfers certain properties to B to be held by B in Now we shall discuss the third essential of consideration i.e.
‘trust for the benefit of M. M can enforce the 3. Consideration may be past, present or future. The words,
agreement i.e., trust (M.K.Rapai vs John). “has done or abstained from doing; or does or has
abstained from doing; or promises to do or to abstain
(b) An addressee of an insured article is entitled to sue the.
from doing,” used in the definition of consideration clearly
Post Office in case V- of loss, as on receipt of such
indicate, that the consideration may consist of either
article, the Post Office becomes in law a constructive
something done. or not done in the past, or done or not
trustee for the addressee (Amir ullah vs. Central Govt).
done in the present, or promised to be done or not done
(c) In Khwaja Mohammad Khan vs Hussaini Begum, in the future, To put it briefly, consideration may consist of
there was an agreement between the lady’s father in law past, present, or future act or abstinence,
and her father that in consideration of her marriage
with his son, he would pay to her Rs.500 per month in Consideration may consist of an act or abstinence. Consider-
perpetuity for the betel leaf expnses. Some immovable ation may consist of either a positive act or abstinence i.e. a
property was specifically charged for this purpose. A negative act. Thus, an agreement between B and A, under which
suit by the wife (not a party to the agreement ) for the B; on failing to pay the debt amount on the due date to A;
recovery of arrears of annuity was upheld. promises to raise the rate of interest from 9 per cent to 12 per
cent in consideration of A promising not to file a suit against
(ii) Family settlement. Where a provision is made in a partition him for another one year, is a valid contract; A’s abstinence being
or family arrangement for maintenance or marriage the consideration for B’s promise.
expenses of female mem-bers; such members, though not
parties to the agreement, can sue on the footing of the Now the question that comes up is that what do we mean by
arrangement. past, present or future consideration.
Illustration. A daughter along with her husband entered into a Past consideration. When something is done or suffered before
contract with her father whereby it was agreed that she will the date of the agreement, at the desire of the promisor, it is
maintain her mother and the property of the father will be called ‘past considera-tion.’ It must be noted that past consider-
conveyed to them. The daughter subsequently refused to ation is good consideration only if it is given by the promisee,
maintain the mother. On a suit it was held that the mother was ‘at the desire of the promisor. Under English law, past
entitled to require her daughter to maintain her, though she was consideration is no consideration. In India sec 25(2) adequately
a stranger to the contract (Veeramma vs Appayya). covers a past voluntary service.
Where a girl’s father entered into an agreement for her marriage Let us discuss some examples of this.
with the defendant, it was held that the girl could sue the Illustrations
defendant for damages for the breach of the promiseof (a) A teaches the son of B at B’s request in the month of
marriage even though she was not a party to the agreement. January, and in February B promises to pay A a sum of Rs
(Rose vs Joseph) 200 for his services. The services of A will be past
(iii) When the defendant constitutes himself, as the agent of consideration.
the third party/ Acknowledgement or Estoppel. Whereby (b) A lawyer, gave up his practice and served as manager of a
the terms of a contract a party is required to make a landlord at the latter’s request in lieu of which the landlord
payment to a third person (viz. while making a part subsequently promised a pension. It was held that
payment), a binding obligation is thereby incurred towards there was good past consideration. (Shiv Saran vs Kesho
him.. acknowledgement can be express or implied. Thus if Prasad)
A receives some money from B to be paid over to C and he
familiar with the Lalman Shukla’s case. relation between the parties does not necessarily import natural
On the same principle, a promise to pay less than what is due love and affection. Thus where a Hindu husband, after referring
under a contract cannot be regarded as a consideration. How- to quarrels and disagreement between him and his wife,
ever, there are certain exceptions to this rule. Thus, part payment executed a registered document in favour of his wife, agreeing
by a third party may be good consideration for the discharge of to pay for separate residence and maintenance, it was held that
the whole debt. In India the promisee may accept in satisfaction the agreement was void for want of consideration because it
of the whole debt an amount smaller than that. No consider- was not merely out of natural love, and affection. (Rajlakhi Devi
ation is needed for such a promise. vs Bhootnath)
(b) Pre existing contract with third party – Where a person 2. Agreement to compensate for past voluntary service (Sec.25
has contracted to do an act, and a third person (2)].
promises to pay him a sum of money if he would go A promise made without consideration is also valid, if it is a
ahead with the performance, is there a consideration for promise to compensate, wholly or in part, a person who has
the promise? In Shadwell vs Shadwell, the plaintiff A had already voluntarily done something for the promisor,’ or done
already promised to marry one Miss Nicholl. A’s uncle something which the promisor was legally compellable to do.
sent him a letter; “I am glad to hear of your starting
Illustrations
intended marriage with Nicholl; and as I promised to
assist you at starting , I will pay to you £ 150 yearly (a) A finds B’s purse and gives it to him. B promises to give A
during my life…” thereafter A married Nicholl. The Rs 50. This is a contract.
majority judgement was that there is a sufficient (b) A supports B’s infant son. B promises to pay A’s expenses
consideration for the promise. The promise of the in so doing. This is a contract. (Note that B was legally
annuity might’ve intended as an inducement to the bound to support his infant son).
marriage. (c) A rescued B from drowning in the river, and B,
Exceptions to the Rule, “No Consideration, No appreciating the service that had been rendered, promises
Contract” to pay Rs 1,000 to A. There is a contract between A and B.
Consideration being one of the essential elements of a valid In order to attract this exception, the following points should
contract the general rule is that “an agreement made without be noted:
consideration is void. But there are a few exceptions to the rule, (i) The service should have been rendered voluntarily for the
where an agreement without consideration will be perfectly valid promisor. If it is not voluntary but rendered at the desire
and binding. These exceptions are as follows: of the promisor, then it is covered under ‘past
Agreement made on account of natural love and affection [Sec. consideration’ [as per Sec. 2(d) and not under this
25 (1)]: An agreement made without consideration is enforce- exception].
able. If it is (ii) The promisor must be in existance at the time the service
(i) Expressed in writing was, rendered. Thus where services were rendered by a
(ii) Registered under the law for the time being in force for promoter for a company not then in existence, a
the registration of documents subsequent promise by the company to pay for them could
not be brought within the exception. (Ahmedabad Jubilee
(iii) Is made on account of natural love and affection
Spinning Co. vs Chhotalal).
(iv) Between parties standing in a near relation to each
(iii) The promise must be to compensate a person who has
other.
himself done something for the promisor and not to a
Thus there are four essential requirements which must be person who has done nothing for the promisor. Thus,
complied with to enforce an agreement made without consider- where B treated A during his illness but refused to accept
ation, as per Section 25 (1). payment from A; they being friends; and A in gratitude
Let us now study some some illustrations in this behalf promises to pay Rs 1,000 to B’s son D, the agreement
(a) A promises, for no consideration, to give to B Rs 1,000. between A and D is void for want. of consideration as it is
This is a void agrpement not covered under the exception.
(b) A for natural love and affection, promises to give his son (iv) The intention of the promisor ought to be to compensate
B, Rs 1,000. A puts his promise to B into writing and the promisee. A promise given for any motive other than
registers it This is a contract. the desire to compensate the promisee would not fall
within the exception. (Abdulla Khan vs Parshottam)
(c) A registered agreement, whereby an elder brother, on
account of natural love and affection, promised to a the (v) The promisor to whom the service has been rendered
debts of his younger brother, was held to be valid and needed competence to contract at the time the service was
binding an the younger brother cause the elder brother in rendered. Thus a promise- made after attaining majority to
the event of his not carrying out the agreement pay for goods supplied voluntarily to the promisor during
(Venkatasamy vs Rangasami) his minority has been held valid and the promisee could
enforce it ,(Karam Chand vs Basant Kaur). The court in
is not illusory and the fireman is entitled to reward.] tion 1 to Section 25. Decision: A promise to gift is not valid.
2. A and B are friends. B treats A during A’s illness. B does Reason: This agreement is void for want of consideration and
not accept payment from A for the treatment and A at the same time, there is only a promise to gift and not a
promises B’s son, X, to pay him Rs 1,000. A being in poor completed gift.
circumstances, is unable to pay. X sues A for the money. 8. X who was badly in need of money offered to sell his car
Can X recover? worth Rs 1,00,000 to Y for Rs 10,000. Before the car was
[Hint. No, X cannot recover the money from A. The agreement delivered, X received an offer of Rs 20,000 and refused to
between X and A is not a contract in the absence of consider- carry out the contract on the ground of inadequacy of
ation. In this case X’s father, B, voluntarily treats A during his consideration. Is X liable to Y for damages?
illness. Apparently it is not a valid consideration because it is Solution: Section to which the given problem relates: Explana-
voluntary, whereas consideration to be valid must be given at tion 2 to Section 25.
the desire of the promisor-vide Section 2(d). The question now
Decision: X is liable to Y for damages.
is whether this’ case is cov-ered by the exception given in Section
25(2) which inter-alia provides: “If it is a promise to compensate Reason: An agreement to which the consent of the party is
a person who has already voluntarily done something for the freely given is not void merely because the consideration is
promisor...” Thus as per the exception the promise must be to inadequate.
compensate a person who has himself done something for the True or False
promisor and not to a person who has done nothing for the 1. An act constituting consideration must be done by the
promisor. As B’s son, X, to whom the promise was made, did promisee only. 3. Consideration must result in a benefit to
nothing for A, so A’s promise is not enforceable even under the both parties. (False)
exception.]
2. Consideration must result in a detriment to both parties.
3. X, a social reformer, promised Y a reward of Rs 1,000 if he (True)
refrained from smoking for two years does so. Is he
entitled to the reward? 3. Consideration must result in a benefit to the promisor and
detriments to promisee.( F)
[Hint. Yes, Y is entitled to the reward from X. In the instant
case, Y at the desire of X refrained from smoking for two years. 4. Past consideration is no consideration in India. (F)
This is a valid consideration in the form of an act of abstinence- 5. Consideration must be adequate. (F)
vide Section 2(d).] 6. An agreement to which the consent of the promisor is
4. A writes to B, “at the risk of your own life, you saved me freely given is not void merely because the consideration is
from a serious motor accident. I promise to’ pay you Rs inadequate. (T)
1,000.” A does not pay. Advise B as to his legal rights. 7. The inadequacy of the consideration may be taken into
[Hint. B is advised, to file a suit for recovery for Rs 1,000. Under account by the Court in determining the question whether
Section 25 (2) of the Contract Act, a promise to compensate for the consent of the promisor was freely given.( T)
voluntary acts done in the past is valid even though without 8. Consideration must be something, which a promisor is
consideration. As the instant case is fully covered by the above not already bound to do. (T)
Section, A cannot avoid his liability later on.] 9. A stranger to consideration can sue. (T)
5. For a valid consideration from B, A makes a promise to B 10. A stranger to a contract cannot sue. (T)
to render some service to C. C sues A on the promise.
Discuss whether he can succeed? 11. In case of trusts, the beneficiary being a stranger to a
contract cannot sue. (F)
[Hint. C cannot succeed. The general rule of law is that “a
stranger to a contract cannot sue.’; In the instant case, C is not a 12. An assignee cannot enforce the contract because he is a
party to the contract and therefore he cannot enforce the stranger to a contract. (F)
promise.] 13. Nearness of relation by itself does not necessarily import
6. X gifted Rs 50,000 to Y his neighbor’s wife by executing a natural love and affection.(T)
registered gift deed without any consideration. There is no 14. Natural love and affection by itself does not necessarily in
near relation between X and Y. nearness of relation. (T)
Is this gift valid? 15. A promise made without consideration to compensate the
Solution: Section to which the given problem relates: Explana- person who has already done something voluntarily is valid
tion I to Section 25. Decision: The gift is valid. if it is made in writing. (F)
16. A verbal promise to pay a time barred debt is valid. (F)
Reason: A completed gift needs no consideration. and’ need
not be a result of natural love and affection or near relation. 17. Completed gifts need no consideration. (T)
7. X promises to make a gift of Rs 50,000 to Y, his neighbors 18. Completed gifts without consideration are valid only if
wife. Is this promise valid? they are out of natural love and affection, and near relation.
-(F)
Notes:
Specific Relief Act, 1963 is framed so as to afford relief only in a from the property of the minor.
case where the minor himself as plaintiff seeks the assistance of
Contracts of apprenticeship and service by a minor.
court and the section is inapplicable if he happens to be merely
A contract of apprenticeship stands on a different footing than
a defendant in a suit by the person who dealt with him when he
an agreement of service by a minor. A contract of apprentice-
was a minor. This section is based on the well known principle
ship is valid and binding upon a minor because such a contract
that “he who seeks equity must do equity”
is protected by the Apprentices Act, 1961 provided the case falls
Beneficial Contracts within the terms of that act. The act inter alia, provides that the
The meaning of the proposition that an infant is incompetent minor must not be less than fourteen years of age and the
to contract or that his contract is void is that the law will not contract must be entered into on behalf of the minor by his
enforce any contractual obligation of an infant. The decision in guardian. The act was passed with a view to enabling children to
Mohiribibi case is confined to cases is confined to cases where a learn trades, crafts and employments, by which, when they come
minor is charged with obligations and the other contracting to full age, they may gain a livelihood.
party seeks to enforce those obligations agreements against him. So far as an agreement of service by a minor is concerned it is
Accordingly, a minor is allowed to enforce a contract, which is of void because a minor’s promise to serve would supply no
some benefit to himand under which he is required to bear ni consideration for the promise of the defendant to pay him/her
obligation. A minor will have the option of retiring from a a salary. In that case the court said that the contract of appren-
beneficial contract on attaining majority. ticeship entered into by the guardian is protected by the
Beneficial agreements are valid contracts. The decision in apprentices act provided the case falls within the terms of that
Mohiribi case as observed earlier, the court protects the rights of act, but no such exception is made in the case of contracts of
minors. Accordingly, any agreement, which is of some benefit service of course, where a minor has already served under a
to the minor and under which he is required to bear no contract of service, he is entitled to enforce the contract not by
obligation, is valid. In other works, a minor can be a beneficiary virtue of the contract but by reason of the relationship
e.g. a payee, an endorsee or a promisee under a contract. Thus resembling those created by the contract under section 70 of the
money advanced by a minor can be recovered by him by a suit contract Act.
because he can take benefit under a contract. The Hindu No ratification on attaining the age of majority. Ratification
Minority and Guardianship Act, 1956, also provides to the means the subsequent adoption and acceptance of an act or
same effect, namely, a natural guardian is empowered to enter agreement. A minor’s agreement being a nullity and void ab-
into a contract on behalf of the minor and the contract would initio has no existence in the eye of law. It cannot be ratified by
be binding and enforceable if the contract is for the benefit of the minor on attaining the age of majority, for, an agreement
the minor. void ab – initio cannot be made valid by subsequent ratification.
Illustrations Thus, if an advance is made to a minor during his minority, a
(a) A duly executed transfer by way of sale or mortgage in promise to pay for such amount after he attains majority would
favor of a minor, who has paid the whole of the not be enforceable. “the consideration which passed under the
consideration money. The contract is enforceable by him or earlier contract cannot be implied into the contract into which
by any other person on his behalf. the minor enters on attaining majority”.
(b) Where a minor as a purchaser of immovable property was, In Arumugam Chetti vs Duraisings Tevar, it was held that there
subsequent to his purchase, dispossessed by a third party, can be no ratification of a transaction which is void owing to
it was held that the minor could recover from his vendor the provisory possessing no contractual capacity at the time. Nor
the sum which he has paid as purchase money. can a void deed form a good consideration for a fresh contract
madebytheminoronattainingmajority.SimilarlySuraj ,in
(c) A minor purchaser of immovable property was held Narain Vs Sukhu Ahir, where a minor borrowed a sum of
entitled to recover possession of property purchased from money by executing a promissory note, and after attaining
his vendor, when refused by vendor. majority executed a second bond in respect of the original loan,
(d) A promissory note executed in favor of a minor is valid the court held that a suit upon the second bond was not
and can be enforced in a court. maintainable as that bond was without consideration. Since
(e) Where a minor had performed his part of the agreement ratification relates back to the date when the contract was
and delivered the goods, he was held entitled to maintain a originally made, it is necessary for a valid ratification that the
suit for the recovery of their price. person who purports to ratify must be competent to contract at
(f) A contract for marriage of a minor is also prima facie for the time of the contract. But if services are rendered or an
hos or her benefit. While a contract of marriage could be advance is made to a minor during his minority and the services
enforced against the other contracting party at the instance are continued or a further advance is made after he attains
of the minor, it can not be enforced against the minor. majority, a promise to pay for such services or amount as a
whole would be valid and enforceable.
(g) A lease to a minor is void.
Let us now discuss the liabilities of a minor under different
(h) A minor can also be supplied with necessaries suited to his
circumstances
conditions in life(e.g. food, lodging, education)and the
minor will have a right to such share if the property or profits The court observed in that case, “if an infant in the course of
of the firm as may be agreed upon and he would have access to doing what he is entitled to do under the contract is guilty of
and inspect and copy any of the accounts of the firm. The negligence, he cannot be made liable in tort if he is not liable on
minor cannot participate in the management of the business the contract.” But if the wrongful action is of a kind not
and shall not share losses except when liability to third parties contemplated by the contract, the minor may be held liable for
has arisen but then too up to his share in the partnership assets. tort. Thus, where a minor hired a horse for riding under express
He cannot be made personally liable for any obligations of the instructions not to jump, he was held liable when he lent the
firm, although he may after attaining majority accept those horse to one of his friends who jumped it, whereby it was held
obligations if he thinks fit to do so. liable when he lent the horse to one of his friends who jumped
it, whereby it was injured and ultimately died. The court
Minor Agent
observed, “ it was a bare trespass, not within the object and
A minor can be an agent. He shall bind the principal by his acts
purpose of the hiring, for which the defendant was liable”
done in the course of such an agency, but he cannot be held
personally liable for negligence or breach of duty. Thus in II. Persons of Unsound Mind
appointing a minor as an agent, the principal runs a great risk. As stated earlier, as per section 11 of the contract Act for a valid
Minor and Insolvency contract, it is necessary that each party to it must have a sound
A minor cannot be adjudicated an insolvent, for, he is incapable mind.
of contracting debts. Even for necessaries supplied to him, he is What is a ‘sound mind’?
not personally liable, only is property is liable Section 12 of the contract act defines the term ‘sound mind’ as
Contract by minor and adult jointly. Where a minor and an follows: “A person is said to be of sound mind for the
adult jointly enter into an agreement with another person, the purpose of making a contract, if at the time when he makes it,
minor has no liability but the contracts as a whole can be he is capable of understanding it and of forming a rational
enforced the contract against the major vendee. judgment as to its effects upon his interests.”
Surety for a Minor According to this section, therefore, the person entering into the
When in a contract of guarantee, an adult stands surety for a contract must be a person who understands what he is doing
minor the adult is liable under the contract, although the minor and is able to form a rational judgment as to whether what he is
is not (as for three is a direct contract between the surety and the about to so is to his interest or not. The section further states
third party). In fact in such a case there cannot be a contract of that:
guarantee in true sense. The Bombay high court considered the “A person who is usually of unsound mind, but occasionally
question in Manju Mahadeo vs Shivappa Manju, and held that of sound mind, may make a contract when he is of sound
“… if a minor could not default, the liability of the guarantor mind.” Thus a patient in a lunatic asylum, who is at intervals of
being secondary, does not arise at all”. Similar decision has been sound mind, may contract during those intervals.
given by Madras High Court in Edvavan Nambiar vs Moolaki “A person who is usually of sound mind, but occasionally of
Raman. unsound mind, may not make a contract when he is of
Position of Minor’s Parents. unsound mind.” Thus, a sane man, who is delirious from
The parents of a minor are not liable for agreements made by a fever, or who is so drunk that he cannot understand the terms
minor, whether the agreement is for the purchase of necessaries of a contract, or from a rational judgment as to its effect on his
or not. The parents can be held liable only when the child is interest, cannot contract whilst such delirium or drunkenness
contracting as an agent for the parents. lasts.
Notes:
Learning Outcomes that if he had known the truth, or had not been forced to agree,
After today’s class you should be able to answer the following he would not have entered into the contract.
questions: In the absence of ‘free consent’, the contract may turn out to be
• The meaning of consent either voidable or void depending upon the nature of the flaw
in consent to an agreement is caused by coercion, undue
• The various factors vitiating consent
influence, misrepresentation or fraud, there is ‘no free consent’
Introduction and the contract is voidable at the option of the party whose
In today’s lecture we shall study about another essential consent was so caused (Sec. 19 and 19A).
element of a contract that is free consent. But when consent is caused by ‘bilateral mistake’ as to a matter
It has already been pointed out in the earlier lecture that, of fact essential to the agreement, the agreement is void (Sec.
according to Section 10’ free consent’ of all the parties to an 20). In such a case there is ‘no consent’ at all.
agreement is one of the essential elements of a valid contract. The various causes leading to ‘flaw in consent’ will now be
But students do you know what is meant by consent? discussed one by one in detail.
‘Consent’ Defined Coercion
Section 13 of the Contract Act defines the term ‘consent’ and Let us first define coersion
lays down that “Two or more persons are said to consent when Definition
they agree upon the same thing in the same sense. “Thus,
Section 15 of the Contract Act defines ‘Coercion’ as follows:
consent involves identity of minds or consensus ad-idem i.e.,
agreeing upon the same thing in the same sense. If, for “Coercion is the committing or threatening to commit, any act
whatever reason, there is no consensus ad item among the forbidden, any property, to the prejudice of any person
contracting parties, there is no real consent and hence no valid whatever, with the intention of causing any person to enter into
contract. an agreement.”
Now we come to free consent The Explanation to the Section further adds that “it is immate-
rial whether the Indian Penal Code is or is not in force in the
‘Free Consent’ defined. Section 14 lays down that “Consent is
place where the coercion is employed,”
said to be ‘free’ when it is not caused by-
1. Coercion, as defined in Section 15, or Illustrations
2. Undue influence as defined in Section 16, or (i) A Madrasi gentleman died leaving a young widow. The
relatives of the deceased threatened the widow to adopt a
3. Misrepresentation as defined in Section 18, or
boy otherwise they would not allow her to remove the
4. Fraud, as defined in Section 17, or dead body of her husband for cremation. The widow
5. Mistake, subject to the provisions of Section, 20, 21 adopted the boy and subsequently applied for cancellation
and 22. of the adoption. If was held that her consent was not free
Henceforth the various factors which vitiate consent are but induced by coercion, as any person who obstructed a
dead body from being removed for cremation, would be
• Coercion,
guilty of an offence under Section 297 of the I.P.C. The
• Undue influence adoption was set aside (Ranganayakamma vs Alwar Setti).
• Misrepresentation (ii) L threatens to shoot M. if he does not let out his house to
• Fraud him . M agrees to let out his house to L. The consent of M
• Mistake has been induced by coercion.
“Consent is said to be so caused when it would not have been (iii) An agent refused to hand over the account books of the
given but for the existence of such coercion, undue influence, business to the new agent sent in his place, unless the
misrepresentation, fraud or mistake” (Sec. 14). This means that principal released him from all liabilities. The principal had
in order to bring a case within this Section, the party, who to give a release deed as demanded. Held, that the release
alleges that his consent has been caused by any of the above deed was voidable at the instance of the Principal who was
elements which vitiate consent, must show that, but for the made to execute the release deed under coercion ( Muthia
vitiating circumstance the agreement would not have been vs Karuppan).
entered into. To put it differently, in order to prove that his (iv) The Government gave a threat of attachment against the
consent is ‘not free’, the complainant must prove that if he had property of A, for the recovery of a fine due from B, the
known the truth, or had not been forced to agree, must prove son of A. A, paid the fine. Held, The payment of fine was
the money paid to remove wrongful attachment (Bansraj short, for ‘duress’ the act ,or threat must be aimed at the life or”
vs The Secy of State). liberty of the other patty to the contract or the members of his
2. The act constituting coercion, may be directed at any family: A threat to destroy or detain property will not amount
person, and not necessarily at the other party to the to ‘duress.’ Thus the scope of the term ‘coercion,’ as defined in
agreement. Likewise it may proceed even from a stranger to Section 15, is wider, because it includes threats over property
the contract. also. ‘
obtained by undue influence and the burden of proving that consent of the aggrieved party is affected from the
there was no undue influence lies on the creditor. It must be domination of the will of one person over another.
noted that both the above conditions must be proved for 2. Coercion is mainly of a physical character involving mostly
giving rise to a presumption of undue influence. There will be use of physical or violent force. Whereas undue influence is
no presumption of undue influence and a transaction will not of moral character involving use of moral force or mental
be set aside on ground of undue influence, merely because the pressure.
rate of interest is high if both the parties are, on equal footing
3. There is no presumption of coercion by law under any
(i.e. none of the parties is in a position to dominate the, will of
circumstance. The burden of proof that coercion was used
the other party) or if there exists valid reason (like tight market
lies on the party whose consent was so caused. In the case
conditions) for charging high rate of interest
of undue-influence, however, there is presumption as to
Illustrations the same in the case of certain relationships. In these cases
(a) A being in debt ,to B, the moneylender of his village, - there is no need of proving the use of undue-influence by
contract a fresh loan on terms which appear to be the party whose consent was so caused.
unconscionable. It .lies on B to prove that the ‘contract was 4. While in the case of rescission of a contract procured by
not induced by undue influence [Illustration (c) to Section coercion, any “benefit received by the aggrieved party has to
16]. be restored under Section 64, of the Contract Act; in the
(b) A poor Hindu widow borrowed Rs 1,500 ;from a case of rescission of a contract procured by I undue
moneylender at 100 per cent per annum rate of interest for influence, as per Section 19-A, the, Court has discretion to
the purpose of enabling her to establish her right to direct the aggrieved party for restoring the benefit
maintenance. It lies on the moneylender to prove that there whether in whole or in part or set aside the contract with
was no undue influ-ence (Rannee Annapurni vs any direction for refund of benefit.
Swaminatha). 5. The party exercising coercion exposes himself to criminal
(c) A, applied to a banker for a loan at the time when there is liability under the Indian Penal Code, besides an action on
stringency in the money market. The banker declines to contract. There is no criminal liability case of undue-
make the loan except at an unusually high, rate of interest. influence.
A, accepts the loan on these terms. This is a transaction in Misrepresentation
the ordinary course of business, and the contract is not A representation means statement of fact made by one party to
induced by undue influence [Illustration (d) to Section 16]. the other, either before or at the time of contract, relating to
Pardanashin Woman some matter, essential to the formation of the contract, with
As observed earlier, there is a presumption of undue influence an intention to induce the other party to enter into the contract.
in case of a contract by or with a ‘pardanashin woman’. She can It may be expressed by words spoken or written or implied
avoid any contract entered .by her on the plea of undue from the acts or conducts of the parties (e.g., by any half
influence and it is for the other party to prove that no undue statement of truth).
influence was used. For proving the absence of undue influ- A representation when wrongly made, either innocently or
ence, the other party will have to satisfy the Court (i) that the indecently , is termed as a mi-representation. To put in differ-
terms of the contract were fully explained to her, (ii) that she ently, misrepresent- may be either innocent or intentional or
understood their implications, and was free to have indepen- deliberate with an intent to deceive the other party. In law, for
dent advice in the matter, and (iii) that she freely consented to the former kind, the term ‘misrepresen-tation’ and for the latter
the contract. It may be noted that the term ‘pardanashin’ here the term ‘fraud’ is used.
refers to a woman who observes complete seclusion (parda) from
Definition
contact with people outside’ her own family, because of the
According to Section 18 ‘Misrepresentation’ means and
custom of her community, and one does not become
includes:
‘pardanashin’ simply because she lives in some degree of
seclusion Shaik Ismail vs Amir Bibi (a) The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not
Further note that the protection ranted to ardent in woman is
true, though he believes it to be true; or
so extended to illiterate and ignorant ladies, who are equally
exposed to the danger and risk of an unfair deal (Sonia Parshini (b) Any breach of duty which, without an intent to deceive,
vs’,S.M. Baksha). gains an advantage to the person committing it, or anyone
Claiming under-him, by misleading another to the
Distinction between Coercion and Undue 1n.i1uence prejudice or to the prejudice of any one claiming under
Both, coercion and undue influence, vitiate consent and make him; or
the consent of one of the parties to the contract unfree.’ But the
(c) Causing, however innocently, a party to an agreement, to
following are the points of distinction between the two:
make a mistake as to the substance of the thing which is
1. In coercion, the consent of the aggrieved party is obtained the subject of the agreement.
by committing or threatening to commit an act forbidden
by Indian Penal Code or detaining or threatening to detain
without belief in its truth, or recklessly careless whether it brought within the scope of the acts enumerated above. A mere
be true or false.” expression of opinion or commendatory express is not fraud.
2. The active concealment of a fact by a person who has “The land is very fertile” is simply a statement of opinion or
knowledge or belief of the act. Active concealment of a material ‘fur products are the best in the market” is merely a commenda-
fact is taken as much and as if the existence of such fact was tory expression. Such statements do not ordinarily amount to
expressly denied or the reverse of it expressly stated. Mere non- fraud.
disclosure is not fraud, where there is no duty to disclose. Can Silence be Fraudulent?
Caveat Emptor or ‘Buyer Beware’ is the principle in all contracts The Explanation to Section 17 deals with cases as to when
of sale of goods. As a rule the seller is not bound to disclose to ‘silence is fraudulent’ or what is sometimes called ‘constructive
the buyer the faults in the goods he is selling. fraud,’ The-explanation declares that “mere silence as to facts
Illustrations likely to affect the willingness of a person to enter into a
contract is not fraud, unless
(a) A, a horse dealer sells a mare to B. A knows that the mare
has a cracked hoof which he fills up in such a way as to defy (i) The circumstances of the case are such that, regard being
detection or on enquiry from B, A affirms that the mare is had to them, it is the duty of the person keeping silence to
sound. The defect is subsequently dis-covered by B. There speak, or
is ‘fraud’ on the part of A and the agreement’ can be (ii) Silence is, in itself, equivalent to speech.”
avoided by B as his consent has been obtained by. fraud. It therefore follows that
(b) A, sells by auction, to B a horse, which he knows to be 1. As a rule mere silence is not fraud because there is no duty
unsound. A says nothing to B about the horse’s cast by law on a party to a contract to make a disclosure to
unsoundness. This is not ‘fraud’ because A is under no the other party, of material facts within his knowledge.
duty to disclose the fact to B. the general rule of law being
Illustration A and B, being traders, enter upon a contract. A has
‘let the buyer beware’ [Illustration (a) to Section 17].
private information of a change in prices which would affect B’s
3. A promise made without any intention of performing it. willingness to proceed with the contract. A is not bound to
If a man while entering into a contract has no intention to inform B [Illustration (d) to Section 17].
person his promise, there is fraud on his part.
2. Silence is fraudulent, if the circumstances of the case are
Illustrations such that it is the duty of the person keeping silence to
(a) X purchases certain goods from Y on credit without any speak ‘. In other words, silence is fraudulent in contract of
intention of paying for them as he was in insolvent ‘utmost good faith’ i.e contracts ‘unberrimae fides’. These
circumstances. It is a clear case of fraud from X’s side. Note are contracts in which the law imposes a duty of abundant
that mere failure to pay, where there was no original disclosure on one of the parties thereto, due to peculiar
dishonest intention, is not fraud. relationship of the parties or due to the fact that one of
the parties has peculiar means of knowledge which are not
(b) Where a man and a woman went throug a ceremony of
accessible to the other. The following contract come within
marriage without any intention on the part of the husband
the class of ‘unberrimae fides’ contracts;
to regard it as a real marriage, it was held that the consent
of the wife was obtained by fraud and that the marriage (a) Fiduciary relationship. When the parties stand in a fiduciary
was mere pretence. (Shireenl vs John J J. Taylor). rela-tion to each other, the person in whom confidence is
reposed is under a duty to act with utmost good faith and
4. Any other act fitted to deceive. “the fertility of man’s
to make a full disclosure of all material facts concerning the
invention in devising new schemes of fraud is so great that
transaction known to him. Examples of a fiduciary
it would be difficult, if not impossible, to confine fraud
relationship include those of principal and agent, solicitor
within the limits of any exhaustive definition. All surprise,
and client, guardian and ward, and trustee and beneficiary.
trick, cunning, dissembling and other unfair way that is
used to cheat anyone is considered fraud and sub-section Illustrations
(4) is obviously intended to cover all those cases of fraud (i) Where a broker who was employed to buy shares for the
which cannot appropriately be covered by the other sub- client, sold his own shares to the client, without disclosing
sections. this fact to him and without obtaining his consent
5. Any such act or omission as the law specially declares to be therefore, it was held that the sale can be avoided by the
fraudulent. This sub-section refers to the provisions in client (Regier vs Campbell-Stuart).
certain Acts which make it obligatory to disclose relevant (ii) Where solicitor purchased certain property from his client
facts. Thus, for instance under Section 55 of the Transfer nominally for his brother, but really for himself; it was held
of Property Act, the seller of immovable property is that the sale can be avoided by the client, even if the
bound to disclose to the buyer all material defects in the transaction was perfectly proper one (Macpherson vs Watt).
property (e.g., the roof has a crack) or in the seller’s title
(b) Contract of insurance-In contracts of marine, fire and life
(e.g., the property is mortgaged). An omission to make
insurance, the insurer contracts on the basis that all material
such a disclosure amounts to fraud.
facts have been communicated to him; and it is an implied
to rescind the contract cannot be exercised. This has been termed by Salmond as ‘error in consensus as
3. Lapse of time. It may be treated as evidence of affirmation distinguished from ‘error in causa’ (i.e. where consent is
where the party misled fails to exercise his rights promptly not free and is caused by coercion, undue influence,
on discovering the representation to be untrue of’ on misrepresentation or fraud). In case .of bilateral mistake of
becoming aware of –the fraud ‘of coercion. As ‘such the essen-tial fact, the agreement is void ab-initio. Section 20
right of rescission may also be lost be too long-a-delay provides that “where both the parties. to an agreement are
under a mistake as to a matter of fact essential to the
4. Rights of third parties. Since the, contract is valid until
agreement, the agreement is void Thus for declaring an
rescinded, being a voidable contract, if before the contract is
agreement void ab-inito under this Section, the following
rescinded third parties, bona fide for value, acquire rights in
three conditions must be fulfilled
the subject matter of the contract, those rights are valid
against the party misled, and the right to rescind will no (i) Both the parties must be under a mistake i.e., the mistake
longer be available.34 Thus where a person obtains goods must be mutual. Both the parties should misunderstand
by fraud and, before the seller rescinds the contract, each other so as to nullify consent.
disposes them off to a bona fide party, the seller cannot Illustration M, having two houses A and B, offers to sell house
then rescind (Phillips vs Brooks Ltd 35). A, and N not knowing that M has two houses, thinks of house
Mistake B and agrees to buy it. Here there is no real consent and the
Mistake may be defined as an erroneous belief concerning agreement is void.
something. It may be of two kinds: (ii) A stake must relate to some fact and not to judgement or
1. Mistake of law. opinion etc. An erroneous opinion as to the value of the
thing which forms the subject-matter of the agreement is
2. Mistake of fact. not to be deemed a mistake as to a matter of fact
Mistake of Law (Explanation to Section 20)
Mistake of law may be of two types: Illustration
(a) Mistake of law of the country; (i) If A buys a motorcar, thinking that it is worth Rs 80,000,
(b) Mistake of foreign law. and pays Rs. 80,000 for it, when it is only worth Rs 40,000,
(a) Mistake of law of the country or Mistake of law. Every one the contract remains good. A has to blame himself for his
is deemed to be conversant with the law of his country, ignorance of the true value of the motorcar and he cannot
and hence the maxim “ignorance of law is-no excuse.” avoid the contract on the ground of mistake.
Mistake of law, therefore, is no excuse and It does not give (ii) The fact must be essential to the agreement -i.e., the fact
right to the parties to avoid the contract Stating the effect must be- such which goes to the very root to the
of mistake as to law, Section 21 declares that “a contract is agreement. On the basis of judicial decisions, the mistakes
not voidable because it was caused by a mistake as to .any which may be covered under this condition may broadly be
law in force in India. Accordingly, no relief can be granted put into the following heads
on the ground of mistake of law of the country. (a) Mistake as to the existence of the subject-matter of the
Illustration (To Sec. 21). A and B make a contract grounded on agreement. If at the time of the agreement and unknown
the erroneous belief that a particular debt is barred by the to parties, the subject-matter of the agreement has ceased
Indian Law of Limitation: the contract is not voidable (i.e., the to exist, or if it has never been in existence, then the
contract is valid). agreement is void (Bell vs Lever Bros.).
However, if one of the parties makes a ‘mistake of law’ Illustrations
through the inducement, whether innocent or otherwise, of the
(a) A agrees to sell to B a specific cargo of goods supposed
other party, the contract may be avoided
to be on is way from England to Bombay. it turns out
(b) Mistake of foreign law. Mistake of foreign law stands on that, before the day of the bargain, the ship conveying
the same footing as the ‘mistake of fact’. Here the the cargo had been cast away, and the goods lost.
agreement is void in case of ‘bilateral mistake’ only, as Neither party was aware of these facts. The agreement
explained under the subsequent heading. is void.
Mistake of Fact (b) A. agrees to buy from B a certain horse. It turns out
Mistake of fact may be of two types: that the horse was dead” at the time of-the bargain,
i. Bilateral mistake; or though neither party was aware of the fact. The
agreement is void.
ii. Unilateral mistake.
(b) Mistake as to the identity of the subject-matter. “ Where
1 Bilaterial mistake. Where the parties to an agreement
both parties are working under mistake as to the-identity
misunderstood each other and are at cross purposes, there
of the - subject-matter i. e., one, party had one thing in
is a bilateral mistake. Here there is no real correspondence
mind and the other party had another, the agreement is
‘of offer acceptance, each party obviously understanding
void for want of consensus-ad-idem
the contract in a different way. In fact in such cases, there is
the auction (A.A. Singh vs ‘Unon of India). company, gave instructions that no ticket was to be sold to
(b) X buys rice from Y, by sample under the impression that Said, who was a very bad critic of all the plays of _11e
the rice is old. The rice -is, however, new. X cannot avoid company. Said, knowing this, asked a friend to buy a ticket
the contract. The rule of caveat emptor (let the buyer for him. With this ticket Said went to the theatre but was
beware) of the Sale of Goods Act is generally applicable in refused admission. Said filed a suit for damages for breach
such cases of unilateral mistake as to quality of subject- of contract. Held that there was no contract because the
matter of a contract, and despite the mistake the contract theatrical company never intended to contract with Said.
remains valid. (Notice that in the given circumstances the identity of the
plaintiff was a material element in the formation of the
Contract voidable. If the unilateral mistake is caused by fraud or
contract.)
misrepresentation, etc., on the part of the other party, the
contract is void-able and can be avoided by the injured, party. (c) In Cundy vs Lindsay A fraudulent person named Blenkarn,
taking advan-tage of the similarity of his name with that
Illustration. A, has a horse with a’ hole in the hoof. A, so fills it
of a big company named Blenkiron & Co., in the same
up that the defect cannot be discovered on a reasonable
town, placed an order with Lindsey & Co., for supply of
examination. B. purchases the horse under the impression that
certain goods on credit and signed the order in such a way
the horse is sound. Here A, is guilty of fraud and as such on
as to look like that of Blenkiron & Co. Lindsay & Co.,
discovery of the defect B can avoid the contract because his
mistook ‘his order for that of Blenkiron & Co., and
unilateral mistake has been caused by A’s fraud
dispatched the goods. Blenkarn took delivery of the goods
Agreement void ab-initio. In the following two cases, where the and sold them to Cundy & Co., a bona fide purchaser for
con-sent is given by a party under a mistake which is so value, and did not pay Lindsay & _o., for them. On coming
fundamental as goes to the root of the agreement and has the to know the true facts, Lindsay & Co., filed a suit on Cundy
effect of nullifying consent, no contract will arise even though & Co., for recovery of goods. The Court of Appeal held
there is a unilateral mistake only: that owing to mistake as to identity of contracting party
1. Mistake as to the identity _contracted with. where such caused by Blenkarn, the rogue, there was no consensus of
identity is important. The rule of law is that a contract mind which could lead to any agreement whatever between
apparently made between A and C is a complete nullity, if Blenkarn and Lindsay & Co., and hence the agreement was
the inference from the faces is that to the knowledge of C, void ab-initio and Blenkarn got no title to the goods which
it was the intention of A to contract only with B, for, there he could pass to Cundy & Co. As Cundy & Co., obtained
can be no real formation of an agreement by proposal and no title to the goods, it must return them or pay their price
acceptance unless a proposal is accepted by the person to to Lindsay & Co.
whom it is made. Thus, whenever the identity of the Notice that in the above case if the contract between Blenkarn
person with whom one intends to contract is important and Lindsay & Co., would have been merely voidable for fraud,
element of the contract, a mistake with regard to the Cundy & Co., would have been entitled to retain the goods as it
person contracted with destroys his consent and had taken them in good faith for value, because in case of a
consequently annuls the contract. Identity of person voidable contract before it is repudiated, one can pass a good
contracted ‘with is important either when there is a credit title to a bonafide purchaser for value. Hence the specialty of a
deal or when one party has a set-off agilest the other party. mistake as to the identity of person contracted with becomes
It is important to note that in case of mistake as to identity clear. that in such a case, even if the mistake is committed
of person contracted with, even if the mistake is because of misrepresentation or fraud of another party, the
committed because of fraud or misrepresentation of contract is absolutely void. to the prejudice of third parties who
another party, the contract is not merely voidable but is later deal in good faith with the fraudulent person.
absolutely void.
Further, “mistakes to the identity” of a party is to be distin-
Illustrations. (a) In Boulton vs Jones Boulton had. taken over guished from “mistake as to the attributes” of the other party.
the business of one Brocklehurst, with whom the defendant, Mistake as to attributes, for example, as to the solvency or social
Jones, had been accustomed to deal, and against whom” he had status of that person, cannot negative the consent. It can only
a set-of. Jones sent an order for goods to. Brocklehurst; which Vitiate consent.. It, therefore, makes the’ contract merely
Boulton supplied without informing hi131 that the business voidable for fraud. Thus where X enters into a contract ‘with’ Y,
has . changed hands. Jones consumed the goods of the belief falsely representing himself to be a richman, the contract is only
that thy had been supplied by Brocklehurst. When Boulton voidable at the option of Y. Again where the identity of the
demanded. the payment the of the goods supplied, Jones party contracted with is. immaterial, mistake as to identity will
refused to pay, alleging that he had intended to contract with not avoid a contract. Thus if X enters a shop, introduces
Brocklehurst personally, since he had a set-off which he wished himself as Y and purchases some goods for cash, the contract is
to enforce against him. Boulton, therefore, sue3d Jones for the valid.
price. It was held that Jones was not liable to pay for the
2. Mistake as to the nature and character of a written
goods. Pollock C.B. observed, “it is a rule of law that if a
document. The second circumstances which even an
person intends to contract with A, B cannot give himself any
unilateral mistake may make a ‘ con-tract absolutely void is
right under it.”
Notes:
A and B is void as it implies a fraud by concealment by A cannot recover the rent, it being an act for furtherance of
upon his principal. [Illustration (g) to Section 23]. sexual immorality ( Choga Lal vs Piyasi).
4. If it involves or implies in fury to the person or property The landlord may, however, recover if he did not know the
of an-other. If the object or consideration of an agreement purpose.
is injury to the person or property of another, it is void,
Illustrations
being an lawful agreement.
(a) Money advanced to a married woman to enable her to
Let us now do some illustrations in this respect
procure a divorce and to marry the plaintiff could not be
Illustrations recovered back as the object of the agreement was held
(a) An agreement to commit an assault or to beat a man has immoral (Bai Vij/i vs Nansa Nagar).
been held unlawful and void (Allen vs Raucously). (iii) An agreement for future separation between a husband
(b) An agreement to put certain property to fire is unlawful and wife is void ab--initio, it being immoral in the eye or
and void under this clause. law.
(c) An agreement involving the publication of a libel (iv) Such acts which are against good public morals.
(defamatory article against someone) has been held Illustrations
unlawful and void (Clay vs Yates).
(a) An agreement for future marriage, after the death of first
(d) An agreement by which a debtor, who borrowed Rs 100, wife is against good morals and hence would be void
promised to do manual labour without pay for the (Wilson vs Comleyl)
creditor, so long as the debt was not repaid in full has been
(b) A who is B’s mukhtar, promises to exercise his influence,
held to be void, as it involved injury to the person of the
as such with B in favour of C and C promises to pay Rs
debtor (Ram Sarup vs Bansi Mandar)
1,000 to A. The agreement is void, because it is immoral.
5. If. the court regards it as immoral. An agreement whose [Illustration to Section 23]
object orconsideration, is immoral, is illegal and therefore
6. If the court regards it as opposed to public policy. An
void. The scope of the word ‘immoral’ here extends to the
agreement is unlawful if the court regards it as ‘opposed to
following:
public policy.’ It is not possible to give a precise or exact
(i) Sexual immorality e.g., illicit cohabitation or concubinage or definition of the term ‘public policy.’ It is rather an elastic
pros-titution. term and its connotation may vary with the social structure
Illustrations of a state. Public policy is a principle of law which holds
the no citizen can lawfully do that which is injurious to the
(a) A, agrees to let her daughter to hire to B for concubi-nage.
public or is against the interests of the society or the state.
The agreement is void, because it is immoral, though the
Broadly speaking, an agreement which tends to promote
letting may not be punishable under the Indian Penal
corruption or injustice or immorality is said to be opposed
Code. - [Illustration (k) to Section 23]
to public policy. It is interesting to note that ‘opposed to
(b) A gift deed executed in consideration of illicit intercourse public policy’ and ‘immoral,’ both are very much similar in
has been held void as its object was immoral (Ghumma vs nature because what is ‘immoral’ must be ‘opposed to
Ram Chandra ). public policy’ and reverse is also true in most cases.
It may be noted that an agreement to pay for ‘past’ or ‘future’ Public policy is an illusive concept. It has been described as an
illicit cohabitation is also void, as being immoral. Consideration ‘un-trustworthy guide’ ‘unruly horse’ etc., and therefore, the
which is immoral at the time when it passes cannot become doctrine of public policy is generally governed by precedents. In
innocent by passage of time and therefore the .consideration for Gherulal vs Mahadeodas the Supreme court served, “, though
past cohabitation is unlawful as being immoral (Hussenali vs the heads (of public policy) are not closed and though theoreti-
Dinbai). Similarly, a promise to pay for the purpose of future cally it may be permissible to evolve a new head under
cohabitation, which comprised the consideration, was held exceptional circumstances of a changing world, it is advisable in
illegal and void (Lakshminarayana vs Subhadri). the interest of stability of society not to make any attempt to
(ii) Furtherance of sexual immorality. discover new heads in these days.” The courts, thus, are
Illutration generally disinclined to invent new heads of public policy.
(a) A prostitute was sued for the hire money of a carriage in On the basis of decided cases. on the subject the following’
which she used to go every evening in order to make a agreements have been held to be against -public polity:
display of her beauty and thus to attract customers. The (i) Trading with an alien enemy. It is now fully established
suit was dismissed on the ground that the plaintiff that trading with an alien enemy ( i.e. a citizen of the other
contributed towards the performance of an immoral and country at war with the state ) is against public polity in so
illegal act and hence he was liable to suffer ( Pearce vs far as It tends to aid the economy of the enemy country.
Brooks). Such agreements are therefore illegal, unless made with the
special permission of Government. It is to be noted that
A, borrowed money from B, a moneylender, and agreed that he Section 23 (already discussed) deals with cases in which object
.would not, without the written consent of B, leave his job, or/and consideration are unlawful. Now we come to those
borrow money, dispose of his property or change his residence. cases where object/consideration are unlawful in part
It was held that the agreement was illegal as it unduly restricted The Dowry Prohibition Act, 1961 had defined dowry as
the liberty of A ( Harwood vs Miller’s Timber and Trading Co ). property given directly or indirectly by one party to another, by
(viii)Agreements interfering with parental duties. A father, and parents of one party to either party at or before or after the
in his absence the mother, is the legal guardian of his/her marriage or in consideration of marriage. The Dowry Prohibi-
minor child. The au-thority of a guardian is to be exercised tion (Amendment) Act, 1984 has changed the definition of
in the best’ interest of the child, in accordance with good dowry slightly. The new Act has defined dowry as property
public morals. If, therefore, the right of guardianship is given in connection (not consideration) with marriage. The
bartered away by any agreement, which is - inconsistent Amendment Act however clarifies that presents given to the
with the duties arising out of such custody such an bride or the bridegroom at the time of marriage voluntarily,
agreement shall be void on the ground of public policy. without a demand being made, will not be treated as dowry.
But these presents will have to be carefully listed in accordance
Illustration.
with the rules of the Amendment Act. In this case consider-
For monetary consideration, A agrees to place his daughter at
ation is wholly illegal.
the disposal of B to be married as B likes. The agreement is
illegal and void as B it would interfere with A’s parental duty to But what is the position if the same agree-ment contains, both
select a husband in the best interests of the girl (Alma Ram vs 1egal and illegal terms, i.e., it is partly legal and partly illegal?
Banku Mal) Sections 24, 57 and 58 of and 58 of the Contract Act provide
(ix) Marriage brokerage agreements. These are agreements for for such cases. Accordingly, if the object or consideration is
the- payment of money in consideration of procuring for partially unlawful, the following rules will apply:
another in marriage a husband or a wife. Such agreement 1. When an agreement contains several distinct promises to
its are illegal and void as being contrary to public policy. do things legal and also other things illegal, and the legal
Thus, when a ‘profit’ was promised Rs 200 in considera- part cannot be separated from the illegal part (i.e., the
tion of procuring a wife for the defendant, the agreement consideration for different promises is a single sum of
was held, invalid and the money could} recovered money), the whole agreement is illegal and void (Sec.24).
(Pitamber vs. Jagjiwan). . Illustrations
Further, an agreement of dowry i.e., to give money or property (a) A promises to superintend, on behalf of B, a legal
to the parents of the bride or the bridegroom in connection of manufacturer of indigo and an illegal traffic in other
their agreeing to the contract of marriage is also illegal and articles. B promises to pay to A a salary of Rs. 10,000 a year.
cannot be enforced. But such an agreement is illegal in respect The agreement is void and unlawful. Here a part of the
of payment only; the validity of marriage is not affected. So, object is legal and a part is illegal which are not severable
once the marriage is solemnized, money if actually paid cannot because the consideration for both promises is a single
be recovered back, and if not paid, a suit therefore would not sum (illustration to Section 24).
lie, because the agreement to pay is illegal. Of course the money
(c) A agrees to serve B as his housekeeper and also to live in
can be recovered when the marriage is not performed
adultery with him at a fixed salary. The whole agreement is
(Dharnidhar vs. Kanhji Sahay). Similarly, clothes and ornaments
unlawful and void. A cannot sue even for service rendered
or their value can be recovered if the marriage does not take
as housekeeper because it cannot be ascertained as to what
place (Girdhari Singh vs Neelandhar Singh ).
was due on account of adulterous intercourse and what
(x) Miscellaneous cases. The following agreements have also was due for housekeeping (Alice Hill vs. William Clarke).
been held to be against public policy:
2. Where there is reciprocal promise to do things legal and
(a) Agreements “tending to create monopolies” are illegal and also other things illegal and the legal part can be separated
void (Kameshwar Singh vs Yasin Khan). . from the illegal part (i. e., there is a separate consideration
(b) Agreements to the fraud revenue authorities are void and for different promises), the legal part is a contract and the
illegal. For example, an agreement by which’ an employee illegal part is a void agreement (Sec. 57).
was to get, in addition to salary, an expense allowance Illustration. A and B agree that A shall sell B a house for Rs
grossly in excess of the expenses actually incurred by him, 10,000, but that, if B uses it is as a gambling house he shall pay
was held illegal because the provision as to expenses was ‘ A Rs50,000 for it. The first set of reciprocal promises, namely,
contrary to public policy being merely a device to defraud to sell the house and to pay Rs10,000 for it is a contract. The
the income-tax authorities (Napeier vs National Business second set is for an unlawful. object, namely, that B may use the
Agency Ltd). house as a gambling house, and is a void and illegal agreement.
(c) Agreements whereby money is given to induce persons to (Illustration to Section 57). Here it is to be noted that the two
give evidences in a civil court are void because every one is promises are distinct and severable with a separate consideration
expected to perform his legal duty ( Adhiraja Shatty vs for each such promise. The promises are thus inde-pendent of
Vittil Bhatta). each other except that they form part of the same contract.
Notes:
Learning Outcomes have not been discussed in the preceding chapter. Illegal
After today’s class you should be able to answer the following agreements are also ‘unlawful agreements’ as they are expressly
questions; declared void by the Contract Act. It may be recalled that in the
• The agreements expressly declared to be void case of illegal agreements, transactions collateral to them are also
tainted with illegality and hence void.
• The uncertain agreements
1. Agreements in Restraint of Marriage
• The wagering agreements
Every individual enjoys the freedom to marry and so according
Introduction to Section 26 of the Contract Act “every agreement in restraint
In today’s lecture we shall study about void agreements and of the marriage of any person, other than a minor, is void.”
their different classes The restraint may be general or partial but the agreement is
You all must be aware by now that void, and therefore, an agreement agreeing not to marry at all, or
“An agreement not enforceable by law is said to be void” a certain person, or a class of persons, or for a fixed period, is
[Sec.2(g)]. Thus a void agreement does not give rise to any legal void. However, an agreement restraining the marriage of a
consequences and is void ab-initio. In the eye of law such an minor is valid under the Section.
agreement is no agreement at all from its very inception. It is interesting to note that a promise to marry a particular
We have already dealt with the following types of void agree- person does not imply any restraint of marriage, and is,
ments in the preceding chapters, and will not therefore discuss therefore, a valid contract.
them here again: The preceding chapters, and will not therefore Illustrations
discuss them here again:
(a) Agrees with B for good consideration that he will not
1. Agreements by a minor or a person of unsound mind marry C. It is a void agreement.
(Sec. 11).
(b) A agrees with B that she will marry him only. It is a valid
2. Agreements made under a bilateral mistake of fact material contract of marriage.
to the agreements(Sec. 20).
2. Agreements in Restraint of Trade
3. Agreements of which the consideration or object is
The Constitution of India guarantees the freedom of trade and
unlawful (Sec. 23).
commerce to every citizen and therefore Section27 declares
4. Agreements of which the consideration or object is “every agreement by which any one is restrained from exercising
unlawful in part and the illegal part cannot be separated a lawful profession, trade or business of any kind, is to that
from the legal part (Sec. 24). extent void,” Thus no person is at liberty to deprive himself of
5. Agreements made without consideration (Sec. 25). the fruit of his labour, skill or talent, by any contracts that he
Expressly Declared Void Agreements enters into.
The last essential of a valid contract as declared by Section 10 is It is to be noted that whether restraint is reasonable or not, if it
that it must not be one which is ‘expressly declared’ to be void is in the nature of restraint of trade, the agreement is void
by the Act. Thus, there arises a question, as to what are always, subject to certain exceptions provided for statutorily.
‘expressly declared’ void agreements? The following agreements Illustration.
have been ‘expressly declared’, to be void by the Indian An agreement whereby one of the parties agrees to close his
Contract Act: business in consideration of the promise by the other party to
1. Agreements in restraint of marriage (Sec. 26). pay a certain sum of money, is void, being an agreement in
2. agreements in restraint of trade (Sec. 27). restraint of trade, and the amount is not recoverable, if the
other party fails to pay the promised sum of money ( Madhub
3. Agreements in restraint of legal proceedings (Sec. 28).
Chander vs Raj Kumar)
4. Agreements the meaning of which is uncertain (Sec. 29)
But agreements merely restraining freedom of action necessary
5. Agreements by way of wager (Sec. 30). for the carrying on of business are not void, for the law does
6. Agreements contingent on impossible events (Sec. 36). not intend to take away the right of a trader to regulate his
7. Agreements to do impossible acts (Sec. 56). business according to his own discretion and choice.
At the very outset, it may be borne in mind that the law Illustration
declares these agreements void ab-initio and not illegal, and An agreement to sell all produce to a certain party, with a
therefore transactions collateral to such agreements are not stipulation that the purchaser was bound to accept the whole
made void. In fact it is for this reason that these agreements quantity, was held valid because it aimed to promote business
similar agreement the purchaser was free to reject the goods (i.e., price, to pool profits or output and to divide the same in
was not bound to accept the whole quantity tendered) it was an agreed proportion, does not amount to a restart of
held that the agreement was void as being in restraint of trade trade and IS perfectly valid (Fraser & Co. v Bombay Ice
(Sheikh Kalu vs Ram Saran). Company5). Similarly, an agreement amongst the traders
of a, particular locality with the object of keeping the trade
Exceptions
in their own hands is not void merely because it hurts a
An agreement in restraint of trade is valid in the following cases
rival in trade (Bhola Nath vs Lachmi Narain). But if an
(i) Sale of goodwill. The seller of the ‘goodwill’ of a business agreement attempts to create a monopoly, it would be void
can be restrained from carrying on a similar business, (Kameshwar Singh vs Yasin Khan). Agreements tending
within specified local limits, so long as the buyer, or any to create monopolies are now also governed by the
person deriving title to the goodwill from him, carries on a provisions of the Monopolies and Restrictive Trade
like business therein, provided the restraint is reasonable in Practices Act, 1969, which forbids certain types of trade
point of time and space (Exception to Sec. 27). agreements.
Illustrations (iv) Negative stipulations in service agreements. An agreement
(a) A after selling the goodwill of his business to B promises of service by which a person binds himself during the
not to carry on similar business “anywhere in the world.” term of the agreement, not to take service with anyone
As the restraint is unreasonable the agreement is void. else, is not in restraint of lawful profession and is valid.
(b) C a seller of imitation jewellery in London sells his Thus a chartered accountant employed in a company may
business to D and promises that for a period of two years be debarred from private practice or from serving elsewhere
he would not deal: (a) in imitation jewellery in England, during the con-tinuance of service (Maganlal vs Ambica
(b) in real jewellery in England, and (c) in real or imitation Mills Ltd. 8) But an agreement of service which seeks to
jewellery in certain foreign countries. The first promise restrict the freedom of occupation for some period, after
alone was held lawful. The other two promises, namely (b) the termination of service, is void. Thus, where S, who
and (c), were held void as the restraint was unreasonable in was an employ-ee of Brahmputra Tea Co. Assam, agreed
point of space and the nature of business (Goldsoll vs not to employ himself or to” change himself in any similar
Goldma). business within 40 miles from Assam, for a period of five
years from the date of the termination of his service, it was
(ii) Partners’ agreements. An agreement in restraint of trade
held that the agreement is in restraint of lawful profession
among the partners or between any partner and the buyer
and hence void (Brahamputra Tea Co. vs Scarth).
of firm’s goodwill is valid if the restraint comes within any
of the following cases: 3. Agreements in Restraint of Legal Proceedings
(a) An agreement among the partners that a partner shall not Section 28, as amended by the Indian Contract
carry on any business other than that of the firm while he (Amendment) Act, 1996, declares the following three kinds
is a partner . of agreements void:
(b) An agreement by a partner with his other partners that. on (a) An agreement by which a party is restricted absolutely nom
retiring from the partnership he will not carry on any taking usual legal proceedings, in respect of any rights
business similar to that of the firm within a specified arising Item a contract.
period or within specified local limits, provided the (b) An agreement which limits the time within which one may
restrictions imposed are reasonable [Section 36(2) of the enforce his contract rights, without regard to the time
Partnership Act}. allowed by the Limitation Act.
(c) An agreement among the partners, upon or in anticipation (c) An agreement ‘which provides for forfeiture of any rights
of the dissolution of the term, that some or all of them arising from a contract, if suit is not brought within a
will not carry on a business similar to that of the firm specified period, without regard to the time allowed by the
within a specified period or within specified local limits, Limitation Act.
provided the restrictions imposed are reasonable (Section Restriction on Legal proceedings. As stated above Section 28
54 of the Partnership Act). renders every agreement in restraint of legal proceedings void.
(d) An agreement between any partner and the buyer of the This is in furtherance of what we studied under the definition
firms that such partner will not carry on any business of a ‘contract’, namely, agreement plus ‘enforceability at law is a
similar to that of the firm within a specified period or contract. Thus if an agreement inter-alia provides that no party
within specified local limits, provided the restrictions shall ‘-go to a court of law, in case of breach, there is no contract
imposed are reasonable [Section 55(3) of the Partnership , and the agreement is void ab-initio. In this connection the
Act.] following points must also be borne in mind:
(iii) Trade combinations. As pointed out earlier, an agreement, (a) The Section applies only to rights arising from a contract. It
the Ii primary object of which is to regulate business and does not apply to cases1o of civil or criminal wrongs or
not to restrain it, is valid. Thus, an agreement in the nature torts.
of a business combination between traders or
upwards D will pay C Rs 50; there is, a wagering agreement that “agreements by way of wager are void; and no suit shall be
A ‘wager’ can be described as, follows: “The agreement of brought or recovering anything alleged to be won on any wager,
gaming and wagering’ is that one party is to win and the other e or entrusted to any person to abide the result of any game or
upon a future every which at the time C the contract is of an a other uncertain event on which any wager if made.” Thus,
in nature - that is to say, if the event turns out one way A will where A and B enter into an agreement which provides that if
lose; I it turns out the other way he will win.” England’s cricket team wins the test match, A will pay B Rs,
100, and if it loses B will pay Rs. 100 to A, nothing can be
Possibly the most expressive and all-encompassing definition
recovered by the winning party under the agreement, it being a
of a “was agreement” was given by, Hawkins., in Carlill vs
wager. Similarly, where C and D enter into a wagering agreement
Carboli,c Smoke Ball Co.
and each deposits Rs 100 with Z. instructing him to, pay or give
‘A wagering contract is one by which two persons professing to the total sum to the winner, no suit can ‘be brought by the
hold opposite views touching the issue of a future uncertain winner for recovering the. bet amount from Z, the stake-holder.
event mutually agree independent upon the determination of Further, if I.. had paid the sum to the winner, the loser cannot
that event, one shall win from the and the other shall pay or bring a suit. for recovering his Rs 100, either against the winner
hand over to him, a sum of money or other neither of the or against Z, the stake-holder, even if Z had paid after the
contracting parties having any other interest ill that contract than loser’s definite instructions not to pay. Of course the loser can
the sum of stake he will so win or lose, there being ‘no other recover back, his deposit if he makes the demand before the
real consideration ‘for the making of such contract by either of stake-holder’ had paid it ovation the winner (Ratnakalli vs
the parties. It is essential to a wagering contract that each party Vochalapu).
may under it either win or lose, whether he will win or lose
But even such a deposit cannot be recovered by a loser. in the
being dependent on the issue of the event, and, therefore,
States of Maharashtra and Gujarat. where such an agreement is
remaining ‘uncertain until that issue is known. If either’ of the
void and illegal.
parties may win but cannot lose, or may lose but cannot win, it
is not a wagering contract.” The Section makes an exception in favour of certain prizes for
horse racing by providing further that “This Section shall not be
Certain aspects of the above definition require to be
deemed to render unlawful’” a subscription, or contribution, or
emphasised. In me first place, wager is a game of chance in
agreement to subscribe or con-tribute, made or entered into for
which the contingency of either gain or loss is wholly depen-
or toward any plate, prize or sum of money, of the value or
dent on an ‘uncertain event.’ An event may be uncertain., not
amount of five hundred rupees or upwards, to be awarded to
only because it is a future event, but because it is not yet known
the winner or winners of any horse race.” Thus, a bet on a
to the parties. Thus a wager may be made upon the result of
horse race carrying a prize of Rs 500 or more to the winners has
the cricket match which is to take place”, next month in Calcutta,
been made valid under the exception. But with a view to
or upon the result of an election which is over, if the parties do
protecting the poor persons from gambling, a bet on a’ horse
not know the result. Secondly, the parties to a wager must have
race carrying a prize of less than Rs 500 remains a wager.
no interest in the event’s ‘hap-pening or non-happening except
the winning or losing of the bet laid be-tween them. It is here It is important to note that in the States of Maharashtra and
that wagering agreements differ from insurance contracts which Gujarat wagering agreements are, by a local statute, not only
are valid because parties have an interest to protect the life or void but also illegal. As a result in these states the collateral
property, and have, for that very reason, entered into the transactions to wagering agreements become tainted with
contract of insurance. illegality and hence are void.
Essential features of a wager. The essentials of a wagering Special cases. We now turn to certain special cases in order to
agreement may thus be summarised as follows: examine as to whether they are wagers:
(a) There must bean promise to pay money or money’s Commercial transactions. Agreements for sale and purchase of
worth,_ any commodity or share market transactions, in which there is a
genuine inten-tion to ‘do legitimate business i. e., to give and
(b) The promise must be conditional on an event’s happening
take delivery of goods or shares, are not wagering agreements.
or not happening
If there is no such genuine intention and parties only want to
(c) The event must be an uncertain one. If one of the parties gamble on the rise or fall of the market by paying or receiving
has the event in his own hands, the transaction is not a the differences in prices only, the transaction would be a wa-
wager. gering agreement and therefore void. “In order to constitute a
(d) Each party must stand to win or lose under the terms of wagering contract, neither party should intend to perform the
agreement. An agreement is not a wager if one party- may contract itself, but only to pay the differences”
only win and cannot lose, or if he may lose but cannot Lotteries. A lottery is a game of chance. Hence the lottery
win, or if he can neither win nor lose. business is a wagering transaction. Such a transaction is not only
(e) No party should have a proprietary interest in the event. void but also illegal because 294-A of the Indian Penal Code
The stake must be the only interest which the parties have declares ‘conducting of lottery a punishable offence. If a lottery
in the agreement. is authorized by the Government, the only effect of such
permission is that the persons conducting the lottery (i. e., the
(a) The holder of an insurance policy must have an ‘insurable [Hint: No, B will not succeed as the transaction, through
interest’ in the event upon which the insurance money ostensibly a sale, is in reality a wager ( Brogden vs Marriott)
becomes payable. ‘thus con-tracts of insurance are entered 3. A lends money to B to enable him to pay off the loss
into to protect an interest. In a wagering agreement there is which he has sustained in a wagering transaction with C.
no interest to protect and the parties bet exclusively because Can A recover the money lent by him?
they can thereby make some easy money. [ Hint: A can recover, because an agreement collateral to a
(b) Contracts of insurance are based on scientific and actuarial wagering agreement remains valid except in Maharashtra and
calculation whereas wagering agreements are a gamble Gujarat States where wagering agreements are illegal.]
without any scientific calculation of risks. 4. A and B are partners in a business. They enter into a
(c) Contracts of insurance are regarded as beneficial to the wagering agreement with a third party. On losing the bet A
public, whereas wagering agreements do not serve any satisfies his own and also B’s liability under the agreement.
useful purpose. Can A claim from B the amount paid on his behalf?
6. Agreements Contingent on Impossible Events [Hint. Yes, A can claim the amount from B because a wagering
“Contingent agreement to do or not to do anything, if an agreement is only void and not illegal and therefore a collateral
impossible event happens, are void, whether the impossibility contract can be enforced.]
of the event is known or not to the parties to the agreement at True or False Questions
the time when it is made.” (See.. 36) State whether the following statements are true or false:
Illustrations (to Sec. 36). 1. The performance of a contingent contract depends upon
(a) A agrees to pay B Rs 1,000 (as a loan) if two straight lines the happening of some future event.
should enclose a space. The agreement is void. 2. The performance of a contingent contract depends upon
(b) A agrees to pay B Rs. 1,000 (as a loan) if B will marry A’s the non-happening of some future event.
daughter, C. C was dead at the time of the agreement. The 3. The event in. a contingent contract must be essential to the
agreement is void. contract. 4. The event in a contingent contract may be
7. Agreements to do Impossible Acts certain, or uncertain.
“An agreement to do an act impossible in itself is void.” (Sec. 5. The performance of a contingent contract must not
56 Para 1 depend upon mere will of the promisor.
6. Contracts contingent upon the happening of an uncertain
Illustrations
future event be- comes avoidable at the option of
(a) A agrees with B to discover treasure by magic. The promisee if that event becomes impossible.
agreement is void [Illustration (a) to Section 56].
7. Contracts contingent upon the non-happening of a certain
(b) A agrees with B to run with a speed of -100 Kilometers per future event cannot be enforced if the happening of that
hour. The agreement is void. event becomes impossible.
No Restitution 8. Contracts contingent upon the happening of an uncertain
The term ‘restitution’ means ‘return’ or ‘restoration’ of the specified event within a fixed time can become void only
benefit received from the plaintiff under the agreement. As per after the expiry of the fixed time.
References
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
Sultan Chand and Sons, New Delhi.
• http://www.indialawinfo.com/bareacts/soga.html
• M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
• P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
Pvt. Ltd, Delhi.
• Rohini Aggarwal(2003), “Student’s Guide To Mercantile
And Commercial Laws,” Tata Mc. Graw Hill Pvt. Ltd,
Delhi
Notes
Learning Outcomes agreements by minors, idiots, luna-tics, etc., are void ab-initio,
After today’s class you should be able to answer the following but Section 68 makes an exception to this rule by providing that
questions: their estates are liable to reimburse the supplier who supplies
• The meaning of quasi contract them or to some one whom they are legally bound to support
with ‘necessaries’ of life. The following points need to be
• The different types of quasi contract
emphasized:
• The meaning of contingent contract
(i) The Section does not create any personal liability but only
• The nature and effect of contingent contract the estates are liable.
• The differences between wagering and contingent (ii) The things supplied must come within the category of
contracts. ‘necessaries’. The word ‘necessaries’ here covers not only
The first of all we will start with the Quasi Contracts bare necessities of existence, e.g.. food and clothes, but all
Quasi Contracts things which are reasonably necessary to the incompetent
person, having regard to his status in society, e.g., a watch, a
Introduction radio, a bicycle may be included therein.
We have seen that a contract is the result of an agreement
(iii) Necessaries should be supplied only to such incompetent
enforceable by law. But in some cases there is no offer, no
person or to some one
acceptance, no consensus ad idem and in fact no intention on the
part of parties to enter into a contract and still the law, from the whom he is legally bound to support such as his wife and
conduct and relationship of the parties, implies a promise children.
imposing obligation on the one party and conferring a right in (iv) Incompetent person’s property is liable to pay only
favour of the other. reasonable price for the goods or services supplied and not
In other words under certain special circumstances obligations the price which the incompetent person might have agreed
resembling those created by a contract are imposed by law to pay(legally speaking an incompetent person cannot agree
although the parties have never entered into a contract. Such to anything).
obligations imposed by law are referred to as ‘Quasi-Contracts’ Illustrations (to See 68)
or ‘Constructive Con-tracts’ under the English law, and “certain (a) A supplies B, a lunatic, with necessaries suitable to his
relations resembling those cre-ated by contracts” under the condition in life. A is entitled to be reimbursed from B’s
Indian law. The term’ quasi-contract’ has been used because property.
such a contract resembles with a contract so far as result or effect
(b) A supplies the wife and children of B, a lunatic, with
is concerned but it has little or no affinity with a contract in
necessaries suitable to their condition in life. A is entitled to
respect of mode of creation.
be reimbursed from B’s property.
A quasi-contract rests upon the equitable “doctrine of unjust
2. Reimbursement of person paying money due by another,
enrich-ment” which declares that a person shall not be allowed
in pay-ment of which he is interested (Sec. 69). “A person
to enrich himself unjustly at the expense of another. Duty, and
who is interested in the payment of money which another
not a promise or agreement, is the basis of such contracts. It
is bound by law to pay, and who therefore pays it, is
may be noted that a suit for damages for the breach of the
entitled to be reimbursed by the other.”
contract can be filed in the case of a quasi-contract in the same
way as in the case of a completed contract (Sec. 73). Illustration (to Sec. 69).
The Contract Act deals with ‘quasi-contractual obligations’ B holds land in Bengal, on a lease granted by the zamindar. The
under Sections 68 to 72, which are discussed below: revenue payable by A to the Government being in arrear, his
land is advertised for sale by the Government. Under the
I. Claim for necessaries supplied to a person incapable of
revenue law, the. conse-quence of such sale will be the annul-
contract-ing or on his account (Sec. 68). “If a person,
ment of B’s lease. B, to prevent the sale and the consequent
incapable of entering into a contract, or anyone whom he is
annulment of his own lease, pays to the government the sum
legally bound to support, is supplied by another person
due from A. A is bound to make good to B the amount so
with necessaries suited to his condition in life, the person.
paid.
who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.” In order to make Section 69 applicable, the following conditions
must be satisfied:
This provision has already been considered in connection with
minor’s agreements in the chapter of “Capacity of Parties.” (i) The plaintiff should be interested in making the payment
With a view to recapitu-late it may be stated here that although in order to protect his own interest and the payment
D for white-washing his house on the terms that no payment insurance claim) if a certain ship does not return (of course
shall be made till the completion of the work, it is not collateral after charging premium). The ship is sunk. The contract can be
to the contract, but is itself a reciprocal promise or is the very enforced when the ship sinks.
thing contracted for, and is thus an integral part of the contract. 3. If a contract is contingent upon how a person will act at an
Similarly, a contract for the sale of goods wherein the seller unspecified time, the event shall be considered to become
agrees to give delivery of goods after a week provided the impossible when such person does anything which renders
purchaser makes the payment within two days, is an absolute it impossible that he should so act within any definite
contract and not a contingent contract because the event time, or otherwise than under further contingencies (Sec.
(making payment by the buyer) is an integral part of the 34).
contract ( a condition precedent ) and not collateral to the
Illustration (To Sec. 34). A agrees to pay B a sum of money (as
contract.
loan) if B marries C. C marries D. The marriage of B to C must
In simple words, the collateral event is one, which does not now be considered impossible, although it is possible that D
form part of consideration of the contract, and is independent may die and that C may afterwards marry B. [If later B actually
of it. For example, A contracts to pay Rs50,000 to B, a contrac- marries C (the D’s widow), it will not revive the old obligation
tor, for constructing a building, provided the construction is of A to pay the sum, because that came to an end when C
approved by an architect. It is a contingent contract because the married D].
consideration of the promise to pay Rs50,000, is the construc-
4. Contingent contracts to do or not to do anything, if a
tion of the building, and the event, namely, approval by an
specified uncertain event happens within a fixed time,
architect, is a collateral event, which is independent of the
becomes void, if, at the expiration of the time fixed, such
consideration, and it is on the happening of this collateral event
event has not happened, or if, before the time fixed, such
that the contract shall be enforced.
event becomes impossible [Sec. 35 (1)].
Essentials of Contingent Contract Illustration ( to Sec. 35). A promises to pay B a sum of money
From the foregoing discussion the following two essentials of (as loan) if a certain ship returns within a year. The contract may
a contingent contract become evident: be enforced if the ship returns within the year, and becomes
1. The performance of such a contract depends upon the void if the ship is burnt within the year or if the ship does not
happening or non-happening of some future uncertain return within the year.
event. 5. Contingent contracts to do or not to do anything, if a
2. The future uncertain event is collateral i.e., incidental to the specified uncertain event does not happen within a fixed
contract. time, may be enforced by law when the time fixed has
Rules Regarding the Performances of Contingent expired and such event has not happened, or, before the
Contracts time fixed has expired, if it becomes certain that such event
The rules regarding the performance of contingent contracts, as will not happen [Sec. 35 (2)].
contained in Sections 32 to 36 of the Contract Act, are given Illustration ( to Sec, 35). A promises to pay B a sum of money
below: ( as insurance claim) if a certain ship does not return within a
1. Contingent contracts to do or not to do anything if an year. The contract may be enforced if the ship does not return
uncertain future event happens, it cannot be enforced by within the year, or is burnt within the year.
law unless and until that event has happened. If the event 6. Contingent agreements to do or not to do anything, if an
becomes impossible, such contracts become void (Sec. 32). impossible event happens, are void, whether the
impossibility of the event is known or not to the parties to
Illustrations
the agreement at the time when it is made (Sec. 36).
(a) A makes a contract with B to buy B’s horse if A survives C.
Illustrations (to Sec. 36). (a) A agrees to pay B Rs. 1,000 (as a
The contract
loan), if two straight lines should enclose a space. The agree-
cannot be enforced by law unless and until C, dies in A’s ment is void.
lifetime.
(a) A agrees to pay B Rs. 1,000 (as a loan), if B will marry A’s
(b) A makes a contract with B to sell a horse to B at a specified daughter C. C was dead at the time of the agreement. The
price, if C, to whom the horse has been offered, refuses to agreement is void.
buy it. The contract cannot be enforced by law unless and
Difference between a Contingent Contract and a Wagering
until C refuses to buy the horse.
Agreement
(c) A contracts to pay B a sum of money (as loan when B
The main points of distinction between the two are as under:
marries C. C dies without being married to B. The contract
becomes void. 1. A contingent contract is a valid contract but a wagering
agreement is absolutely void.
2. Contingent contracts to do or not to do anything if an
uncertain future event does not happen, it can be enforced 2. In a contingent contract the parties have real interest is the
when the happening of that event becomes impossible, occurrence or non-occurrence of the event e.g., insurable
and not before (Sec. 33). interest in the property insured, but in a wager the parties
LESSON 12:
PERFORMANCE AND DISCHARGE OF A CONTRACT
Learning Outcomes would have been had there been performance and not breach,
At the end of this chapter, you would be able to: and not to punish the defaulter party. As a general rule,
• Identify the remedies for breach of the Contract “compensation must be commensurate with the injury or loss
sustained, arising naturally from the breach.” “If actual loss is
• Rescission of the contract
not proved, no damages will be awarded.
• Suit for damages
Assessment of damages. We will now consider the extent to
• Suit upon quantum meruit which a plaintiff is entitled to demand damages for breach of
• Suit for specific performance of the contract contract. The rules in this regard have been laid down by Section
• Suit for an injunction 73. Accordingly, an injured party is entitled to receive from the
defaulter party:
Introduction
There are the following remedies available to the aggrieved party (a) Such damages which naturally arose in the usual course of
for the breach of the Contract things from such breach. No compensation is to be given
generally for any remote or indirect loss sustained by reason
Let us first start with the Rescission of the Contract of the breach (Ordinary Damages).
Rescission of the Contract (b) Such damages which the parties knew, when they entered
When there is a breach of contract by one party, the other party into the contract, as likely to result from the breach (Special
may rescind the contract and need not perform his part of the Damages).
obligations under the contract and may sit quietly at home if he
(c) In estimating the loss or damage caused to a party by
decides not to take any legal action against the guilty party. But
breach, the means which existed of remedying the
in case the aggrieved party intends to sue the guilty party for
inconvenience caused by the breach must also be taken into
damages for breach of contract, he has to file a suit for rescis-
account (Explanation to Sec.73). (Duty to mitigate damage
sion of the contract. When the court grants rescission, the
suffered.)
aggrieved party is freed from all his obligations under the
contract; and becomes entitled to compensation for any damage With a view to making the study of the quantum of damages
which he has sustained through the non-fulfillment of the easily comprehensible, the above rules, as enunciated in Section
contract (Sec. 75). . 73 may now be considered in some more details under
appropriate heads.
Illustration A contracts to supply 100 kg of tea leaves for Rs
8,000 to B on 15 April. If A does not supply the tea leaves on Different kinds of damages. Damages may be of four kinds:
the appointed day, B need not pay the price. B may treat the 1. Ordinary or General or Compensatory damages (i.e.,
contract as rescinded and may sit quietly at home. B may also file damages arising naturally from the breach).
a suit for rescission and claim damages. 2. Special damages (i.e., damages in contemplation of the
Thus, applying to the court for ‘rescission of the contract’ is parties at the time of contract).
necessary for claiming damages for breach or for availing any 3. Exemplary, Punitive or Vindictive damages.
other remedy. In prac-tice a ‘suit for rescission’ is accompanied 4. Nominal damages.
by a ‘suit for damages,’ etc., in the same plaint.
We shall now see these kinds one by one.
It is worth noting that in certain cases a suit for ‘rescission of
the contract’ may be filed even when no damages are to be 1. Ordinary Damages
claimed, for example, in case of pledge of movable goods, say When a contract has been broken, the injured party can, as a
gold ornaments, if the pledger does not pay as per agreement, rule, always recover from the guilty party ordinary or general
the pledgee may file a suit for rescission of the contract (of damages. These are such damages as may fairly and reasonably
course within the period of limitation which is 30 years in this be considered as arising natu-rally and directly in the usual course of
case), in order to free himself from his obligation to return the things from the breach of contract itself. In other words,
ornaments on payment and to become entitled to sell the ordinary damages are restricted to the “direct or proximate
ornaments in order to realise his debt. consequences” of the breach of contract and remote or indirect
losses, which are not the natural and probable consequence of
Suit for Damages
the breach of contract, are generally not regarded.
Damages are monetary compensation allowed to the injured
party for the loss suffered by him as a result of the breach of
contract. The fundamental principle underlying damages is not
punishment but compensation. By awarding damages the court
aims to put the injured party into the position in which he
(a) The leading case of Hadley vs Baxendale, which is said to several dates of delivery.
be the foundation of modern law of damages in England Illustrations
and India (as Sec, 73 is almost based on the rules laid down
(a) A agrees to sell to B 5 bags of rice at Rs 500 per bag,
in this case); is an authority on the point. In that case:
delivery to be given after two months. On the date of
H’s mill was stopped by a breakage of the crankshaft. H delivery the price of rice goes up and the rate is Rs550 per
delivered the shaft to B, a common carrier, to take it to the bag. A refuses to deliver the bags to B, B can claim from A
manufacturers at Greenwich as a pattern for a new one. The Rs 250, as ordinary damages arising directly from the
only information given to B was that the article to be carried was breach, being the difference between the contract price (i.e.;
the broken shaft of the mill. It was not made known to B that Rs 500 per bag) and the market price (i,e” Rs 550 per bag)
delay would result in loss of profits. By some neglect on the on the date of delivery of 5 bags. Notice that if Rs 250 are
part of B the delivery of the shaft was delayed beyond a paid to B by way of damages, then he will be in the same
reasonable time. In consequence the mill remained idle for a position as if the contract has been performed.
longer period than should have been necessary. H brought an (b) A contracts to buy from B, at a stated price, 50 maunds of
action against B claiming damages for loss of profits, which rice, no time being fixed for delivery: A afterwards informs
would have been made during the period of delay. Held that B B that he will not accept the rice if tendered to him. B is
was not liable for loss of profits caused by the delay because it entitled to receive from A, by way of compensation, the
was a remote consequence, and only nominal damages were amount, if any, by which the contract price exceeds that
awarded. The Court pointed out that B, the defendant, was which B can obtain for the rice at the time when A informs
never told that the delay in the delivery of the shaft would entail B that he will not accept it [Illustration (c) to Section 73].
loss of profits of the mill; the plaintiffs might have had
another shaft, or there might have been some other defect in (c) A contracts to buy B’s ship for Rs 60,000, but breaks his
the machinery to cause the stoppage, or for any other reason promise. As a consequence of breach B sold the ship in the
there might have been loss actually. Accord-ingly it was not a open market and he could only get Rs 52,000 for the ship.
direct consequence of the breach and hence not recoverable. B can recover by way of compensation Rs 8,000, the excess
of the contract price over the actual sale price [Adapted
(b) A contracts to pay a sum of money to B on a specified day. from Illustration (d) to Section 73].
A does not pay the money on that day. B, in consequence
of not receiving the money on that day, is unable to pay his Under a contract of ‘sale of goods,’ if there is a breach of
debts, and is totally ruined. A is not liable to make good to ‘warranty,’ the seller is liable to pay all damages which the
B anything except the principal sum he contracted to pay, purchaser has to pay to the person to whom the goods are sold
together with interest upto the date of payment by him, whether the seller is aware of such a sale or not. In
[Illustration (n) to Section 73]. (If a suit has been filed order that the purchaser should be able to claim such damages
then A will have also to pay ‘cost of the suit’ to B.) and costs it is an overriding requirement that the sub-contracts
should have been made on the same terms and conditions as
(c) A contracts to sell and deliver 500 bales of cotton to B on a the first contract.
fixed day. A knows nothing of B’s mode of conducting his
business. A breaks his promise, and B, having no cotton, is Illustration A sells certain’ merchandise to B, warrant-ing it to
obliged to close his mill. A is not responsible to B for the be of a particular quality, and B, in reliance upon this warranty,
loss caused to B by the closing of the mill [Illustration (p) sells it to C with a similar warranty. The goods prove to be not
to Section 73]. (B, however, can claim damages for the according to the warranty, and B becomes liable to pay C a sum
breach of ‘contract. He cannot claim the loss of profits of money by way of compensation. B is entitled to be reim-
callused by the closing of the mill because it cannot be bursed this sum by A.
considered to have been in contemplation of both the 2. Special Damages
parties when they made the contract and thus is a remote Special damages are those which arise on account of the special
consequence of the breach.) or unusual circumstances affecting the plaintiff. In other words,
In the case of a contract for ‘sale and purchase’ the general rule they are such remote losses which are not the natural and
as regards measure of damages is that the damages would be probable consequences of the breach of contract. Unlike
assessed on the difference between the contract price and the ordinary damages, special damages cannot be claimed as a
market price at the date of breach and any subsequent increase matter of right. These can be claimed if the special circum-
or decrease in the market price would not be taken note of. If stances which would result in a loss in case of breach of
there is no market price for the subject matter of the contract, contract are brought to the notice of the other party. It is
the rule is to take the market price of the nearest substitute. If important that such damages must be in contemplation of the
there is no nearest substitute, the market price is to be ascer- parties at the time when the contract is entered into. Subsequent
tained by adding to the price at the place of purchase, the knowledge of the special circumstances will not create any special
conveyance charges to the place of delivery plus the usual profit liability on the guilty party.
of the importer (Hajee Ismail & Sons vs Wilson & Co). If the
delivery is to be made in instalments, then the due date of each
instalment is taken as the date of breach and the measure of
Let us first know what we mean by the two terms. ‘Liquidated 200 payable by five yearly installments of Rs 40, with a
dam-ages’ means a sum fixed up in advance, which is a fair and stipulation that, in default of payment of any installment,
genuine pre--estimate of the probable loss that is likely to result the whole shall become due. This is a stipulation by way of
from the breach. ‘Pen-alty’ means a sum fixed up in advance, penalty. [illustration (g) to Section 74]
which is extravagant and uncon-scionable in amount in Stipulation regarding payment of interest. The Explanation
comparison with the greatest loss that could conceiv-ably be added to Section 74 states, “a stipulation for increased interest
proved to have followed Item the breach. Thus the essence of a from the date of default may be a stipulation by way of
penalty is a payment of money stipulated as per the terms of penalty.” It implies that such a stipulation maybe considered a
the offending party. penalty clause and disallowed by the courts, if the enhanced rate
Sometimes the parties fix up at the time of the contract the is exorbitant.
sum payable as damages in case of breach. In such a case, a Illustration [(d) to Sec. 74]. A gives B a bond for the repayment
distinction is made in English Law as to whether the provision of Rs 1,000 with interest at 12 percent per annum at the end of
amounts to ‘liquidated damages’ or a ‘penalty’. Courts in six months, with a stipulation that in case of default interest
England usually allow ‘liquidated damages’ as stipulated in the shall be payable at the rate of 75 per cent p.a. from the date of
contract, without any regard to the actual loss sustained. default. This is a stipulation by way of penalty and B is only,
‘Penalty’ clauses, however, are treated as invalid and the courts in entitled to recover from A such compensation as the court
that case calculate damages according to the ordinary principles considers reasonable.
and allow only rea-sonable compensation.
The following rules must also be noted in connection with
Under the Indian Law Section 74 does away with the distinction payment of interest
be-tween ‘liquidated damages’ and ‘penalty’. This Section lays
(a) Unless the parties have made a stipulation for the payment
down that the Courts are not bound to treat the sum men-
of interest or there is a usage to that effect, interest cannot
tioned in the contract, either by way of liquidated damages or
be recovered legally as damages, generally speaking
penalty, as the sum payable as damages for the breach. Instead
{Mahabir Prasad vs Durga Datt).
the courts are required to allow reasonable compensation so as
to cover the actual loss sustained, not exceeding the amount so (b) Where a contract provides that the amount should be paid
named in the contract. Thus, according to the section, the without interest by a particular date and on default it will
named sum, regardless whether it is a penalty or not, deter- be payable with interest, such a stipulation may be allowed
mines only the maximum limit of liability in case of the breach if the interest is reasonable. If the interest is exorbitant, the
of contract. The section does not confer a special benefit upon courts will give relief.
any party; it merely declares the law that notwithstanding any (c) Payment of compound interest on default is allowed, only
term in the contract pre-determining damages or pro-viding for if it is not at an enhanced rate (Bhushan Rao vs Subayyal).
forfeiture of any property by way of penalty, the Court will Earnest money. Money deposited as security for the due
award to the party aggrieved only reasonable compensation not performance of a contract is known as earnest money. Forfeiture
exceeding the amount named or penalty stipulated. of earnest money is allowed if the amount is reasonable. But
Exception. There is, however, one exception provided for by where it is in the nature of penalty, the court has jurisdiction to
Section 74 to the above rule. When any person enters into any award such sum only as it considers reasonable but not
bailbond, recognizance or other instrument of the same nature, exceeding the amount so agreed (Fateh Chand vs Balkishen
or under the provisions of any law or under the orders of the Dass). The proportion the amount bears to the total sale price,
Government, gives any bond for the performance of any public the nature of the contract and other circumstances have to be
duty or act in which the public are interested, he shall be liable to taken into account in ascertain-ing the reasonableness of the
pay the whole sum mentioned therein upon breach of the amount.
condition of any such instrument. Cost of Suit
Illustrations The aggrieved party is entitled, in addition to the damages, to
(a) A contracts with B to pay Rs 1,000 if he fails to pay B Rs get the costs of getting the decree for damages tram the
500 on a given day, A fails to pay B Rs 500 on that day. B is defaulter party. The cost of suit for damages is in the discretion
entitled to recover from A such compensation, not of the court.
exceeding Rs 1,000 as the court considers reason-able. Summary of the Rules Regarding the Measure of Damages
[illustration (a) to Section 74] The principles governing the measure of damages discussed
(b) A undertakes to repay B a loan of Rs 1,000 by five equal above may be summarised as under:
monthly installments with a stipulation that, in default of 1. The damages are awarded by way of compensation for the
payment of any installment, the whole shall become due. loss suffered by the aggrieved party and not for the
This stipulation is not by way of penalty and the contract purpose of punishing the guilty party for the breach.
may be enforced according to its terms. [Illustration (j) to
2. The injured party is to be placed in the same position, so
Section 74]
far as money can do, as if the contract had been performed.
(a) Where a common carrier fails to take a complete differently, where a party is in breach of negative term of the
consignment to the agreed destination, he may recover pro- contract (i. e., where he is doing something which he promised
rata freight. (He will, of course, be liable for breach of the not to do), the court may, by issuing an injunction, restrain him
contract.) from doing, what he promised not to do. Thus ‘-injunction’ is
a preventive relief. It is particularly appropriate in cases of
(b) S had agreed to erect upon H’s land two houses and stables
anticipatory breach of contract where damages would not be an
for $ 565. S did part of the work and then abandoned the
adequate relief.
contract. H himself completed the buildings using some
materials left on his land by S. In an action by S for the Illustration
value of work done and of the materials used by H, it was (a) A, agreed to sing at B’s theatre for three months from 1st
held that S could recover the value of the materials (for H April and to sing for no one else during that period.
had the option to accept or to reject these) but he’ could Subsequently she contracted to-sing at C’s theatre and
not recover the value of the work done (for H had no refused to sing at B’s theatre. On a suit by B, the court
option with regard to the partly erected building, but to refused to order specific performance of her positive
accept that). The court observed, ‘“The mere fact that a engagement to sing at the plaintiff’s theatre, but granted an
defendant is in possession of what he cannot help keeping, injunction restraining A from singing elsewhere and
or even has done work upon it, affords no ground for such awarded damages to B to compensate him for the loss
an inference. He is not bound to keep unfinished a caused by A’s refusal. (Lumley vs Wagnerl)
building which in an incomplete state would be a nuisance (b) G agreed to take the whole of his supply of electricity from
on his land.” (Sumpter vs Hedges). a certain company. The agreement was held to import a
Suit for Specific Performance negative promise that he would take none from elsewhere.
Specific performance means the actual carrying out of the He was, therefore, restrained by an injunction from buying
contract as agreed. Under certain circumstances an aggrieved electricity from any other company. (Metropolitan Electric
party may file a suit for specific performance, i. e., for a decree by Supply Company vs Ginder).
the court directing the defendant to actually perform the
Practical Problems
promise that he has made. Such a suit may be filed either
Attempt the following problems, giving reasons for your
instead of or in addition to a suit for damages.
answers:
A decree for specific performance is not granted for contracts of
1. A contracts to pay a sum of money to B on a specified day.
every description. It is only where it is just and equitable so to
A does not pay the amount on that day. B in consequence
do, i.e., where the regal remedy is inadequate or defective, that
of not receiving the money on that day, is unable to pay his
the courts issue a decree for specific performance. It is usually
debts and, is totally ruined. B claims heavy damages.
granted in contracts connected with land buildings articles and
Advise A.
unique goods having some special value to the party suing
because of family association. Notice that in all these contracts [Hint. A is liable to pay interest only from the specified day
monetary compensation is not an adequate relief because the upto the date of payment. In other words B can; claim only
injured party will not be able to get an exact substitute in the ordinary damages. B cannot claim heavy damages unless A had
market. notice of the special circumstances resulting in the special loss at
the time of entering into the contract]
Specific performance is not granted, as a rule, in the following
cases: 2. A agreed to erect a plant for B by 31st March, 1976. A
further agreed to pay Rs 500 per month as damages in case
(i) Where monetary compensation is an adequate relief. Thus
of delay beyond the agreed date. A was late by four
the courts refuse specific performance of it contract to lend
months. B sued A for Rs 4,500, the actual loss caused to
or to borrow money or where the contract is for the sale of
him as a result of the delay. What damages will you award,
goods easily procurable elsewhere.
and why?
(ii) Where the court cannot supervise the actual execution of
[Hint B is entitled to recover Rs 2,000 only, because when a sum
the con-tract, e.g., a building construction contract.
is named in - the contract as the amount to be paid in case of
Moreover, in most cases dam-ages afford an adequate
breach, the court will allow only reasonable compensation so as
remedy.
to cover the actual loss sustained, within the limits stated in the
(iii) Where the contract is for personal services, e.g., a contract to contract.]
marry or to paint a picture. In such contracts ‘injunction’
3. A employs B as manager of his factory for a term of three
(i.e., an order which forbids the defendant to perform a like
years at a monthly salary of Rs 3,000. Without any lapse on
personal service for other persons) is granted in place of
the part of B, A dismisses him after two years of service. B
specific performance.
could not get an alternate job elsewhere and files a suit for
Suit for an Injunction damages for breach of contract against A. Will he succeed?
‘Injunction’ is an order of a court restraining a person from If yes, assess the amount of damages recoverable by him.
doing particular act. It is a mode of securing the specific
Notes:
LESSON 14:
THE SALE OF GOODS ACT, 1930
INTODUCTION TO SALE OF GOODS AND ITS FORMATION
Learning Outcomes there is one exemption i.e. where a person’s goods are sold
After reading the lesson, you should be able to know: in execution of a decree, he himself may buy them.
• Contract of Sale of Goods 2. Transfer of Property: ‘Property’ here means ‘ownership’.
• Formation of Sale of Goods Transfer of property in the goods is another essential of a
contract of sales of goods. A mere transfer of possession
• Difference between Sale and Agreement to Sale
of the goods cannot be termed as sale. To constitute a
Introduction contract of sale the seller must either transfer or agree to
Contract of Sale of Goods transfer the property in the goods to the buyer. Further,
We have already studied rules relating to Indian Contract Act, the term ‘property,’ as used in the Sale of Goods Act,
1872. These rules are applicable to contract of Sales of Goods means ‘general property’ in goods as distinguished from
Act as for as they are not in consistent with the express provi- ‘special property’
sions of sales of goods Acts. This Act came into force on first 3. Goods: The subject-matter of the contract of sale must be
July 1930. The provisions of this Act extends to the whole of ‘goods’ According to Section 2(7) “goods means every kind
India except the state of J&K. certain minor amendments of movable property other than actionable claims and
where made in this Act in 1963. money; and includes stock and shares, growing crops,
Some of the provisions of Indian Contract Act apply to this grass, and things attached to or forming part of the land
Act for example the rules relating to Capacity of parties, free which are agreed to be severed before sale or under the
consent, agreements in Restaurant of trade , wagering agree- contract of sale.” Goodwill, trade marks, copyrights,
ments and measure of damages. However the definition of patents right, water, gas, electricity,, decree of a court of law,
consideration stands modified to the extent that in a contract of are all regarded as goods. In the case of land the grass
sale of goods consideration must be my way of ‘Price’, only which forms part of land have to be separated from the
money consideration. land. Thus where trees sold so that they could be cut out
and separated from the land and then taken away by the
Just like Indian Contract Act, there should be offer and
buyer, it was held that there was a contract for sale of
acceptance in the case of sales of goods. The parties to the
movable property or goods (Kursell vs Timber Operators
contract enjoy unfettered discretion to agree to any terms they
& Contractors Ltd.). But contracts for sale of things
like, for example delivery of goods and payment of Price etc.
‘forming part of the land itself’ are not contracts for sale
The sales of goods Act does not seek to fetter this discretion; it of goods. For example, a contract for the sale of coal mine
simply lays down certain positive rules of General application or building-stone quarry is not a contract of sale of goods.
for those cases where the parties have failed to contemplate
‘Actionable Claims’ means claims which can be enforced by a
expressly for contingencies which may interrupt the smooth
legal action or a suit, example a book debt. A book debt is not
performance of a contract of sale, such as destruction of goods
goods because it can only be assigned as per Transfer of
sold, before it is delivered or in solvency of the buyer. However
Property Act but cannot be sold. Same is case in the case of bill
the law gives full freedom to the parties to modify any provi-
of exchange, promissory note etc. The negotiable instrument
sions.
like promissory note can be transferred under Negotiable
Definition of Sale of goods Instruments Act by mere delivery or endorsement and delivery,
Section 4 (1) the sales of goods Act defines a contract of sale of such instruments cannot be sold.
goods as “A contract where by the seller transfers or agrees to ‘Money’ means current money. It is not regarded as goods
transfer the property in goods to the buyer for a price”. because it is the medium of exchange through which goods can
Essential Characteristics of Sale of Goods be bought. Old and rare coins, however, many be treated as
goods and sold as such.
1. Two parties: There should be two parties namely the buyer
and seller. Incase the students of a Hostel take meals in a It may be mentioned that sale of immovable property is
mess run by them , there is no contract of sale because the governed by the Transfer of Property Act, 1882.
student are undivided joined owners, who are running the 4. Price: The consideration for a contract of sale must be
mess on cooperative basis. An undivided join owners money consideration called the ‘price .’ If goods are sold or
must be distinguished from a ‘part-owner’ who is a join exchanged for other goods, the transaction is barter,
owner with divisible share. Example supposes X and Y governed by the Transfer of Property Act and not a sale of
jointly owns a typewriter and X sells the type writer to Y goods under this Act. But if goods are sold partly for
the ownership of type writer goes to Y. Although the goods and partly for money, the contract is one of sale
general rule is that a person cannot buy his own goods, (Aldridge vs Johnson).
these circumstances, the seller may refuse to deliver the able price. A cannot ask for its return. As regards the second car,
goods to the Official Receiver or Assignee unless paid for, B cannot insist on its delivery to him since the contract has
as ownership has not passed to the buyers. become void (Sec. 10)].
6. Insolvency of seller if the buyer has already paid the price d) A dealer in radios gives a ‘Murphy’ radio to a customer on
In a sale, if the seller is adjudged insolvent, the buyer is the terms that Rs. 100 should be paid by him immediately
entitled to recover the goods from the Official Receiver or and Rs 200 more in two monthly equal instalments. It was
Assignee, as the property in the goods rests with the buyer. further agreed that if the radio is found defective the
On the other hand, in an agreement to sell, if the buyer has customer may return it within a week but not later. The
already paid the price and the seller is adjudged insolvent, customer makes default in paying the last installment. Can
the buyer can only claim a ratable dividend (as a creditor) the radio dealer take back the radio on his default? [ Hint.
and not the goods because property in them still rests with No. the radio dealer connot take back the radio on default
the seller. by the customer because it is a contract of sale and not of
Let us now understand the difference between Sale And Hire hire purchase]
Purchase e) A sold 100 quintals of groundnut oil to B. Before it could
be delivered to B, the Government of India requisitioned
Hire Purchase
the whole quantity lying with A in public interest. B wants
Although hire purchase resembles sale of goods it is different
to sue A for breach of contract. Advise B.
in many ways. Under hire purchase agreement the goods are
delivered to the hire purchaser for his use at the time of the Notes
agreement but the owner of the goods agrees to transfer the
property in the goods to the hire purchaser only when the hirer
pays a certain fixed number of installments of price. Thus, the
essence of hire-purchase agreement is that there is no agreement
to buy, but there is only a bailment of the goods coupled with
an option to purchase them, which may or may not be exer-
cised.
Distinction between a sale and a hire-purchase agreement
Sale Hire-purchase agreement
1. Ownership is transferred from the seller to 1 Ownership is transferred from the seller to the
the buyer as soon as the contract is entered hire-purchaser only when a certain agreed
into. number of instalments is paid.
2. The position of the buyer is that of the 2. The position of the hire-purchaser is that of
owner. the bailee.
3. The buyer cannot terminate the contract and 3. The hire-purchaser has an option to terminate
as such is bound to pay the price of the the contract at any stage, and cannot be forced
goods. to pay the further instalments.
4 If the buyer makes the payment in 4. The instalments paid by the hire-purchaser are
instalments, the amount payable by the buyer regarded as hire charges and not as payment
to the seller is reduced, for the payment made towards the price of the goods till option to
by the buyer is towards the price of the purchase the goods is exercised.
goods.
Existing goods can be classified into ‘specific or (a) Damage to goods so that the goods have ceased to exist in
unascertained.’ the commercial sense, i.e., their merchantable character as
such has been lost (although they are not physically
(a) Specific goods. Goods identified and agreed upon at the destroyed), e.g., where cement is spoiled by water and
time of the making of the contract of sale are called becomes almost stone or where sugar becomes sharbat and
‘specific goods’ [Sec. 2(14)]. It may be noted that in actual thus are unsaleable as cement or sugar;
practice the term ‘ascertained goods’ is used in the same
sense as ‘specific goods,’ For example, where A agrees to (b) Loss of goods by theft (Barrow Ltd. Vs Phillips Ltd. );
sell to B a particular radio bearing a distinctive number, (c) Where the goods have been lawfully requisitioned by the
there is a contract of sale of specific or ascertained goods. government (Re Shipton, Anderson & Co. ).
(b) Unascertained goods. The goods, which are not separately You must note that it is only the perishing of specific and
identified or ascertained at the time of the making of the ascertained goods that affect the sales. In the case of unascer-
contract, are known as ‘unascertained goods.’ They are tained goods, their perishing does not affect the contract. Where
indicated or defined only by description. For example, if A A agrees to sell to B ten bales of Egyptian cotton out of 100
agrees to sell to B one bag of sugar out of the lot of one bales lying in his godown and the bales in the godown are
hundred bags lying in his godown, it is a sale of completely destroyed by fire, the contract does not become void.
unascertained goods because it is not known which bag is A must supply ten bales of cotton after purchasing them from
to be delivered. As soon as a particular bag is separated the market or pay damages for the breach.
from the lot for delivery, it becomes ascertained or specific Effect of Pershing of Goods May Fall Under
goods.
1. Where specific goods from the subject matter of contract
The distinction between ‘specific’ or ‘ascertained’ and ‘unascer- of sale (both actual sale and agreement to sell, and they,
tained’ goods is important in connection with the rules without the knowledge of seller perish, at or before the
regarding ‘transfer of property’ from the seller to the buyer. time of contract , the contract is void. This provision is
2. Future goods: Future goods are goods to be manufactured made either on the ground of mutual mistake as to matter
or produced or yet to be acquired by seller. There cannot be of fact essential to agreement, or on the ground of
present sale in respect future goods because the property impossibility of performance, both of which render the
cannot pass. contract void ab-initio.
Where there is agreement to sell specific goods, and the price prevailing on the date or placing the order, the
subsequently the goods, without any fault on the part of course of dealing suggest that in subsequent transactions
the seller or buyer, perish before the risk passes to buyer, also the price as on the date of order will be paid.
the agreement is thereby avoided, i.e., Sales becomes void 4. If the price is not capable of being determined in
and both parties are excused from performance. This is accordance with any of the above modes, the buyer is
based on Supervening Impossibility. bound to pay to the seller “A reasonable price”. What is
If only part of the goods agreed to be sold perish, the contract reasonable price depends of circumstances. Generally, the
is void is if it is indivisible. In case contract is divisible, perish- market price of the goods prevailing on the date of supply
ing of goods rule apply to the extent of perishing goods. The is taken as reasonable price.
contract is valid as regards the part available in good condition. Agreement to Sell at Valuation (Sec. 10 ) says where there is an
It is to be noted that if fault of either party causes the destruc- agreement to sell goods and the price is to be fixed by the
tion of the goods , then the party in default is liable for valuation of a third party and such that parties fails to fix the
non-delivery or to pay for goods as the case may be. Again if price (either because he cannot value of because he does not
the risk has passed to the buyer, he must pay for the goods, want to value ) the contract becomes void, except to as part of
though undelivered. goods delivered and accepted, if any, under the contract, as
3. Effect of Perishing of Future goods: Present sale of regards which the buyer is bound to pay a reasonable price. If,
future goods is an agreement to sale. In case of future however any one of the parties , namely, the sellers or the buyer,
goods, if sufficiently identified, are to be treated as specific prevents the third party from making the valuation, the
goods, the destruction of which makes the contract void. innocent party may maintain a suit for damages against the
E.g. A agreed to sell B, 100 tons of potatoes to be grown party at fault. Although in this case also the contract becomes
in A’s land. A did everything needed but decease attacked void, yet the party at fault is bound to compensate the other
and could produce only 20 tones. The contract was held as party for the actual loss suffered by him because of the Act of
void. prevention.
Price is very important in the contract of Sale of Goods. Let me Sec:32 says that, unless otherwise agreed, payment of price and
now take up the meaning and fixation of price. delivery of goods are concurrent condition.
LESSON 16:
THE SALE OF GOODS ACT, 1930
CONDITIONS AND WARRANTIES
reject the same ( Nichol vs godts). (b) The plaintiff bought a bun at a baker’s and confectioner’s
5. Condition as to fitness or quality: Usually in a contract of ship. The bun contained a stone which broke one of the
sale of goods there is no implied condition or warranty as plaintiff’s teeth. Held, the seller was liable in damages
to quality or fitness for any particular propose of goods because he violated the condition of wholesomeness
supplied ; the rule being ‘Caveat Emptor’ that is, let the (Chaproniere vs Mason).
buyer beware. But an implied condition is deemed to exist (c) W bought a bottle of beer from H, a dealer in wines. The
on the part of the seller that the goods supplied shall be beer was contaminated with arsenic. W, on taking the beer,
reasonably fit for the purpose for which the buyer wants feel ill. H was held liable to W for the consequent illness
them, if the following conditions are satisfied: (Wren vs Halt ).
(i) The buyer, expressly or impliedly, should make known to Implied Warranties
the seller the particular purpose for which the goods are Unless otherwise agreed, the law in-corporate following Implied
required; and Warranties
(ii) The buyer should rely on the seller’s skill or judgment and 1. Warranty of quite possession: Sec –14 (b), the first implied
(iii) The goods sold must be of a description which the seller warranty on the part of the seller is that “the buyer shall
deals in the ordinary course of his business, whether he be have and enjoy quite possession of goods.” If the buyer is
the manufacturer or not. in anyway disturbed by a person having a superior right
Example than that of the seller, the buyer can claim damages from
A buyer ordered for the Hessian cloth, which is generally used the seller. Since disturbances of quite possession is likely to
for packing purposes, without specifying the purpose for which arise only where the seller’s title of goods is defective, this
he wanted the same. The cloth was supplied accordingly. On warranty is regarded as an extension of the implied
receiving the cloth the buyer found that it was not suitable for condition of the title provided in section-14(a)
packing food products as it had an unusual smell. Held, that the Example: A buys a typewriter and spent some money for
buyer had no right to reject the cloth as it was suitable for repairs. It turns to be a stolen article. A is entitled to get back
packing purposes alright. The buyer ought to have disclosed his what he paid plus repair charges.
particular purpose to the seller in order to make him liable for 2. Warranty of freedom from encumbrances: Sec.-14 (c) Says
the breach of implied condition as to fitness (Rs. Andrew Yule that ‘the goods shall be free from any charge or
& Co.) encumbrance in favour of any third party not declared or
The purpose need not be told expressly if the goods are fit for known to the buyer before or at the time when the contract
one particular purpose only or if the nature of the goods itself is made’ if goods are afterwards found to be subject to a
tells the purpose by implication. In such case the purpose is charge and the buyer has to discharge the same , there is a
deemed to be made known to the seller impliedly. breach of warranty and the buyer is entitled to damages. If
6. Condition as to merchantability: This condition is applicable the buyer knows about the encumbrance on the goods at
only when the sale is by description. The goods should the time of entering into the contract, he becomes bound
correspond with description. Sec-15 Lays down another by the same and he is not entitled to claim compensation
implied condition that the goods should be ‘merchantable from the seller for discharging same.
quality’ and it should satisfy following conditions: Example
(a) The seller should be a dealer in goods of that description, A pledges a watch with B. Later gets the watch for limited
whether he be a manufacturer or not purpose and A sales it to C. B tells C about the pledge. C has to
(b) The buyer must not have any opportunity of examining make payment for the pledge amount to B. Here is breach of
the goods or there must be some latent defect in the warranty and C can get compensation from A.
goods, which should be apparent on reasonable 3. Warranty of disclosing the dangerous nature of goods to
examination. the ignorant buyer: The third implied warranty on the part
The term ‘merchantable quality’ means that the goods are such of seller is that in case the goods sold are of dangerous
quality and in such condition that a reasonable man, acting nature he will warn the ignorant buyer of the probable
reasonably, would accept them under the circumstances of the danger. If there is a breach of warranty the buyer is entitled
case in performance of his offer to buy those goods, whether he to claim damages for injury. The seller is bound to give
buys them for his own use or to sell. some warning of the danger in the goods to the buyer.
7. Condition as to wholesomeness. This condition is Example
implied only in a contract of sale of eatables and C. Purchases a tin of disinfectant powder from A. A knows that
provisions. In such cases the goods supplied must not the lid of the tin is defective and if it is opened without special
only answer to description and be merchantable but must care it may be dangerous, but tells nothing to C. C opens the tin
also be wholesome, i.e., free from any defect which render in the normal ways whereupon the disinfectant powder flies
them unfit for human consumption. into her eyes and causes injury, A is liable in damages to C as he
should have warned C of the probable danger.
his action justified? 14. H, a housewife, ordered from C, a coal merchant, ‘a ton of
[Hint. Yes, B is entitled to reject the goods. The facts of the coalite’ and it was duly delivered to her. When part of the
given case are similar to Arcos Ltd. Vs E.A. Ronaasen & Son, consignment was put on fire in an open grate in H’s house,
1933, A.C. 470, in which case Lord Atkin observed: “If the an explosion occurred which caused damage. H claims
contract specifies conditions of weight, measurement and the damages. Is she entitled to sue?
like, those conditions must be complied with. A ton does not [Hint: Yes, as the goods are not of merchantable quality (Sec.
mean about a ton, or a yard about a yard. Still less, when you 16(2)].
descend to minute measurements, does half an inch means 15. In a contract for the purchase of 3,00 tins of canned fruits
about half inch. If the seller wants a margin he must, and in to be packed in cases each containing 30 tins, a substantial
my experience does, stipulate for it.”] part was tendered in cases containing 24 tins instead of 30.
8. A purchases some chocolates from a shop. One of the Can the buyer reject the cases?
chocolates contains a poisonous matter and as a result A’s [Hint: Yes, as the goods do not correspond with the descrip-
wife who has eaten it falls seriously ill. What remedy is tion of the goods ordered
available to A against the shopkeeper?
[ Sec. 15; Moore & Co. v. Landaur & Co.)].
[Hint The chocolates are not of merchantable quality and hence
A can repudiate the contract and recover damages (Sec. 17: References
Drummond v. Van Ingen)]. • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
9. A lady, who knew that her skin was abnormally sensitive, Sultan Chand and Sons, New Delhi.
bought a tweed coat and developed skin trouble by using • http://www.indialawinfo.com/bareacts/soga.html
it. She did not disclose to the seller that her skin was • M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
abnormally sensitive. Is the seller liable for breach of House Pvt. Ltd, Delhi.
implied condition as to fitness or quality? • P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
[Hint. The implied condition as to fitness or quality is with Pvt. Ltd, Delhi.
regard to the suitability of the goods to a normal buyer. If the
buyer is suffering from an abnormality and does not inform the
seller about the same, this implied condition does not apply. Notes:
Hence in the given case there is no breach of implied condition
as to fitness and as such the seller is not liable. (Griffths vs peter
Conway Ltd., 1939,
10. Worsted cotton cloth of quality equal to sample was sold
to tailors who could not stitch it into coats owing to some
defect in its texture. The buyers had examined the cloth
before effecting the purchase. Are they entitled to damages?
[Hint. Yes, as there is a latent defect in cloth (Sec. 17;
Drummond v. Van Ingen)].
11. M. asked for a bottle of Stone’s Ginger Wine at F’s shop
which was licensed for the sale of wines. While M was
drawing the cork, the bottle broke because of defect in the
glass and M was injured. Can M claim damages for the
injury?
[Hint: Yes, as the bottle is not of merchantable quality and
there is a sale of goods by description [Sec. 15 and 16(2); Morelli
v. Fitch and Gibbons)].
12. A sold to B a tin of disinfectant power. He knew that it
would be dangerous to open the tin without special care
but he did not warn B. B without knowledge of the
danger, opened the tin whereupon the power flew into his
eyes and injured him. B filed a suit for damages for the
injury. Will he succeed?
[Hint: Yes (Sec. 16(2)].
13. A contract to sell B a piece of silk. B thinks that it is Indian
silk. A knows that B thinks so, but knows that it is not
Indian silk. A does not correct B’s impression. B afterwards
discovers that it is not Indian silk. Can he repudiate the
contract?
Learning Outcomes 2. Suit for price: Generally speaking the seller can sue for the
After reading the lesson, you should be able to know: price if the property in goods has passed to the buyer.
• The meaning of transfer of property 3. Insolvency of the seller or the buyer: In case of insolvency
• The rules relating to transfer of property of the buyer or seller, whether official receiver or assignee
can take over goods shall depend upon whether the
• The transfer of property by non owners
property in goods was with the party who has become
Introduction insolvent. Example: If the seller becomes insolvent before
You must know what we mean by transfer of property. giving delivery of the goods but the property in goods has
Transfer of property in a contract of sale is primarily the transfer already passed on to the buyer who has paid the price, the
of property in goods by the seller to the buyer. The exact time official receiver have no claim on goods.
at which property in goods passes from seller to the buyer is of Do you know that there is a difference in transfer of property in
great importance. ‘The transfer ‘of property in goods’ means specific /ascertained goods and unascertained goods. Let us try
transfer of ownership of goods. ‘Property in goods’ is different to understand the difference.
from possession of goods. Possession simply refers to the Rule regarding Transfer of Property in specific or ascertained
custody of goods. Although the property in goods may pass goods:
from the seller to the buyer, but the goods may be in posses-
sion of the seller as unpaid seller or as a bailee for buyer. In In the case of specific or ascertained goods the property is
some cases the property in goods to still be with the seller transferred to the buyer at such time as parties intend to be
although the goods may be in possession of the buyer or his transferred. For ascertaining the intention of parties regard shall
agent or a carrier for transmission to the buyer. be had on terms of the contract, the conduct of parties and
circumstances of the case. The parties may intend to pass the
The Following Require special Notice property as wanted at the time making the contract, or when
1. Risk ‘prima-facia’ passes with property. goods are delivered or when the goods are paid.
As a general rule the risk of the loss of goods is prima-facie in Only when the intention of parties cannot be judged from the
the person in whom property is. Section 26 provides to the contract or conduct or circumstances of the case, the rules in
same effect, thus, “Unless otherwise agreed, the goods remain Section-20, 21,22,23, will apply.
at the seller’s risk until the property therein is transferred to the
1. When goods are in a deliverable state(Sec 20). Where there
buyer, but when the property therein is transferred to buyer, the
is an unconditional (i.e., not subject to any condition
goods are at the buyer’s risk whether delivery has been made or
precedent to be fulfilled by the parties) contract for the sale
not.” Thus, if after the contract the goods are destroyed or
of specific goods in a deliverable state, the property in the
damaged the question who is to bear the loss is to be decided
goods passes to the buyer as soon as the contract is made,
not on the basis of possession of the goods but on the basis
and it is immaterial whether the time of payment of the
of ownership of goods. Whosoever is the owner of the goods
price or the time of delivery of the goods, or both are
at the time of loss must bear the loss.
postponed.
Example
Example
A buys goods from B and property has passed to him, but the
goods remained in B’s warehouse. Before delivery of goods to (a) A buys a bicycle for Rs. 300 on a month’s credit and asks
A, there is a fire in B’s warehouse and all the goods are de- the shopkeeper to send it to his house. The shopkeeper
stroyed. A must bear the loss and pay the price of goods to B, agrees to do so. The bicycle immediately becomes the
if he has not paid it so far. property of A.
The opening words of Section 26, namely, ‘unless otherwise (b) P buys a table for Rs 100 on a week’s credit and arranges to
agreed’ are of great significance. These words imply that ‘risk take delivery of the table the next day. A fire broke out in
passes with property’ is not an absolute or inflexible rule, but a the furniture mart the same evening and the table is
prima facie one. Risk is no test of property passing. There is destroyed. The property in the table has passed to P and
nothing to prevent the parties from contracting that risk shall the is bound to pay the price.
pass even before passing of property or vice versa. The goods are said to be in a ‘deliverable sate’ when they are in
1. Action against third parties: If after the contract of sale, the such a state that the buyer would, under the contract, be bound
goods having damaged by a third party, it is only the to take delivery of them [sec.2(3)]. For example, in illustration
person in whom the property vests who can take action (b) above, if the seller has to polish the table to make it
against the wrong doer. acceptable to the buyer, it is not in a deliverable state until it is
It may be noted that if the seller has done all what he was The process of ascertainment or appropriation consists in
required to do under the contract and nothing remains to be earmarking or setting apart goods as subject-matter of the
done by him, the property passes to the buyer even if the buyer contract. It involves separating, weighing, measuring, counting
has to do something for his own satisfaction. or similar acts done in relation to goods with an intention to
identify and determine the specific goods to be delivered under
Example the contract. The distinction between ‘ascertainment’ and
A sold to B 289 bales of goat skins, each bale containing five ‘appropriation’ is that whereas ‘ascertainment’ can be a unilateral
dozens, and the price was for certain sum per dozen skins. It act of the seller, that is, he alone may set apart the goods,
was the duty of A to count the goat skins in each bale. Before A ‘appropriation’ involves the element of mutual consent of the
could do the same, the bales were destroyed by fire. Held, that seller and the buyer.
the property in the goods had not passed to the buyer (i.e.B) as
Essentials of valid appropriation: As regard a valid or proper
something still remained to be done by the seller (i.e. , A) for
appropriation of goods, the following point should be noted:
ascertaining the price, and as such the loss caused by fire had to
be borne by the seller ( i.e., A) (Zagury vs Furnell). (i) The appropriation must be of goods answering the
contract description, both as to quality and quantity.
4. When goods are delivered on approval: (Section 24) When
goods are delivered to the buyer on approval or ‘on sale or (ii) The appropriation must be intentional, i.e., it must be
return,’ or on other similar terms, the property therein made with intention to appropriate goods to specific
passes to the buyer: contract, and it must not be due to mere accident or
mistake.
(i) When he signifies his approval or acceptance to the seller or
does any other act adopting the transaction, e.g., uses the (iii) The appropriation must be made either by the seller with
goods, pledges the goods or resells them; the assent of the buyer or by the buyer with the assent of
the seller. Assent of the other future party is thus
(ii) If he does not signify his approval or acceptance to the
necessary; whether before of after the appropriation is
seller but retains the goods, without giving notice of
made for a valid appropriation.
rejection, beyond the time fixed for the return of goods, or
if no time has been fixed, beyond a reasonable time. (iv) The appropriation must be unconditional, i.e. the seller
should not reserve to himself the right of disposal of the
goods until and unless certain conditions are fulfilled.
to induce the buyer to alter his position to his seller in respect of those goods.
prejudice. It is to be noted that a person who has got merely ‘an option to
Example: M, the owner of a wagon allowed one of his buy,’ as in a hire-purchase agreement, cannot convey a good title
employees K, to have his name painted on it. M did so for the to a sub-buyer, however bonafide, for ‘an option to buy’ is not
purpose of inducing the public to believe that the wagon ‘an agreement to buy’ (Belsize Motor Supply Co. vs Cox). In
belonged to K. C purchased the wagon from K in good faith. C order to make this exception applicable it is essential that the
acquires a good title as M is estopped from denying K’s person must have obtained possession of the goods under ‘an
authority to sell (O, Connor vs Clark). agreement to sell’ (i.e., under ‘and agreement to buy’ from the
3. Sale by joint owner: (Sec.28) If one of several joint owners buyer’s point of view).
of goods has the sole possession of them by permission Example
of the co-owners of goods has the sole possession of
(a) A buys some furniture and agrees to pay for that in two
them by permission of the co-owners, the property in the
monthly installments, the ownership to pass to him on
goods is transferred to any person who buys them from
payment of the second installment. Having obtained
such joint owner in good faith without notice of the fact
possession of the furniture, A, sells the furniture to B
that the seller has no authority to sell. It may be noted that
before paying the second installment. B buys the furniture
in the absence of this provision (i.e., Sec. 28) the buyer
bonafide. Subsequently A does not pay the second
would have obtained only the title of the co-owners and
installment. The furniture dealer cannot take back furniture
would have become merely a co-owner with the other co-
from B, who obtains a good title to the same. The dealer
owners. Hence the provision constitutes an exception to
can, of course, sue A for the breach of the contract and
the rule – “no one can give what the has not got.”
claim damages.
Example: A, B and C are three brothers. They own a cow in (b) A agreed to buy a car and pay for it, if his solicitor
common. B and C entrust the work of looking after the cow to approved. A obtained possession of the car and sold the
A and leave the cow in A’s possession. A sells the cow to D. D same to B. But the solicitor subsequently disapproved of
purchases bonafide for value. D gets a good title. the transaction. It was held that B, the bonafide buyer, got
4. Sale by person in possession under voidable contract: (Sec. a good title, because A agreed to buy ( Marten vs Whale).
29) When a person has obtained possession of goods 7. Resale by an unpaid seller: [Sec. 54(3)]. Where an unpaid
under voidable contract and sells those goods before the seller, who has exercised his right of lien or stoppage in
contract has been rescinded acquires a good title to them transit, resells the goods (of which ownership has passed
provided he acts in good faith and without notice of the to the buyer), the subsequent buyer acquires a good title
seller’s defect in title. thereto as against the original buyer, even though the resale
Example: A, by misrepresentation induces B to sell and deliver may not be justified in the circumstances, i.e., no notice of
to him a cow. A sells the cow to C before B has rescinded the the resale has been given to the original buyer.
contract. C purchases the cow in good faith and without notice 8. Exceptions under other Acts. Other Acts also contain some
of the seller’s defective title. C acquires a good title. provisions under which a non-owner may pass to the
It is to be noted that this Section (Sec. 29) does not apply unless buyer a better title than he himself has. For example,
there is a contract. Thus it does not apply to a contract originally (a) Sale by finder of lost goods under certain circumstances
void or where goods have been obtained by theft. (Sec. 169, The Indian Contract Act).
5. Sale by Seller in possession after sale [Sec. 30 (1)] Where a (b) Sale by Pawnee or pledgee under certain circumstance (Sec.
seller, after having sold the goods, continues to be in 176, The Indian Contract Act.).
possession of the goods or of the documents of title to
them and again sells or pledges them either himself or (c) Sale by Official Receiver or Assignee in case of insolvency
through a mercantile agent, he will convey a good title to of an individual and Liquidators of companies. These
the buyer or the pledge provided the buyer or the pledge persons are not owners of the properties they deal in, but
acts in good faith and without notice of the previous sale. convey a better (good) title to the buyers than they
For the application of this exception it is essential that the themselves possess.
possession of the seller must be as seller and not as hirer (d) Under the Negotiable Instruments Act, a holder in due
or bailee. course gets a better title than what his endorser had. In
6. Sale by buyer in possession after ‘agreement to buy’ [Sec. other words, a person who takes a negotiable instrument
30(2)]. Where a buyer has agreed to buy the goods and has in good faith and for value becomes the true owner even if
obtained possession of the same or the documents of title he takes it from a thief of finder.
to them with the consent of the seller, resells or pledges Solve the following problems for a better understanding:
the goods either himself or through a mercantile agent, he Practical Problems
will convey a good title to the buyer or the pledge provided Attempt the following problems, giving reasons:
the person receiving the goods acts in good faith and
Notes:
Learning Outcomes (a) where the seller in possession of the goods agrees to
After reading the lesson, you should be able to know: hold them on behalf of the buyer.
• The meaning of performance of contract of sale (b) Where the buyer is in possession of the goods and the
• The rules as to delivery of goods seller agrees to the buyer’s holding the goods as owner.
The performance of contract of sale implies delivery of goods, Example. A sells to B 10 bags of wheat lying in C’s Go down.
by the seller, and acceptance of the delivery of goods and A gives an order to C, asking him to transfer the goods to B. C
payment for them by the buyer, in accordance with in contract. assents to such order and transfer the goods in his books to B.
The parties are free to provide any terms they like in their this is a delivery by attornment.
contract about the time, place and manner of delivery of Rules as to Delivery of Goods
goods, acceptance there of and payment of the price. But if the 1. Delivery may be either actual or symbolic or constructive.
parties are silent and do not provide any thing regarding these (sec. 33) Delivery of goods sold may be made by doing
matters in the contract then the rules contained in the sale of anything which the parties agree shall be treated as delivery
Goods Act are applicable. or which has the effect of putting the goods in the
If the contract contains any special terms as to delivery and possession of the buyer or of any person authorized to
acceptance, these must be complied with. If there are no terms hold them on his half. Thus, the delivery of the goods
in the contract to this effect, delivery of the goods and payment may be either actual or symbolic or constructive.
of the price are concurrent conditions, that is , both these must 2. Delivery and payment are concurrent conditions (sec. 32.)
take place at the same time as in, for instance, a cash sale over a unless otherwise agreed, delivery of the goods and
shop over counter (sec.32). payment of the price are con-current conditions, that is ,
Delivery of goods (section. 2(2) the seller should be ready and willing to deliver the goods
Delivery means voluntary transfer of possession of goods to the buyer in exchange for the price and the buyer should
from one person to another [sec. 2(2)]. Delivery of goods sold be ready and willing to pay the price in exchange for
may be made by doing anything which the parties agree shall be possession of the goods simultaneously, just like in a cash
treated as delivery or which has the effect of putting the goods sale over a shop counter.
in the possession of the buyer or his agent (sec.33) Illustration A contracts to sell to B 10 bags of sugar for Rs.
Delivery of goods may be actual, symbolic, or constructive. 9,000. A need not deliver the goods unless B is ready and
willing to pay for the goods on delivery, and B need not pay for
1. Actual delivery. Where the goods are handed over by the
the goods unless A is ready and willing to deliver them on
seller to the buyer or his duly authorized agent, the delivery
payment.
is said to be actual. Delivery of goods may also be made by
doing anything which has the effect of putting the goods 3. Buyer to apply for delivery. Apart from any express
in the possession of the buyer [sec 33]. contract, the seller of goods is not bound to deliver them
until the buyer applies for delivery (sec.35). where the
2. Symbolic delivery. Where the goods are ponderous or
goods are subsequently acquired by the seller. He should
bulky and incapable of actual delivery, e.g., haystack in a
intimate this to the buyer and the buyer should then apply
meadow, the delivery may be symbolic. Handing over of
for delivery. Unless otherwise agreed , the buyer has no
the key of a warehouse to the buyer is symbolic delivery of
cause of action against the seller if he does not apply for
the goods to the buyer and is as effective as actual delivery,
delivey.
even though there is no change in the possession of the
goods. 4. Effect of part delivery, when property in goods is to pass
on delivery (sec.34). A delivery of part of the goods, in
3. Constructive delivery or delivery by attornment .Where a
progress of the delivery of the whole, has the same effect,
third person (e.g., a bailee) who is in possession of the
for the purpose of passing the property in such goods, as a
goods of the seller at the time of the sale acknowledges to
delivery of the whole. In other words, when delivery of
the buyer that he holds the goods on his behalf, there
part of the goods has been made with the intention of
takes place a delivery by attornment or constructive delivery
delivering the rest also, the property in the whole of the
[sec.36(3)]. This may happen in the following cases:
goods is deemed to pass to the buyer as soon as some
portion is delivered.
buyer of the cargo, upon the condition that the property is to different contingencies which may arise in case of a
pass to him on delivery. The captain begins to discharge it. And defective delivery, i.e., delivery of a wrong quantity, are:
delivers over part of the goods to X in progress of the delivery (1) Delivery of goods less than contracted for . where the seller
of the whole. Here, he delivers of the portion of the goods to delivers to the buyer a quantity of goods less than he
X is equivalent to the delivery of the whole of the cargo and he contractecd to sell, the buyer may reject the goods. If he
property in the whole of the goods passes to X, the buyer accepts them, he shall pay for them at the contract rate [sec.
(Dixon vs Yates’). But when a part of the goods is delivered 37(1)].
with the intention of severing it from the whole, it is not
Example. A sells to B 2,000 OF “200 yards reels of sewing
regarded as delivery of the whole of the goods and the property
cotton. After taking delivery B finds that the length of the
is deemed to pass to the buyer in that portion of the goods
cotton per reel is less than 200 yards. The average being shortage
only which has been delivered. If in a contract for the sale of a
of about 6 per cent. B may reject the goods. If he waives the
stack of hay the buyer is permitted to remove only a part of it,
right of rejection, he is liable to pay the price of the goods at the
this does not amount to delivery of the whole as it shows an
contract rate [Back etc. v. synzmanoski, (1924)A.C. 43].
intention to separate the part delivered from the rest of hay
(Bunnery vs Poyntz). If the goods have been rejected for short delivery. The seller can
make, within the time limit, another delivery in accordance with
Place of Delivery SEC.36(1) The delivey of goods should be
the terms of the contract.
effected as per the terms contained in the contract. The rules are
(2) Delivery of
1. where there is a contract as to the place of At the agreed place. goods in
delivery excess of the
2. where there is no contract as to the place of At the place at which the goods are at the time of sale.
quantity
delivery.
contracted for.
(a) In case of sale At the place at which the goods are at the time of
(b) In case of an agreement to sell agreement to sell. Where the
(i) in respect of existing goods At the place at which the goods are manufactured or seller delivers
(ii) In respect of future goods produced. to the buyer a
quantity of
goods larger
1. Time of delivery [sec. 36(2) & (4)]. Where under the
than he contracted to sell, the buyer may (i) accept the
contract of sale the seller is bound to send the goods to
whole ; or (ii) reject the whole ;or (iii) accept the quantity he
the buyer, but no time for sending them is fixed, the seller
ordered and reject the rest. If the buyer accepts the whole
is bound to send them within a reasonable time. Further,
of the goods so delivered, he must pay for them at the
demand of delivery by the buyer or the tender of delivery
contract rate [sec. 37(2)
by the seller should be made at a reasonable hour. What is
a reasonable hour is a question of fact. Example . A places an order with B to supply 25 bottles of
orange syrup. B sends 30.A is entitled to reject the whole, or he
2. Delivery of goods where they are in possession of a third
may accept 25 and reject the rest. If he accepts all the 30, he must
party (sec. 36(3). Where the goods at the time of sale are in
pay for them at the contract rate.
the possession of a third person, there is no delivery by the
seller to the buyer unless and until such third person (3) Delivery of goods contracted for mixed with other goods.
acknowledge to the buyer that he holds the goods on his Where the seller delivers to the buyer the goods he
behalf. Such a delivery is known as “ constructive delivery” contracted to sell mixed with goods of a different
or “ delivery by attornment” and requires the consent of all description, the buyer may accept the goods which are in
the three parties, the seller, the buyer and the person having accordance with the contract and reject the rest, or may reject
possession of the goods, where the seller hands over the the whole [sec 37(3)].
delivery order to the buyer, there is no delivery unless the Example. A contracts with B to buy 100 tons of cane sugar. A
seller’s agent holding the goods has assented thereto. delivers to B 75 tone of cane sugar and 25 tons of beet sugar. A
But where the goods have been sold by the transfer of the may either (i) accept 75 tons of cane sugar which is in accordance
document of title to goods, e.g., railway receipt or bill of lading, with the contract, and reject 25 tons of beet sugar which is of a
the buyer is deemed to be in possession of the goods repre- different description, or (ii) reject the whole sugar.
sented by such document, and the assent of the third party is The provision of sec.37 are subject to any usage of trade, special
not required. agreement, or course of dealing between the parties [sec.37(4)].
3. Cost of delivery. Unless otherwise agreed, all expenses of If quantity deliver is deficit or excess which is negligilgible , the
and incidental to making of delivery are borne by the seller, court does not take it into account. The maxim is “ the law does
but all expenses of and incidental to obtaining of delivery not take trival deviations into account.”
are borne by the buyer (sec.36(5)). 10. Delivery by installment [sec 38] unless otherwise agreed,
4. Delivery of wrong quantity or different quality. [Sec 37] the the buyer of goods is not bound to accept delivery thereof
delivery of the quanti ty of goods contracted for should by installments. If the parties so agree then only the
be strictly according to terms of the contract. A defective delivery of the goods may be made by installments.
bound to take the risk of having put upon him further becomes the owner thereafter who should bear the loss.]
deliveries of goods which do not conform to the contract (Sec. 9. P sold barley to B by sample, delivery to be made at T
38; Robert A. Munro & Co. v. Myer,(1930) 2 K.B. 312)] railway station. B sold the barley to X. The barley was
1. A contracts with B to buy 50 easy-chairs of a certain quality. delivered at T railway station and B, after inspecting a
B delivers 25 chairs of the type agreed upon and 25 chairs sample of it, sent it on to X. X rejected it as not being
of some other type. What are the rights of A? according to sample, whereupon B seeks to reject the
[Hint: A may accept the chairs which are in accordance with the goods. Will B succeed?
contract and reject the rest or may reject the whole (Sec. 37 (3)]. [Hint. B cannot reject the barley, as by reselling those goods to
2. P sold barley to B by sample, delivery to be made at T X and ordering to send them to X, he had in law ‘accepted’ the
railway station. B resold the barley to D. The barley was goods.]
delivered at T station and B, after inspecting a sample of it, References
sent it on to D. D rejected it as not being according to • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
sample, whereupon B claimed to be entitled to reject it. Sultan Chand and Sons, New Delhi.
What are B’s rights?
• http://www.indialawinfo.com/bareacts/soga.html
[Hint: B is not entitled to reject the barley (Secs.17 and 42;
Perkins v. Bell)]. • M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
House Pvt. Ltd, Delhi.
3. There was a contract for the sale of 4,000 tons of meal, 2
per cent more or less. The seller delivered meal greatly in • P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
excess of the permitted variation. What are the rights of Pvt. Ltd, Delhi.
the buyer?
[Hint: The buyer can reject the whole quantity (Sec. 37 (3); Payne Notes:
& Routh V. Lillico & Sons].
4. A of Agra ordered certain specified goods from B of
Mumbai. B sends the goods, not ordered, along with
them. What should A do?
[Hint: A may either reject the whole or accept the whole or
accept the goods ordered by him and reject the rest (Sec. 37(3)].
5. A contract with B to purchase 30 tons of apple juice. B
crushes the apples, puts the juice in casks and keeps it ready
for delivery. A delays to take the delivery and the juice goes
putrid and has to be thrown away. Is A liable to pay the
price?
{Hint: Yes].
6. A sells to B 100 bags of wheat which are locked up in a
godown. A hands over to B the key of the godown. Does
it constitute delivery of the goods to B?
[Hint. Yes, this is a delivery to B, being a symbolic delivery.]
7. X of Cochin agreed to sell 400 tons of rice to Y of Calcutta
to be shipped in November or December 1995. X puts the
rice on ship on 20 October 1995. Is the buyer bound to
accept the consignment?
[Hint: The buyer is not bound to accept the consignment
because the seller has not complied with the stipulation as to
time of delivery and time of delivery of goods being of the
essence of all mercantile contracts, an essential term of the
contract has been broken.]
8. P of Delhi writes to R of Bombay to send him a book by
parcel post. R accordingly sends the book by parcel post.
The parcel is lost on the way. Can R recover its price from
P?
[Hint. Yes, R can recover the price of the book from P because
as per Section 39 of the sale of Goods Act, delivery to the carrier
Learning Outcomes
After reading the lesson, you should Against the goods Against the buyer personally
be able to know:
• The rights of an unpaid seller
• The rights of an unpaid seller Where the property Where the property
against the goods In the goods has in the goods has not
• The rights of an unpaid seller Passed (Sec.46(1) passed (Sec. 46(2)
against the buyer
personally
• The rights of buyer Lien Stoppage Re-sale Withholding Stoppage in
(Secs. Secs. 50 (Sec. 54) delivery Transit
Introduction 47 to 49 to 52
Today will be discussing about the
remedies in case of breach by seller
and buyer. Let us first start with the Suit for Suit for Repudiation Suit for
study of rights of an unpaid seller. Price damages of contract interest
(Sec.55) (Sec. 56) (Sec. 60) (Sec.61)
Rights of an Unpaid Seller
According to (section 45) the term seller includes ‘any person Rights of an Unpaid Seller
who is in the position of a seller, as, for instance, an agent of An unpaid seller has two-fold rights, viz.,;
the seller to whom the bill of lading had been endorsed, or a
I. Rights of unpaid seller against the goods, and
consignor or agent who has himself paid, or is directly respon-
sible for, the price. II. Rights of unpaid seller against the buyer personally.
The seller of goods is deemed to be an ‘unpaid seller’ (a) when We shall now examine these rights in detail.
the whole of the price has not been paid or tendered; or (b) 1. Rights of Unpaid Seller against the Goods.
where a bill of exchange or other negotiable instrument has An unpaid seller has the following rights against the goods
been received as a conditional payment, i.e., subject to the notwithstanding the fact that the property in the goods has
realization thereof, and the same has been dishonoured. passed to the buyer:
According to above the following are the characteristics of and 1. Right of lien;
‘unpaid seller’. 2. Right of stoppage of goods in transit;
1. He must sell goods on cash terms and not on credit, and 3. Right of resale [Sec. 46 (1)].
he must be unpaid.
1. Right of lien (Sec. 47)
2. He must be unpaid either wholly or partly. Even if only a
portion of the price, however small, remains unpaid, he is ‘Lien’ is the right to retain possession of goods and refuse to
deemed to be an unpaid seller. Where the price is paid deliver them to the buyer until the price due in respect of them
through a bill of exchange or other negotiable instrument, is paid or tendered. An unpaid seller in possession of goods
the same must be dishonoured. sold is entitled to exercise his lien on the goods in the following
cases:
3. He must not refuse to accept payment when tendered. If
the buyer has tendered the price but the seller wrongfully (a) Where the goods have been sold without any stipulation as
refuses to take the same, he ceases to be an unpaid seller. to credit;
(b) Where the goods have been sold on credit, but the term of
credit has expired:
(c) Where the buyer becomes insolvent, even though the
period of credit may not have yet expired.
In the case of buyer’s insolvency the lien exists even though
goods had been sold on credit and the period of credit has not
yet expired. When he goods are sold on credit the presumption
is that the buyer shall keep his credit good. If, therefore, before
payment the buyer becomes insolvent, the seller is entitled to
exercise this right and hold the goods as security for the price.
credit are put to an end and the seller has a right to say, “I will exchange payable at a future date or assents to a sub-sale
not deliver the goods until I see that I shall get my price paid” which the buyer may have made.
(Griffiths vs Perry2) It may be noted that right of lien, if once lost, will not revive if
The unpaid seller’s lien is a possessory lien, i.e., the lien can be the buyer redelivers the goods to the seller for any particular
exercised as long as the seller remains in possession of the purpose. Thus, where a refrigerator after being sold was
goods. He may exercise his right of lien notwithstanding that delivered to the buyer and since it was not functioning properly,
he is in possession of the goods as agent or bailee for the buyer the buyer delivered back the same to the seller for repairs, it was
[Sec. 47(2)]. Transfer of property in the goods or transfer of held that the seller could not exercise his lien over the refrigera-
documents of title to the goods does not affect the exercise of tor ( Eduljee vs John Bros.).
this right, provided the goods remain in the actual possession
2. Right of Stoppage of Goods in Transit:
of the seller. In fact when property has passed to the buyer then
Meaning of Right of Stoppage of Goods in Transit: The right
only retaining of goods is called technically ‘lien.’ Where the
of stoppage in transit means the right of stopping the goods
property in goods has not passed to the buyer and the title is
while they are in transit, to regain possession and to retian them
still with the seller then it is, strictly speaking, anomalous to say
till the full price is paid. Lord Cairns LJ in case of Schotsmans v.
that the seller has a lien against his own goods. The seller’s lien
Lances and Yorks Rly. Had made the following observation in
when property has not passed to the buyer is termed as ‘a right
this regard:
of withholding delivery. Accordingly, Section 46(2) provides:
“The essential feature of stoppage in transit is that the goods
The term insolvent here does not mean a person who has been
should be in the possession of a middleman or some other
adjudged insolvent under the Insolvency Law. In Sale of
person intervening between the vendor who has parted with
Goods Act “a person is said to be insolvent who has ceased to
and the purchaser who has not received them.”
pay his debts in the ordinary course of business, or cannot pay
his debts as they become due, whether he has committed an act Conditions under which Right of Stoppage in Transit can be
of insolvency or not” [Sec. 2(8)]. Exercised [Section 50]: The unpaid seller can exercise the right
of stoppage in transit only if the following conditions are
But if the buyer has transferred the documents of title to a
fulfilled:
bonafide purchaser, the seller’s lien is defeated (Sec. 53).
(i) The seller must have parted with the possession of
“Where the property in goods has not passed to the buyer, the
goods, i.e., the goods must not be in the possession
unpaid seller has, in addition to his other remedies, a right of
of seller.
withholding delivery similar to and coextensive with his rights
of lien and stoppage in transit where the property has passed to (ii) The goods must be in the course of transit.
the buyer.” (iii) The buyer must have become insolvent.
This right of lien can be exercised only for the non-payment of Note: The buyer is said to be insolvent when he has ceased to
the price and not for any other charges, i.e., maintenance or pay his debts in ordinary course of business, or cannot pay his
custody charges, which the seller may have to incur for storing debts as they become due, whether he has committed an act of
the goods in exercise of his lien for the price. This right of lien insolvency or not.
extends to the whole of the goods in his possession even Note: The seller’s right of stoppage in transit is based on the
though part payment for those goods has already been made. principle that one man’s goods shall nto be applied to the
In other words the buyer is not entitled to claim delivery of a payment of other man’s debt. [Lord Reading in Booth
portion of the goods on payment of a proportionate price. Steamship Co Ltd. V. Cargo Fleet Iran Co.]
Further, where an unpaid seller has made part delivery of the Duration of Transit [Section 51(1)]: Goods are deemed to be in
goods, he may exercise his right of lien on the remainder, course of transit from the time when they are delivered to a
unless such part delivery has been made under such circum- carrier or other bailee for the purpose of transmission to the
stances as to show an agreement to waive the lien (Sec. 48). buyer, until the buyer or his agent in that behalf takes delivery
Also, the lien can be exercised even though the seller has of them from such carrier or other bailee.
obtained a ‘decree’ for the price of the goods [Sec. 49(2)].
Note: The carrier must hold the goods in the capacity of an
When lien is lost? As already observed, lien depends on independent person and not in the capacity of an agent for the
physical possession of goods. Once the possession is lost, the seller or buyer. If the carrier holds the goods as an agent for the
lien is also lost. Section 49 accordingly provides that the unpaid seller, there is no question of exercising the right of stoppage in
seller of goods loses his lien thereon in the following cases: transit because the seller can exercise his right of lien. If the
(a) When he delivers the goods to a carrier or other beilee for carrier holds the goods as an agent for the buyer, the seller
the purpose of transmission to the buyer without cannot exercise the right of stoppage in transit because the
reserving the right of disposal of the goods; or delivery to the carrier amounts to delivery to buyer.
(b) When the buyer or his agent lawfully obtains possession Circumstances under which Right of Sopttage is Lost [Sections
of the goods; or 51 and 53 (1)]: The right of stoppage in transit is lost when
(c) When the seller expressly or impliedly waives his right of transit comes to an end. Transit comes to an end in the
lien. An implied waiver takes place when the seller grants following cases:
of the transferee price according to the terms of the contract, the seller is
(ii) Where the transfer is by way of pledge, the unpaid seller entitled to sue the buyer for price, irrespective of the
may require the pledgee to have the amount secured by the delivery of goods. Where the goods have not been
pledge satisfied in the first instance, as far as possible, out delivered, the seller would file a suit for price normally
of any other goods or securities of the buyer in the hands when the goods have been manufactured to some special
of the pledgee and available against the buyer. order and thus are unsaleable otherwise.
2. Suit for damages for non-acceptance (Sec. 56). Where the
3. Right of Resale
buyer wrongfully neglects or refuses to accept and pay for
The right of resale is a very valuable right given to an unpaid
the goods, the seller may sue him for damages for non-
seller. In the absence of this right, the unpaid seller’s other
acceptance. The seller’s remedy in this case is a suit for
rights against the goods, namely, ‘lien’ and ‘stoppage in transit,’
damages rather than an action for the full price of the
would not have been of much use because these rights only
goods.
entitle the unpaid seller to retain the goods until paid by the
buyer. If the buyer continues to remain in default, then should The damages are calculated in accordance with the rules con-
the seller be expected to retain the goods indefinitely, specially tained in Section 73 of the Indian Contract Act, that is, the
when the goods are perishable? Obviously, this cannot be the measure of damages is the estimated loss arising directly and
intention of the law. Section 54, therefore, gives to the unpaid naturally from the buyer’s breach of contract. Where the goods
seller a limited right to resell the goods in the following cases: have a ready market the principle applicable is that the seller may
(a) Where the goods are of a perishable nature; or recover from the buyer damages equal to the difference between
the contract price and the market price on the data of the breach
(b) Where such a right is expressly reserved in the contract of the contract. Thus, if the difference between the contract
in case the buyer should make a default; or price and market price is nil, the seller can get only nominal
(c) Where the seller has given a notice to the buyer of his damages ( Charter vs Sullivan). But where the goods do not
intention to resell and the buyer does not pay or tender have any ready market, the measure of damages will depend
the price within a reasonable time. upon the facts of each case. For example, in Thompson Ltd. Vs
If on a resale there is a loss to the seller, he can recover it from Robinson the damages were assessed on the basis of profits
the defaulting buyer. But if there is a surplus on the resale, the lost. In that case, T Ltd., who were car dealers, contracted to
seller can keep it with him because the buyer cannot be allowed supply a motorcar to R.R refused to accept delivery. It was
to take advantage of his own wrong. If, however, no notice of found as a fact that the supply of cars exceeded the demand at
resale [as required in case(c) above] is given to the buyer, the the time of breach and hence in a sense there was no market
right of seller to claim loss and retain surplus, if any, is reversed. price on the date of breach. Held, T Ltd., were entitled to
In other words, if the unpaid seller fails to give notice of resale damages for the loss of their bargain viz., the profit they would
to the buyer, there neither the goods are of perishable nature have made, as they had sold one car less than they otherwise
nor such a right was expressly reserved, he cannot recover the would have sold. To take another illustration, if the goods have
loss from the buyer and it under an obligation to hand over the been manufactured to some special order and they are
surplus, if any, to the buyer, arising from the resale. Thus, it will unsaleable and have been manufactured to some special order
be seen that giving of notice to the buyer, when so required, is and they are unsaleable and have no value at all for other buyers,
very necessary to make him liable for the breach of contract. It is then the seller may even be allowed the full price of the goods
so because such a notice gives an opportunity to the buyer either as damages.
to pay the price and have the goods, or, if he cannot pay, to 1. Suit for special damages and interest (Sec.61) This Section
supervise the sale to see that the same is properly made. entitles the seller to sue the buyer for ‘special damages’ also
It is important that absence of notice, when so required, affects for such loss “which the parties knew, when they made the
the rights of the unpaid seller himself only as discussed above contract, to be likely to result from the breach of it.” In fact
and it does not affect the title of the subsequent buyer who will the Section is only declaratory of the principle regarding
acquire a good title to the goods. Section 54(3) specially declares ‘special damages’ laid down in Section 73 of the Indian
–”Where an unpaid seller who has exercised his right of lien or Contract Act. The Section also recognizes unpaid seller’s
stoppage in transit resells the goods, the buyer acquires a good right to get interest at a reasonable rate on the total unpaid
title thereto as against the original buyer, notwithstanding that price of the goods sold, from the time it was due until it is
no notice of the resale has been given to the original buyer.” actually paid. (Telu Ram Jain vs Aggarwal & Sons).
II. Rights of Unpaid Seller against the Buyer Personally We have discussed a lot about the rights of an unpaid seller.
The unpaid seller, in addition to his rights against the But does the buyer too enjoys some rights. Yes, of course! Let
goods as discussed above, has the following three rights of me throw a light on it.
action against the buyer personally: Rights of Buyer
1. Suit for price (Sec. 55). Where property in goods has passed The rights available to the buyer have been shown below in
to the buyer; or where the sale price is payable ‘on a day Let us discuss these rights one by one.
certain’, although the property in goods has not passed;
LESSON 21:
THE NEGOTIABLE INSTRUMENT ACT 1881
MEANING AND TYPES OF NEGOTIABLE INTRUMENTS
(a) Meaning of Negotiable Instrument Payable to The same are being discussed in some detail. Let us come to the
order. definition aspect of important negotiable instruments
A promissory note, bill of exchange or cheque is payable to Definitions
order if, either of the following two conditions is fulfilled: (a) Promissory Note: A promissory note is an instrument
(a) It must be expressed to be so payable (not being a bank note or a currency – note ) in writing
(b) It must be expressed to be payable to a particular containing an unconditional undertaking, signed by the
person and it must not contains words which prohibit maker to pay a certain sum of money only to or to the
transfer or indicate and intention that it shall not be order of, a certain person or to the bearer of the
transferable. instrument ( Section 4).
(b) Meaning of Negotiable instrument Payable to In other words, the requirements of promissory note are as
Bearer. follows:
A Promissory note, bill of exchange or cheque is payable to (i) It must be in writing: This means that the engagement
bearer if either of the following condition is fulfilled cannot be oral. There is no prescribed form of language for
(a) It must be expressed to be so payable this; even the word ‘promise’ need not be used. What is
necessary is that whatever language is used, it must clearly
(b) The only and last endorsement must be endorsement in show that the maker is unconditionally bound to pay the
blank sum.
(iii) This order must be unconditional, as the bill is payable at (vi) The sum must be certain [what we have discussed on this
all events. Thus it is absolutely necessary for the drawer’s point in relation to promissory note vide requirement (iii)
order to the drawee to be unconditional. The order must on page 2 will equally hold goods here].
not make the payment of the bill dependent on a (vii) The medium of payment must be money and money only.
contingent event. A conditional bill of exchange is invalid. The distinctive order to pay anything in kind will vitiate the
Where a bill contains an order to pay the amount specified bill.
therein out of a particular fund it will be conditional and (c) Distinction between a promissory note and a bill of
therefore invalid. The reason for this invalidity is that it is exchange: The distinctive features of these two types of
uncertain whether the funds will be in existence or prove negotiable instruments are tabulated below:
sufficient on the bill becoming payable. However, an unquali-
You should carefully note that neither a promissory note nor a
fied order to pay together with an indication of a particular fund
bill of exchange can be made payable to bearer on demand.
out of which the drawee is to reimburse himself, is not
conditional. Hence such as indication does not vitiate the (d) Definition of Cheque: A “cheque” is a bill of exchange
instrument. drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the
(iv) The drawee must sign the instrument. The instrument
electronic image of a truncated cheque and a cheque in the
without the proper signature will be inchoate and hence
electronic form.
ineffective. It is permissible to add the signature at any time
after the issue of the bill. But if it is not so added, the For the purposes of this section, the expressions –
instrument remains ineffectual. (a) “a cheque in the electronic form” means a cheque which
(v) The drawer, the drawee (acceptor) and the payee – the contains the exact mirror image of a paper cheque, and is
necessary parties to a bill – are to be specified in the generated, written and signed in a secure system ensuring
instrument with reasonable certainty. You should the minimum safety standards with the use of digital
remember that all these three parties may not necessarily be signature ( with or without biometrics signature ) and
three different persons. Once can play the role of two. But asymmetric crypto system;
there must be two distinct persons in any case. (b) “a truncated cheque” means a cheque which is truncated
during the course of a clearing cycle, either by the clearing
(Section 124). liable for conversion? The effect of Section 130 of the Act.
(c) Crossing after issue: (f) If cheque has not been crossed, broadly, is that if the holder has a good title, he can still transfer
the holder thereof may cross it either generally, or it with a good title; but if the transferor has a defective title, the
specially. (ii) If it is crossed generally, the holder may transferee is affected by such defects, and he cannot claim the
cross it, specially. (iii) If it is crossed, either generally or right of a holder in due course by providing that he purchased
specially the holder may add the words “not the instrument in good faith and for value. As X in the case in
negotiable”. (iv) If a cheque is crossed specially, the question had obtained the cheque by fraud, he had no title to it
banker to whom it is crossed, may again cross it and could not give to the bank any title to the cheque or the
specially to another banker, his agent, for collection. money and the bank would be liable for the amount of the
This is the only case where the Act allows a second cheque for conversion. A similar decision was taken in Great
special crossing by a banker and for the purpose of Western Railway Co. vs. London and Country Banking Co.
collection [Akro Kervi Mines vs. Economic Bank (1901) A.C. 414 the facts whereof are exactly the same as the
(1904) 2 K.B. 465 (Section 125)]. It may be noted that example cited above.
the crossing of a cheque is an instance of an alteration The addition of the words” not negotiable” in a crossed cheque
which is authorized by the Act. has a special significance. The use of the words does not render
(d) Payment of cheque, crossed generally or specially the cheque non-negotiable but only affects one of the main
(Section 126 & 127): If a cheque is crossed generally, the features of negotiability. The general rule about the negotiability
banker on whom it is drawn shall not pay it otherwise is that the holder in due course of a bill or promissory note or
than to a banker. Again, where a cheque is crossed cheque takes the instrument free from any defect which might
specially, the banker on whom it is drawn shall not pay be existing in the title of the transferor. If the holder takes the
it otherwise than to the banker to whom it is crossed instrument in good faith , before maturity and for valuable
or his agent for collection. consideration, his claim is not defeated or affected by the
defective title of the transferor. In case of any dispute, it is the
Where a cheque is crossed specially to more than one banker
transferor with the defective title who is liable. But the addition
except when it is crossed to an agent for the purpose of
on the words “not negotiable” to the crossing of a cheque,
collection, the banker on whom it is drawn shall refuse payment
makes the position different. When such a crossing is placed on
thereof. This is because, in such a case, the instruction by the
a cheque, the holder in due course does not get any better title
drawer would not be clear (Section 127).
than what the transferor had: If the transferor had defective
(e) Payment in due course of crossed cheque: Where the title, the title of the holder in due course also becomes defective.
banker on whom a crossed cheque is drawn, pays it in Therefore, he will have to refund the amount of the bill to the
due course, it is to be presumed that he has made true owner. In other words, the principle of the ‘nemo dat
payment to the true owner of cheque, though in fact, quod non habet’ – (that is, nobody can pass on a title better
the amount of the cheque may not reach the true than what he himself has ) will be applicable to a cheque with a
owner. In other words, banker making payment in due “not negotiable” crossing.
course is protected, whether the money is or is not, in
Thus, cheques with “not negotiable” crossing are negotiable so
fact, received by the true owner of the cheque (Section
long as their title is good. Once the title of the transferor or
128).
endorser become defective the title of the transferee is also
(f) Payment out of due course: Any banker paying a affected by such defect and the transferee cannot claim the right
crossed cheque otherwise than in accordance with the of a holder in due course.
provisions of Section 126 shall be liable to the true
As per the latest instructions issued by the Reserve Bank of
owner of the cheque for any loss he may have
India (9-9-1992) it would be safer for the drawer to cross a
sustained. Thus, if the money does not reach the true
cheque “not negotiable” with the words “account payee” added
owner, he can claim payment over again from the
to it. The courts of law have held that “an account payee”
banker (Section 129).
crossing is a direction to the collecting banker as to how the
(g) Cheque marked “not negotiable”: A person taking a proceeds are to be applied after receipt. The banker can disregard
cheque crossed generally or specially bearing in either the direction only at his own risk and responsibility. In other
case the words’ not negotiable’ shall not have or shall words, an ‘account payee, cheque can be collected only for the
not be able to give a better title to the cheque than the account of the payee named in the cheque and not for anyone
title the person from whom he took had. else. A banker collecting an ‘account payee’ cheque for a person
In consequence if the title of the transferor is defective, the title other than the payee named in the cheque may be held liable for
of the transferee would be vitiated by the defect. But, in the case conversion.
of a bill negotiated in the ordinary way, the title of the holder in In other words, if the bank collects an account payee cheque for
due course would not be affected by the defect in the title of the a person other than the payee it does so at its own risk. It is
transferor (Section 130). imperative on the part of collecting bank, therefore to take
For example, X, by means of fraud, obtained from Y a cheque utmost care to enquire into the title of its customer and satisfy
crossed ‘not negotiable’ and got it cashed at a bank other than
the payment is made in due course. Hence the proposition that holder in due course for such amount. Provided that no person
“once a bearer instrument always a bearer instrument.” other than a holder in due course shall recover from the person
(b) Inland and Foreign Instrument (Sections 11 & 12): A delivering the instrument anything in excess of the amount
promissory note, bill of exchange or cheque drawn or intended to be paid by them there under. The principle of this
made in India and made payable in or drawn upon any rule (namely that a person who gives another possession to his
person resident in India shall be deemed to be an inland signature on a blank stamped paper, Prima facie authorizes the
instrument. Any such instrument, not so drawn, made or latter as his agent to fil it up and give to the world the instru-
payable shall be deemed to be a foreign instrument. ment as accepted by him ) is one of estoppel. By such signature
he binds himself as drawer, maker, acceptor or endorser. His
Thus, the foreign bills are: (a) bills drawn outside India and
signature on the blank paper purports to be an authority to the
made payable in or drawn upon any person resident in any
holder to fill up the blank, and complete the paper as a nego-
country outside India; (b) bills drawn outside India and made
tiable instrument.
payable in India, or drawn upon any person resident in India;
(c) bills drawn in India upon persons resident outside India Till this filling in and completion, the instrument is not a valid
and made payable outside India. negotiable instrument, and no action is maintainable on it.
Further, as a condition of liability, the signer as a maker, drawer,
In the absence of a contract to the country, the liability of the
endorser or acceptor must deliver the instrument to another. In
maker or drawer of a foreign promissory note or bill of
the absence of delivery, the signer is not liable. Furthermore, the
exchange is regulated in all essential matters by the law of the
paper so signed and delivered must be stamped in accordance
place where he made the instrument, and the respective liability
with the law prevalent at the time of signing and on delivering
of the acceptor and endorser by the law of the place where the
otherwise the signer is not estopped from showing that the
instrument is made payable (Section 134). For example, a bill of
instrument was filled without his authority.
exchange is drawn by A in California where the rate of interest is
25% and accepted by B payable in Washington where the rate of Sight And Time Bills Etc.: (Sections 21 To 25)
interest is 6%. The bill is endorsed in the State and is (i) Instruuments payable on demand: Bills and notes are
dishonoured. An action on the bill is brought against B in the payable either on demand or at a fixed future time.
States. He is liable too pay interest at the rate of 6% only. But if Cheques are always payable on demand. A promissory note
A is charged as drawer, he is liable to pay interest at 25. or bill of exchange in which no time for payment is
The distinction between inland and foreign bills is of impor- mentioned is payable on demand. A bill or promissory
tance in connection with Sections 104 and 134 of the Act. note is also payable on demand when it is expressed to be
Inland bills need not be protested for dishonour; protest in payable on demand, or “at sight” or “presentment”. It
this case is optional. But foreign bills must be protested when should be noted that the expression “on demand” does
law of the place of making or drawing them requires such not imply that any actual demand is to be made; it is only a
protest. The question by what law are the contracts on nego- technical expression meaning “immediately payable”. Such
tiable instruments governed is also important. a bill or note may be presented for payment at any time at
Foreign bills must be protested for dishonour if the law of the the option of holder, but it must be presented within a
place where these are drawn prescribes for such a protest. In the reasonable time after its issue in order to tender the drawer
case of inland bills, protest is optional (Section 104). liable, and within a reasonable time after its endorsement
to render the endorser liable.
c) Ambiguous and inchoate bills An ambiguous bill means
an instrument which can be constructed either as a (ii) Time Bills: The expression “after sight” means, a
promissory note or as bill of exchange (Section 17). E.g., a promissory note after presentment for sight, and in a bill
bill drawn by a person on himself in favour of a third of exchange, after acceptance, noting for non-acceptance or
person or where the drawee is a fictitious person. The law protest for non – acceptance. It is useful to make a bill or
on the point is that the holder of such a bill is at liberty to not payable at so many months or days after sight.
treat the instrument as bill or a promissory note. The The term ‘after sight’ is differently used in a note and a bill. In
nature of the instrument will be as determined by the the former case, it denotes that payment is not to be demanded
holder. till it has been exhibited to the maker, for a note is incapable of
An incomplete instrument called an inchoate instrument. being accepted; while in the latter case, it denotes that sight
Section 20 of the Negotiable Instruments Act provides that must appears in legal way , i.e., after acceptance, if the bill has
when one person signs and delivers to another a paper stamped been accepted or a after noting for non-acceptance or protest for
in accordance with the law relating to negotiable instruments non-acceptance soon).
then in force in India and either wholly blank or having written (iii) Maturity. Where bill or note is payable at fixed period after
thereon an incomplete negotiable instrument, he thereby give sight, the question of maturity becomes important. The
prima facie authority to the holder thereof to maker or com- maturity of a note or bill is the date on which it falls due.
plete, as the case may be, upon it a negotiable instrument for an A note or bill, not payable on demand, at sight or on
amount specified therein and not exceeding the amount covered presentment; is at maturity on the third day after the day
by the stamp. The person so signing shall be liable upon such on which it is expressed to be payable. Three days are
Learning Outcomes therefore, means the signification of assent to the order of the
After reading the lesson, you should be able to know: drawer by delivery or notification thereof. Under Section 27 of
• The Parties to a negotiable instrument the Act, every person capable of legally entering into a contract,
may make, draw, accept endorse, deliver and negotiate a
• The liability of various parties to negotiable
promissory note, bill of exchange or cheque, himself or
instrument
through a duly authorized agent. The agent may sign in two
Introduction ways, viz., (a) he may sign the principal’s name, for it is
The important parties to Negotiable Instruments can be listed immaterial what hand actually signs the name of the principal,
as follows: when in fact there exists an authority for the agent to put it
• Parties to a promissory note: Maker, payee, indorser, these; (b) he may sign by procreation stating on the face of the
indorsee instrument that he signs as agent. It is thus essenial that the
• Parties to a bill of exchange: Drawer, Drawee or agent, while putting his signature to the instrument, must have
Acceptor, drawee in case of need, acceptor for honour, either express or implied authority to enter, for his principal
, indorser, indorsee. who must be sui juris, into the particular contract. The authority
of an agent to make, draw, accept or endorse notes and bills
• Parties to a cheque: Drawer, drawee ( always a banker), depends on the general law of agency and is a question of fact.
payee, indorser, indorsee From a perusal of Section 27 and 28 it is, however, evident that
Let us learn about them a general authority to transact business and to discharge debits
Drawer, Drawee, Acceptor, Maker, Payee, etc.,: does not confer upon an agent the power to endorse bills of
(i) The party who draws a bill of exchange or a cheque or any exchange so as to bind his principal; nor can an agent escape
other instrument is called drawer. personal liability unless he indicates that he signs as an agent
and does not intend to incur personal liability.
(ii) The party on whom such bill of exchange of cheque is
drawn is called the drawee. In other words the person who What do you think constitutes a valid acceptance:
is thereby directed to pay is called the drawee. The essentials of a valid acceptance are as follows:
(iii) The drawee of a bill of exchange who has signified his (a) Acceptance must be written: The drawee may use any
assent to the order of the drawer is called the acceptor. The appropriate word to convey his assent. It may be sufficient
acceptor becomes liable to the holder after he has signified acceptance even if just a bare signature is put without
his assent but not before. additional words. But it should be remembered that an
Now a question would naturally arise as to who can be accep- oral acceptance is not valid in law. .
tors? Under Section 33 of the Act, no person except the drawee (b) Acceptance must be signed: A mere signature would be
of a bill of exchange, or all or some of several drawees or a sufficient for the purpose. Alternatively, the words
person named there in as drawee in case of need, can bind ‘accepted’ may be written across the face of the will with a
himself by an acceptance. Under Section 34, where they are signature underneath; if it is not so signed, it would not
several drawees of a bill of exchange who are not partners, each be an acceptance.
of them can accept it for himself; but none of them can accept it (c) Acceptance must be on the bill: That the acceptance should
for another without his authority. be on the face of the bill is not necessary; an acceptance
If follows from the aforesaid provisions that the following written on the back of a bill has been held to be sufficient
person can be acceptors: in law. What is essential is that it must be written on the
(a) Drawee, i.e., the person directed to pay. bill; else it creates no liability as acceptor on the part of the
person who signs it. Now what will happen if acceptance is
(b) All or some of the several drawees when the bill is
signed upon a copy of the bill and the copy is not one of
addressed to more drawees than one.
the part of it or if acceptance is made on a paper attached
(c) A drawee in case of need. to the bill; in either of the cases, acceptance would not be
(d) An acceptor for honour. sufficient.
(e) Agent of any of the persons mentioned above. (d) Acceptance must be completed by delivery: It would not
(f) When no drawee has been named in a bill but a person complete and the drawee would not be bound until the
accepts it, then he may be stopped from denying his drawee has either actually delivered the accepted bill to the
liability as an acceptor. holder or tendered notice of such acceptance to the holder
of the bill or some person on his behalf.
Acceptance is ordinarily made by the drawee by the signing of
his names across the face of the bill and by delivery. Acceptance,
one part only. Where the drawee signs his acceptance on two or in due course:
more parts, he may become liable on each of them separately. (i) A holder may become the possessor or payee of an
Acceptance may be either general or qualified. By a general instrument even without consideration whereas a holder in
acceptance, the acceptor assents without qualification to the due course is one who acquires possession for
order of the drawer . The acceptance of bill is said to be consideration.
qualified, when the drawee does not accept it according to the (ii) A holder in due course as against a holder must become
apparent tenor of the bill but attaches some conditions or the possessor payee of the instrument before the amount
qualification which have the effect of either reducing his thereon become payable.
(acceptor’s) liability or acceptance of the liability subject to certain
(iii) A holder in due course as against a holder, must have
conditions. The holder of a bill is entitled to require an absolute
become the payee of the instrument in good faith i.e.,
and unconditional acceptance as well as to treat it as
without having sufficient cause to believe that any defect
dishonoured, if it is not so accepted. However he may agree to
existed in the transferor’s little
qualified acceptance, but he does so at his own peril, since
thereby he discharges all parties prior to himself, unless he has Privileges of a “Holder in Due Course”:
obtained their consent. (i) A person signing and delivering to another a stamped but
According to the Explanation to Section 86 of the Act, an otherwise inchoate instrument is debarred from asserting,
acceptance to be treated as qualified. as against a holder in due course, that the instrument has
(1) Where it is conditional, declaring the payment to be not been filled in accordance with the authority given by
dependent on the happening of an event therein stated, him, the stamp being sufficient to cover the amount
accepted payable when in funds” “accepted payable on (Section 20).
giving up bills of lading for cover per S.S. Amazon (ii) In case a bill of exchange is drawn payable to the drawer’s
“accepted payable when a cargo consigned to me is sold” order in a fictitious name and is endorsed by the same
(2) When it undertakes the payment of part only of the sum hand as the drawer’s signature, it is not permissible for
ordered to be paid, e.g., a bill drawn for Rs. 5,000 but acceptor to allege as against the holder in due course that
“accepted for Rs. 4,000 only”. such name is fictitious (Section 42).
(3) When, no place of payment being specified on the order, it (iii) In case a bill or note is negotiated to a holder in due course,
undertakes to pay only at a specified place and not the other parties to the bill or note cannot avoid liability on
elsewhere or to pay at a place different from that specified the ground that the delivery of the instrument was
in the bill and not elsewhere. conditional or for a special purpose only (Section 42 and 47
).
(4) Where it undertakes the payment at a time other than that
at which under the order it would be legally due e.g., a bill (iv) The person liable in a negotiable instrument cannot set up
drawn “payable three months after date” is accepted as against the holder in due course the defence that the
“accepted, payable six months after date.” instrument had been lost or obtained from the former by
means of an offence or fraud or for an unlawful
The aforementioned list of examples is only illustrative of the
consideration (Section 58).
different respects in which the bill may be qualified, for it is
possible to qualify the acceptance of a bill in other ways as well. (v) No maker of a promissory note, and no drawer of a bill or
cheque and no acceptor of a bill for the honour of the
(5) Drawee in case of need: When in the bill or any
drawer shall, in a suit thereon by a holder in due course be
endorsement thereon the name of any person is entered, in
permitted to deny the validity of the instrument as
addition to the drawee, to be restored to in case of need,
originally made or drawn (Section 120).
such a person is called a drawee in case of need. In case of
need means in the event of the bill being dishnoured by (vi) No maker of a promissory note and no acceptor of a bill
the drawee by non-acceptance or non-payment. The holder payable to order shall, in a suit thereon by a holder in due
of the bill is at liberty to choose whether be will resort to course, be permitted to deny the payee’s capacity, at the rate
the drawee in case of need or not. of the note or bill, to endorse the same (Section 121). In
short, a holder in due course gets a good title to the bill.
(6) Payee: The party to whom or to whose order the amount
of a bill of exchange, cheque or promissory note is payable You must understand the liability of various parties to
is the payee. negotiable instrument
(7) Delivery means transfer of possession from one person to Liabilities of Parties
another. (a) Liability of legal representatives (Section 29): A ‘legal
(8) Issue of negotiable instrument means its first delivery, representative’ of a deceased person, who signs his own
complete in form, to a person who takes it as a holder. name on an instrument, is personally liable for the entire
amount; but he may expressly limit his liability to the
A holder may become the possessor or payee of an instrument
extent of the assets received by him as legal representative.
even without consideration whereas a holder in due course is
The term “legal representative” includes heirs, executors
one who acquires possession for consideration.
and administrators.
payee will be liable as a surety. Similarly, the drawer of a endorse it against the maker.
cheque, the drawer of a bill until acceptance and the Similarly, if the consideration fails, there is no obligation on the
acceptor are respectively liable as sureties. As between the parties to pay. For example, X makes note in favor of Y in
parties so liable as sure – ties, each prior party is also liable anticipation of Y’s supplying a bale of cotton. Y fails to deliver
as a principal debtor in respect of each subsequent party. the cotton cannot claim payment from X.
For instance, A draws a bill payable to his own order on B
Again, a bill that is drawn or accepted without consideration
who accepts it. Afterwards A endorses the bill to C, C to D
does not impose any liability either on the drawer or on the
to E. As between E ( holder and B, B is the principal
acceptor to pay the holder. Similarly, if an instrument is
debtor and A, C and D are his sureties. As between E and
endorsed without consideration, nothing can be claimed from
C, C is the principal debtor and D his surety.
the endorser.
(h) Nature of suretyship (Section 39): The holder of an
But if any party to an instrument made, accepted, endorsed or
accepted bill may waive his claim against the acceptor, but at
transferred without any consideration, or for a consideration
the same time , he may expressly reserve his right to change
which fails, has transferred the instrument to a holder for a
the other parties. Under Section 134 of the Contract Act,
consideration such holder and every subsequent holder deriving
the release of the principal debtor has the effect of
title from him, may recover the amount due on such instru-
discharging the surety, but in the case of a bill it is not so.
ment from the transfer for consideration or from any party
But if the holder does not reserve his right expressly
prior thereto. For example, X and Z are respectively the drawer,
against the other parties , they too will be discharged if he
the payee and the acceptor of a bill of exchange drawn without
released the acceptor.
consideration; y transfers the bill to P for consideration. P can
(i) Discharge of endorser’s liability (Section 40): Any party claim payment from Y and also from Z and X.
liable on the instrument may be discharged by the
(a) Is also entitled to receive amount when the person through
intentional cancellation of his signature by the holder.
whom he claims was a holder or the lost instrument in due
Suppose that A is the holder of bill of exchange of which
course.
B is the payee and it contains the following endorsement in
blank: Under section 45A, the loser of the instrument has the right to
apply to the drawer for a duplicate of the lost bill. If the drawer
First Endorsement, “B” Second Endorsement, “C”
does not grant the application the loser many compel him to
Third Endorsement, “D” Fourth Endorsement, “E” provide him with a duplicate.
A, the holder, may intentionally strike out the endorsement by Liabilities on an accommodation note or bill (Provision to
D and C; in that case the liability of D and C upon the bill will Section 59): In the case of accommodation bills or notes, a
come to an end. But if the endorsements of D and C are struck defect in the title of the transferor does not affect the title of the
out without the consent of E, A will not be entitled to recover holder acquiring after maturity. An accommodation may be
anything firm E the reason being that as between D and E, D is explained as follows: X draws a bill payable to himself on Y,
the principal debtor and E is surety. If D is released by the who accepts the bill without consideration just to accommodate
holder under section 39 of the act, E, Being surety, will be X, that is, to enable X to raise money by negotiating the bill in
discharged. The rule may be stated thus: when the holder the market. Though Y accepts the bill, X is primarily liable on
without the consent of the endorser impairers the endorser’s the bill, and he cannot demand the amount from Y, for in an
remedy against a prior party, the endorser is discharged from accommodation bill, the acceptor is only surety for the party
liability to the holder. accommodated. However, if the accommodation bill, in the
(i) Liability of acceptor of a bill drawn in a fictitious name: above illustration, is transferred by X to Z for good consider-
the acceptor is not relieved from liability by proving that ation after maturity and Z becomes the holder in good faith, Z
the drawer is fictitious. Suppose X uses a fictitious name in will be able to realize the amount of the bill from Y, the
drawing a bill upon Z and that the bill is made payable to acceptor though Z’s transferor X could not, at the date of
the order of the drawer X then endorses the bill in the transfer, recover anything from Y.
same fictitious name to Y, who presents the Bill to Z, for Do you know what are the rights and obligations of a person
acceptance. If Z accepts the bill, in spite of the fact that the who had obtained an instrument by unlawful means of for
name of the drawer is fictitious; he cannot escape liability unlawful consideration?
to pay by showing that the name of the drawer is fictitious;
Let us discuss it.
rather he will not be allowed to lead evidence that the name
is fictitious. a) Rights and obligations of a person who had obtained an
instrument by unlawful means: If an instrument is
(ii) Liability on an instrument made drawn etc. without
obtained from any maker, acceptor or holder by means, of
consideration: an instrument made, drawn, accepted,
an offence or fraud, the possessor is not, ordinarily, entitled
endorse, or transferred without consideration creates no
to received the amount under it from such maker, acceptor,
obligation of payment between the parties to the
X does not acquire any title to the instrument, and the
instrument. For example, if the maker delivers a
proceeds of the bill, if collected, could be recovered from X
by acceptor. If X transfers it to Y who is a gratuitous
LESSON 23:
THE NEGOTIABLE INSTRUMENT ACT 1881
NEGOTIATION, ENDORSEMENT, ASSIGN ABILITY
intermediate endorsers are liable to him. For example A the (i) The essential distinction between transfer by negotiation
payee and holder of an instrument endorses it to B with the and transfer by assignment is that in the latter case, the
words “without recourse” and B endorses it to C who in his assignee does not acquire the right of a holder in due
turn endorses it to A, B and C are liable to A as intermediate course but has only the right, title and interest of his
endorsers. assignor; on the other hand in the former case he acquires
(xi) Holder deriving title from holder in due course (Section all the rights of a holder in due course i.e., rights from
53): A holder of an instrument deriving title from a holder equities (Mohammad Khunerali vs. Ranga Rao, 24 M. 654).
in due course has rights thereon of the holder in due (ii) In the case of negotiable instrument, notice of transfer is
course. Therefore, a holder deriving title from a holder in not necessary while in the case of an assignment of chose
due course can claim the amount of a bill drawn and in action, notice of assignment must be served by the
accepted without consideration. It has been held that title assignee on his debtor.
which has been cleansed of defects by passing through the
(iii) Again, in the case of transfer of negotiable instrument,
hands of a holder in due course remains immune from
consideration is presumed but in the case of transfer by
those defects inspite of the fact that a subsequent holder
assignment, consideration must be proved as in the case in
may have noticed that the defects once existed provided he
any other contract.
was not a party to them.
(iv) Negotiation requires either delivery only in the case of
For example, X obtains Y’s acceptance to a bill by fraud. X
“bearer” instrument or endorsement and delivery only in
endorses it to Z who takes it as a holder in due course. Z
the case of “order instrument”. But of in the case an
endorses the bill to F who knows of the fraud. Since F derives
assignment, Section 130 of the Transfer of Property Act
the title from Z who is a holder in due course and F is not party
requires a document— be reduced into writing and signed
to fraud, F gets a good title to the bill.
by the transferor.
(xii) Effect of endorsement in full after a blank one (Section 54
(v) Endorsements do not require payment of stamp duty
and 55): An instrument endorsed in blank is payable to the
whereas negotiation requires payment of stamp duty.
bearer, although originally it was payable to order. If an
instrument after having been endorsed in blank is Negotiation Back – An instrument is said to have been
endorsed in full, the endorsee in full does not incur the negotiated back to him and he is said to have taken up or taken
liability of an endorser, so the amount of it cannot be back the negotiable instrument when a person who has been a
claimed from him. In other words if an endorsement in party to the negotiable instrument takes it again. For example,
blank is followed by an endorsement in full, the suppose that that the endorsements on a negotiable instrument
instrument still remains payable to bearer and negotiable are as under.
by delivery as against all parties prior to the endorse in full, Pabxya
though the endorser in full is only liable to a holder who Here A is person who is a prior party to the instrument. He
made title directly through his endorsement and the negotiated it to B, B to X, X to Y and Y again to this very A.
persons deriving title through such holder.For example, X On account of this last endorsement, A should have right to
is the payee holder of a bill of exchange X endorsee it in claim money from X, Y and B. The rule is that every prior party
blasnk and delivers it to Y who endorses it in full to Z or is liable to every subsequent party. Thus, conversely, every
order Z, without endorsement, transfers the bill to F. In subsequent party may sue every prior party. As a result of the
view of Section 55, F as the bearer of the instrument can prior party (i.e. a) having taken back the instrument subsequent,
receive payment or sue the drawer, acceptor or X but not Y he (i.e., a) becomes a subsequent’ party. Therefore A, by reason
or Z who is a subsequent but not a prior party. But there is of the last endorsement mentioned above, come to have the
an exception to this rule. The person to whom it has been rights to claim money Y, X or B.A is permitted by law to use Y,
endorsed in full, or any one who derives title through him, X or B then Y, X or B in his turn can sue A because of A’s prior
can claim the amount from the endorser in full. endorsement. This will lead to a circuitry of action. To prevent
(xiii)Effect of endorsement for part of sum due (Section 56): this, Section 52 of the Negotiable Instruments Act enacts an
An endorsement purposing to transfer only a part of the exception to the general rule to provide that the holder in due
amount of instrument is invalid, and the endorsee, course of a negotiable instrument may sue all prior parties
therefore cannot negotiate it. But when the amount due thereto. Thus A, in the above case cannot sue Y, X or B. But A
has been paid in part, a note to that effect may be endorsed can sue P since the latter is prior to A’s original endorsement. If
on instrument and the instrument may then be negotiated however A, in original endorsement, had signed “sans recourse
from the balance. “ there could be no circuitry of action and A could sue Y, X or
There is an important difference between negotiation and B.
assignment. Let us first try to understand the difference (b) Capacity to incur liability under instrument Section 26:
between it. Every person competent to contract has capacity to
incur liability by making ‘drawing’ accepting, endorsing
, delivering and negotiating an instrument.
holder without obtaining their previous consent. They are such cheque had been paid(section84) for example, if X
discharged as against the holder and those claiming under him. draws 10 cheques of Rs. 100 each, but when the cheque
But, if they subsequently approve of such acceptance by the ought to be presented, has only Rs. 600 at the bank and
holder , they will not be discharged. subsequently the bank fails before the cheques are
An acceptance is qualified in the following cases, namely: (a) presented, X will be released from liability to the extent of
where it is conditional, declaring the payment to be dependent Rs. 600 but will remain liable for the balance. If he had the
on the happening of an event stated therein, (b) when it full amount of Rs. 1,000 at the bank, he will be discharged
undertakes the payment of part only of the sum ordered to be in full.
paid,(c) where no place of payment being specified on the order, Note – In the above case liability of the drawer will be trans-
it undertakes the payment at a specified place, and not otherwise ferred to the banker. For determining what is reasonable time
or elsewhere or where a place of payment being specified in the for presentation, the following matters would be considered: (i)
order it undertakes the payment at some other place and nature of instrument: (ii) usage of the trade and bankers and
otherwise or elsewhere, (d) where it undertakes the payment at a (iii) facts of the case.
time other than that at which under the order it would be legally (x) By operation of Law: it should be noted that a negotiable
due instrument is also discharged by operation of law, which
(vi) By material alteration of the instrument without assent of may occur in any of the following circumstances. (a) By
all parties liable: Any material alteration of a negotiable lapse of time i.e. when the claim under the instrument
instrument renders the same void as against any one who become barred by the limitation act on the expiry of the
is party there to at the time of making such alteration and period prescribed for the recovery of the amount due on
does not consent there to, unless it was made in order to the instrument; (b) By merger, i.e. when the debt, under
carry out the common intention of the original parties and the instrument is merged in the judgment debt obtained
any such alteration, if made by an endorsee, discharges his against the acceptor maker or endorse; under the law of
endorser from all liability to him in respect of the insolvency, i.e. when the acceptor, maker, or endorser, who
consideration there of (section87). The alteration must be has been adjudicated an insolvent, is discharged by an order
so material that it alters the character of the instrument to a of the court made in the insolvency proceedings.
great extent, alteration of the date, alteration of the (xi) By payment by the drawee of a cheque payable to order or
amount payable, or alteration of the time and the to bearer: where a cheque payable to order purports to be
alteration on the place of payment of the instrument are endorsed by or on behalf of the payee, the drawee who
regarded as material alterations of the instrument, in always is a banker is discharged by payment in due course.
hongkong and Shangai Bank vs. Lee shi (1928)A.C 181, it A cheque is said to have been paid in due course, when it
has been held that an accidental alteration will not, however has been paid in good faith, after taking proper care to
render the instrument void. It is necessary to show that the ascertain the genuineness of the endorsement. Payment in
alteration has been improperly and intentionally. due course discharge the bank from liability even if the
(vii) By payment, alteration not being apparent: if, however a payment is made to a wrong person. Even if the
person pays an altered note, bill or cheque, provided the endorsement of the payee is forged the banker is
alteration is not apparent and payment is made in due discharged from the payment in good faith and with
course by person or a banker who is liable to pay the negligence. But if the drawer’s signature is forged, the
amount he is protected (section 89. For example, if A banker can, under no circumstance, claim discharge on
draws a cheque for Rs. 8 in favour of B who fraudulently payment, for the banker is presumed to know the signature
converts eight into eighty, and the alteration is not of his customer (i.e. the drawer)
apparent, the banker, paying Rs. 80 to B will not be liable The bank is discharged by payment in due course to the bearer
to make good to the drawer the amount paid in excess. not with standing any endorsement thereon, whether in full or
(viii) By acceptor becoming holder of a bill at or after maturity in part and whether or not such endorsement purports to
in his own right: restrict or exclude further negotiation. The endorsee under an
If a bill of exchange which has been negotiated is at or after endorsement in full cannot recover the amount from the banker
maturity held by the acceptor in his own right all rights to action who has paid it to the bearer (section 85)
thereon are extinguished (section90) The rule of the discharge applicable to a cheque payable to order
(ix) By default in presenting the cheque within a reasonable also applies, to a draft drawn by one of the bank upon another
time: In the case of a cheque if it is not presented for payable to order or demand (section 85 A)
payment within a reasonable time of its issue and the 4.10 Notice of Dishonour
drawer or person on whose account, it is drawn had the
(a) Dishonour by non - acceptance (section 91): A bill may be
right at the time when presentment ought to have been
dishonored either by non acceptance or by non – payment.
made as between himself and the banker, to have the
A dishonour by non - acceptance may take place in any one
cheque paid and suffers actual damage through the delay he
of the following circumstances: (i) when the drawee either
is discharged to the extent of such damage, that is to say,
does not accept the bill within forty – eight hours of
to the extent to which such drawer or person is creditor of
and drawee of a bill are partners does not give rise to the world, and any certificate given by him is presumed to be
presumption that they are partners in respect of the true by a court of law. The profession of notaries is
drawing of the bill, or that the bill was drawn by one of regulated by the Notaries Act, 1952.
them on behalf of both. [jambu Ramaswamy vs. (d) Notice of Protest: When a promissory note or a bill of
Sundraraja chetti 29 mad 239]. Such a case does not fall exchange is required by law to be protested, notice of such
under purview of the rule mentioned above, so as to protest in lieu of notice of dishonour must be given in the
dispense with notice, (vii) in the case of promissory note same manner as notice of dishonour (Section 102).
which is not negotiable, (viii) when the party entitled to
notice, knowing the facts, promises unconditionally to pay 4.12 Acceptance and Payment for Honour and
the amount due on the instrument. reference in Case of Need
Acceptance for honour – If a bill has been dishonoured by
4.11 Noting and Protesting non-acceptance and has been duly noted or protested for such
(a) Noting- noting is a convenient mode of authenticating the dishonour, any person, before it is overdue, who is not a partly
fact that a bill or note has been dishonored. When a note already liable under the bill may, with the consent of the holder
or a bill has been dishonored by non- acceptance or non- of the bill, by writing on the bill, accept the bill for the honour
payment, the holder causes such dishounour to be noted of any of the parties liable on it. The object of such an
by a Notary public. Noting is a minute recorded by a acceptance for honour is to protect the credit of the party liable
notary public on the dishonored instrument. When an on the bill, and to prevent legal proceeding being taken against
instrument, say a bill of exchange, is to be noted for him.
dishonour, it is taken to Notary public who presents it Conditions for valid acceptance for honour: These are: (i) that
once again for acceptance or payment, as the case may be; the bill has been noted or protested for non-acceptance or better
and if the drawee or acceptor still refuses to accept or pay security: (ii) that such an acceptance has been made with the
the bill, it is noted, i.e., a minute is prepared containing the consent of the holder, (iii) that the acceptor for honour is not
date of dishonour, reason for such dishonour, etc.; which already liable on the bill, (iv) that the acceptance is for the
is attached to the instrument; and the facts are’ noted on honour of any party already liable on the bill; and (v) that the
the instrument. acceptance is by writing on the bill.
(b) Protest - When an instrument is dishonored, the holder Rights and Liabilities of such acceptor: Section 111 of the Act
may cause the fact not on by to be noted, but also to be states that an acceptor for honour binds h himself all parties
certified by a Notary Public that the bill has been subsequent to the party for whose honour he accepts to pay the
dishonolired. Such a certificate is referred to as a protest. amount of the bill if the drawee does not. But an acceptor for
If the creed it or an acceptor of a bill is shaken by insolvency or honour is not liable to the holder of the bill unless it is
otherwise before the date of maturity of the bill, the holder presented or (in case the address given by such acceptor on the
may cause such a fact also to ‘be noted and certified, bill is a place other then the place where the bill is made payable)
Such a certificate is called a protest for better security. The forwarded for presentment not later than the ‘day next after the
contents of a protest are given in Section, 101 of the Act. day of its maturity. Moreover, an acceptor for honour cannot be
charged unless the bill has been presented at its maturity to the
Neither noting nor protesting is compulsory in the case of
drawee for payment and has been dishonoured by him and
inland bi is. But under Section
noted or protested for such dishonour (Section 112),
104 every foreign bill of exchange must be protested for
Section 111 further provides that the party for whose honour
dishonour when such a pretest
the acceptor accepts to pay and
is required by the law of the country where the bill was drawn.
all prior parties become liable in their respective capacities to
The advantage of both noting and protesting is that this
compensate the acceptor for honour for all loss or damage
constitutes prim facie good evidence in the Court of the fact that
sustained by him, in consequence of sad acceptance:
instrument has been dishonoured; It is necessary to note that
under Section 119, the Court is bound to recognise a protest. Payment for honour: It is a payment which is made by any
But it may of may not recognise noting. person for the honour of any party liable on the bill after it has
been protested for non-payment. The condition essential for
To make good this lacuna, Section 104 A has been introduced.
such payment are, (i) that the bill must have been noted or,
It c1ai-ifies the position that any bill or document which has
protested for non-payment (ii) that the person paying or his
been noted can be protested any time thereafter for taking legal
agent declares before Notary Public the pal}:y for whose honour
action against the parties. Thus, where a document has been
he pays; (iii) that such declaration has been recorded by such
noted within the time required by law, legal proceeding cannot
Notary Public; (iv) that the payment must be made for the
be vitiated on account of protest not having been made.
honour of an y party liable to pay the bill and ( v) that the
(c) Notary Public: A Notary public is appointed by the Central payment may be made by any person whether he is already
State Government . His functions are to attest deeds, liable on the bill or not.
contracts and other instruments that are to be used abroad
The effects of such a payment are : All parties subseq1,Jent to
and to give a certificate of due execution of such
the party for whose honour it is paid are is charged. ( 2) The
not he acceptor), presentment should be made at the place place of business, he ( i.e., maker, drawer or acceptor ) closes
specified (Section 69) (C) If no place of payment is such place on a business, day during the usual business hours;
specified then the bill should be presented for payment at (3) if the instrument being payable at some other specified
the place of business ( if any ) or the residence of the place, neither he nor any person authorized to pay it attends at
drawee or acceptor or (if he has no fixed place of business such place during the usual business hours: (4) if the instru-
or residence) to him in person wherever he can be found ment not being payable at any specified place, he (i.e., maker, etc.
(Section 70 and 71). ) cannot after due search be found.
(iv) Presentment of promissory note payable by installment (b) Not presentment for payment is necessary as against any
(Section 67) party sought to be charged with payment, if he has
A promissory note payable by instalments must be presented engaged to pay notwithstanding non-presentment.
for payment on the third day after the date fixed for payment of (c) No presentment for payment is necessary as against any
each instalment. party if, after maturity and with the knowledge that
(v) Presentment of cheque to drawer (Section 72): It is the instrument has not been presented:
duty of the holder of cheque to present it at the bank (d) He makes a part-payment on account of the amount due
upon which it is drawn. If payment is refused by the bank, on the instrument; or (2) he promises to pay the amount
the holder may sue the drawer. If the holder sues the due thereon in whole or in part; or (3) he otherwise waives
drawer without first presenting the cheque at the bank, the his right to take advantage of any default in presentment
suit will be dismissed. for payment.
If the holder does not present the cheque at the bank in time, When we say that no presentment for payment is necessary, we
the position of the bank may become unsound and it may not mean thereby the instrument is taken as dishonoured at the due
be possible for the banker to honour the cheque; in this case, date for presentment even though it has not been presented.
the drawer is not liable if the bank refuses payment on present- The result is that the holder any sue the party liable without
ment. The rule is that the cheque must be presented before the presentment and the plea that the instrument was not
relation between the drawer and his banker has been altered to presented for payment is no defence to the claim of the holder.
the prejudice of the drawer. 4.14 Payment and Interest
(vi) Distinction between drawer of bills and drawer of cheque: (a) To whom payment should be made (Section 78): Payment
If a bill is not presented in time, the drawer is absolutely of the amount due on promissory note, bill of exchange
discharged; but the drawer of a cheque, in case of delay in or cheque must, in order to discharge that maker or
presentment, is discharged only if he has suffered some acceptor, be made to the holder. If payment is made to any
loss or injury and that too, to the extent of such loss only. person other than the holder, the holder can claim payment
Therefore, if the bank remains solvent, the drawer will over again from the maker or acceptor.
remain bound after presentment and refusal, although
solvent, the drawer will remain bound after presentment (b) Payment of interest when rate is specified (Section 49):
and refusal, although months ( short of the period of Where interest at a specified rate is expressly made payable
limitation ) have elapsed since the drawing. on a promissory note or a bill of exchange, interest shall be
calculated at the rate specified, on the amount of the
(vii) Presentment of cheque to charge any other person (Section
principal money due thereon; (i) from the date of the
73) : It may be recalled that in order to charge the drawer,
instrument until tender or realization of such amount (ii)
the cheque must be presented before the relation between
from the date of the instrument until such a date after the
the drawer and his banker has been altered to the prejudice
institution of a suit to recover the principal amount as the
of the drawer, but in order to charge any person other than
Court directs.
the drawer the cheque must be presented within a
reasonable time. For example, A drawes a cheque in favour (c) Payment of interest when no rate is specified (Section 80):
of B, who endorses it to C. C must present it at the bank When no rate interest is specified in the instrument ,
within a reasonable time, otherwise B will be discharged interest on the amount due shall be calculated at the rate of
from liability. 18% per annum from the date at which the instrument
ought to have been paid until tender or realization of the
(viii)Presentment of instrument to agents, etc. (Section 75):
amount, or until such date as the Court directs.
Presentment for acceptance or payment may be made not
only to the drawer maker or acceptor acceptance or payment 4.15 International Law Regarding Negotiable
may be made not only to the drawer maker or acceptor but Instrument
also to his duly authorized agent or where he is dead to his In the absence of a contract the contrary (i.e., unless the parties
legal representative, or where he has been declared an otherwise agree ), the liability of the maker or drawer a foreign
insolvent, to his assignee. promissory note, bill of exchange or cheque is governed in all
When presentment is unnecessary (Section 76): (a) No present- essential matters by the law of the place where he made
ment for payment is necessary in any of the following cases; (1) instrument. The respective liability of the acceptor and endorser,
if the maker, of acceptor intentionally prevents the presentment in such cases, will be governed by the law of the place where the
LESSON 24:
THE NEGOTIABLE INSTRUMENT ACT 1881
TUTORIAL
These questions are intended to enable the student to test his 7. A bill is drawn “Pay to X or order the sum of one
knowledge before proceeding to answer the test paper. The thousand rupees. In the margin the amount stated is Rs.
answer to these questions are not required to be written out or 100. What is the amount of the bill for?
submitted for evaluation. (The Answers are given at the end). 8. When is a negotiable instrument, dated 30th August ( in a
1. X signs a negotiable instrument in the following terms. year ) and made payable three months after date, deemed to
(a) “I promise to pay X or order Rs. 400”. be at maturity?
(b) “I acknowledge myself to be indebted to X in the 9. A bill of exchange is addressed to Swapan Ganguli, Anil
sums of Rs. 400 to be paid on demand for value Benerjee writes an acceptance on it. Can Anil Banerjee bind
received”. himself by such acceptance?
(c) “Mr. X, I.O.U. Rs. 800”. 10. Where there are several drawees of a bill, who are not
partners, can any one of such drawees accept it for another
(d) “I promise to pay X Rs. 400 and all other sums which
without that other’s authority?
shall be due to him”.
11. A who is the holder of a bill transfers it to B without
(e) “I promise to pay X Rs. 400 first deducting thereout
consideration. B transfers it to C without consideration. C
any money which he may owe me”.
transfers it to D for value. D transfers it without
(f) “I promise to pay X Rs. 400 seven days after my consideration to E. (a) Can E recover the amount of the
marriage with Z” bill from A? (b) Has E any right against D? Say Yes or No.
(g) “I promise to pay, X Rs. 400 on P’s death provided P 12. A owes to B Rs. 500. B draws a bill on A for Rs. 1,000. A
leaves me enough to pay that sum. to accommodate B and at his request, accept it. B sues A on
(h) “I promise to pay Rs. 400 and deliver to him may black the bill. Can he recover Rs. 1,000?
horse on Ist July next.” Which of the aforesaid 13. A agrees to supply a quantity of paper to B. B accept a bill
instruments are not promissory notes? for Rs, 1,000 drawn by A, being the price of the paper. The
2. State whether the following bills are “inland” bills. paper. The paper is delivered to B but it turns out to be of
(a) Bills drawn outside India and made payable in or a quality different from the stipulated one, and worth Rs.
drawn upon any person resident in any country 500 only. B retains the paper. A sues B on the bill. Is B
outside India. bound to pay Rs. 1,000 to A?
(b) A bill drawn in Calcutta on a merchant in Bombay but 14. X accepts a bill for Rs. 1,500. This is the agreed price of two
endorsed in Paris. bales of cotton to be supplied by Y to X, Y delivers only
one bale to X, Y sues X on the bill. Can Y recover Rs.
(c) Bills drawn outside India made payable in India, or
1,500 from X?
drawn upon any person resident therein.
15. X owes to Y Rs. 2,000 and makes a promissory note for
(d) Bills drawn in India and made payable outside India,
the amount payable to Y. X dies and the note is
or drawn upon a person resident outside India, but
subsequently found amongst his papers. Can Y sue on the
not made payable In India.
note even if it was later on delivered to him?
(e) A bill is drawn in Madras upon a merchant in Brussels
16. A, the holder of a negotiable instrument payable to bearer,
and accepted payable in Bombay.
which is in the hands of A’s banker who is at the time the
3. When a note is drawn in this from ; “I promise to pay Rs. banker to transfer the instrument to B’s credit in the
500 to B only”, Can it be called a negotiable instrument? banker’s account with B. The banker does so and according
4. A bill is made payable to “Saroj Sehgal”. Saroj Sehgal now possesses the instrument as B’s agent. Can the
endorses it in blank and negotiates it. Is the bill payable to instrument be deemed to have been negotiated?.
bearer? 17. A is the holder of a bill payable to “A or order”. A by
5. A bill is drawn by an agent acting with the scope of his simple delivery transfers the bill without endorsing it to B.
authority upon his principal. Can the holder thereof treat it Can ‘B’ deemed to be a holder in due course?
at his option as a note or bill.? 18. A is holder of a bill endorsed by B in bank. A writes over
6. A draws a bill on B and negotiates it away. B is fictitious B’s signature the words “Pay to C or order”. (a) is the
drawee. Can the holder of the bill teat it as note made by writing of A operates as an endorsement in full from B to
A? C ? (b) Is A liable an endorser?
19 B signs the following endorsement on different negotiable
instruments payable to bearer. Do these endorsements
Notes:
LESSON 25:
INDIAN PARTNERSHIP ACT, 1932
PARTNERSHIP ,FORMATION ,TEST AND REGISTRATION OF PAR TNERSHIP
Learning Objectives 2. Two or more persons:- There must be at least two persons
At the end of this chapter, you will able to know: to form a partnership. It is obvious that a single person
• The Meaning and nature of partnership cannot constitute partnership. Only persons competent to
contract can enter into partnerships.
• The true test of partnership
As to the maximum number of partners, there is no limitation
• The types of partnership
in the partnership Act 1932 but is no limitation in the partner-
• The formation of partnership ship Act 1932 but the Joint Stock companies Act 1956 provides
• The registration of partnership that in a firm carrying banking business, the number of
Introduction partners should not be more than 10 whereas in other type of
Have you ever heard of partnership? business, the limit is 20 partners. It is also mentioned that in
case, the number of partners in the above business are more
Try to answer what do you mean by partnership in general. than the prescribed limit, the partnership will be treated as
Yes, partnership is an association between two or more illegal.
persons. Let us now discuss about the legal aspects of partner- 3. Carrying on of business There can be partnership if there
ship. is some business is carried under it. Sec 2(b) of the Act
The Rules and regulations relating to partnership are governed reads as under “business” includes every trade, occupation
by the Indian Partnership Act 1932. This act contains 74 or profession. If the purpose is to carry on charitable work,
sections and it came into force on Ist December 1932 except it will not be partnership. Carrying on of the business
Section 69 (relating to the effect of non – registration of the means continuity of business activities is required to
firms ) which came into force on Ist October 1933. It extends to consider it as partnership business. A and B agrees to open
whole of India except to the state of Jammu and Kashmir a shop of fancy items and agree to carrying on of the
Definition business for sharing of profit. It is a partnership.
Section 4 Indian Partnership Act 1932 defines ‘Partnership’ in Sec. 8, however, provides that there can be a ‘particular partner-
the following terms: - ship’ between partners whereby they engage in a particular
“Partnership is the relation between persons who have agreed adventure or undertaking, which, if successful, would result in
to share the profit of business carried on by all or any of them profit. Thus there can be a partnership for production of a film,
acting for all.” construction of a building etc. although there is single adven-
ture but the same requires a series of transaction a and
Breaking the above definition, following essential elements of
continuing relationship.
partnership are revealed:-
4. Sharing of profit:- The essential element of partnership is
1. There must be an agreement.
to carry on business with the object of sharing profit
2. Between two or more persons amongst the partners. The partners may however, agree to
3. Who agree to carry on business share profits in any ratio they like.
4. With the object of sharing profit Ex. A, B, and C entered into a contract to carry on business of
manufacturing of toys. ABC decided the ratio as 40:30:30.
5. The business must be carried by all or any of them
acting for all or Mutual Agency. Besides sharing of profit, in case, there is loss in the partner-
ship, it is not essential that the partners should agree to share
All the above elements must coexist in order to constitute
the losses. Sec 13(b) however, provides that the partners are
partnership. A brief explanation of these elements is as follows:
entitled to share equally in profits earned and shall contribute
1. An agreement :- The relationship of partnership arises equally to the loss sustained by the firm, unless otherwise,
from an agreement between the persons concerned not agreed. It means that the partners may make a contract contrary
from status. Agreement as made between the persons to this provision. There may be an agreement vide when only
must be valid and enforceable by law. This agreement may one artner may bear the whole loss.
be oral or written. To avoid future complications and
5. Mutual Agency ‘Business must be carried by all or any of
dispute amongst the persons constituting partnership,
them acting for all” It means all the partners should be able
agreement in writing must be preferred.
to represent each other and should be represented by each
Example other with respect to the business of partnership. Thus the
A & B enters into a contract to carry on business of manufactur- fundament of a partnership is that partners carrying on the
ing of tin plates; a partnership is exacted between A&B. business of the firm are agents as well as principals of each
other. A partner can bind the firm by has act provided: -
6. Rules as to interest on loans and capital, their salary, “King”, “Queen”, “Royal”, or words expressing or implying
commission, etc. thesanction,approvalorpatronageo5f [Government],
, except 6,
[when the State Government] signified 7[its] consent to the use
7. Method and arrangement of keeping accounts
of such words as part of the firm name by order in writing
8. Division of task and obligation of partners
Section 59- Registration
9. Rules to be followed in case of admission, expulsion /
When the Registrar is satisfied that the provisions of section 58
retirement or death of a partner.
have been duly complied with, he shall record an entry of the
10. Whether a partner is allowed to carry competing business. statement in a register called the Register of Firms, and shall file
11. The circumstances under which the partnership will stand the statement..
dissolved. Section 60- Recording of alterations in firm name
12. In case of dispute which course of action shall be followed and principal place of business
e.g. Court, arbitrations etc. (1) When an alteration is made in the firm name or in the
Registration of Partnership location of the principal place of business of a registered
Registration of firm means the recording of the firm name firm, a statement may be sent to the Registrar accompanied
along with the prescribed particulars, in the Register of the by the prescribed fee, specifying the alteration and signed
firms, kept. in the office of the Registrar of Firms. The and verified in the manner required under section 58.
registration provides a reliable evidence and conclusive proof of (2) When the Registrar is satisfied that the provisions of sub-
the existence of a partnership firm. section (1) have been duly complied with, he shall amend
Section 56- Power to exempt from application of this Chapter the entry relating to the firm in the Register of Firms is
The 3[State Government of any State], may, by notification in accordance with the statement, and shall file it along with
the Official Gazette, direct that the provisions of this Chapter the statement relating to the firm filed under section 59.
shall not apply to 4[that State] or to any part thereof specified in Section 61- Noting of closing and opening of
the notification. branches
Section 57- Appointment of Registrars When a registered firm discontinued business at any place or
begins to carry on business at any place, such place not being its
(1) The State Government may appoint Registrars of Firms
principal place of business, any partner or agent of the firm may
for the purposes of this Act, and may define the areas
send intimation thereof to the Registrar, who shall make a note
within which they shall exercise their powers and perform
of such intimation in the entry relating to the firm in the
their duties.
Register of Firms, and shall file the intimation along with the
(2) Every Registrar shall be deemed to be a public servant statement relating to the firm filed under section 59.
within the meaning of section 21 of the Indian Penal Code
(45 of 1860). Section 62- Noting of changes in names and
addresses of partners
Section-58- Application for registration When any partner in a registered firm alters his name or
(1) The registration of a firm may be effected at any time by permanent address, any partner or agent of the firm may send
sending by post or delivering to the Registrar of the area in an intimation of the alteration to the Registrar, who shall deal
which any place of business of the firm is situated or with it in the manner provided in section 61.
proposed to be situated, a statement in the prescribed Section 63- Recording of changes in and dissolution of a firm
form and accompanied by the prescribed fee, stating-
(1) When a change occurs in the constitution of a registered
(a) The firm name, firm any incoming, continuing or outgoing partner, and
(b) The place or principal place of business of the firm, when a registered firm is dissolved any person who was a
(c) The names of any other places where the firm carries partner immediately before the dissolution, or the agent of
on business, any such partner or person specially authorized in this
behalf, may give notice to the Registrar of such change or
(d) The date when each partner joined the firm,
dissolution, specifying the date thereof; and the Registrar
(e) The names in full and permanent addresses of the shall make a record of the notice in the entry relating to the
partners, and firm in the Register of Firms, and shall file the notice along
(f) The duration of the firm. with the statement relating to the firm filed under section
The statement shall be signed by all the partners, or by their 59.
agents specially authorized in this behalf. (2) Recording of withdrawal of a minor-When a minor who
(2) Each person signing the statement shall also verify it in the has been admitted to the benefits of partnership in a firm
manner prescribed. attains majority and elects to become or not to become a
partner, and the firm is then a registered firm, he, or his
(3) A firm name shall not contain any of the following words,
agent specially authorised in this behalf, may give notice to
namely-
the Registrar that he has or has not become a partner, and
Firms or for copies from the Register of Firms: merchants agreed to carryon the business subject to the
It is also provided that such fees shall not exceed the control of A in several respects. A was to receive a
maximum fees specified in Schedule I. commission of 20% on all the profits. Is it a partnership
agreement between A, Band C?
The State Government may make rules-
[Hint: A is not a partner. The object of the agreement is to give
(a) Prescribing the form of statement submitted under
maximum security to A for the returns on his money - Mallow
section 58, and of the verification thereof;
March & Co. v. The Court of Wards [1872] LR 2 CP 419.]
(b) Requiring statements, intimations and notices under
6. A, a contractor, undertook a contract of loading and
sections 60, 61, 62 and 63 to be in prescribed form, and
unloading railway wagons. He appointed H-to manage the
prescribing the form thereof;
work. It was agreed that B would receive 75%of the profits
(c) Prescribing the form of the Register of Firms, and the as his remuneration and would bear all the losses, if any. Is
mode in which entries relating to firms are to be made it a partnership agreement?
therein, and the mode in which such entries are to be
[B. Com. (H), 1999]
amended or notes made therein;
[Hint- No, B is an agent of A, not his partner - Munshi Abdul
(d) Regulating the procedure of the Registrar when
Latif v. Gopeshwar Chattoraj AIR 1933 Calcutta 204.] )
disputes arise;
6. A, B and C are partners of an unregistered firm. D owes
(e) Regulating the filing of documents received by the
this firm Rs. 1,000 on a con-tract. The firm filed a suit
Registrar;
against D. The suit is dismissed for non-registration of the
(f) Prescribing conditions for the inspection of original firm. The firm is registered later on. Can the firm now
documents; successfully bring the suit against D? [B. Com. (H), 1986]
(g) Regulating the grant of copies; [Hint - Yes, after registration, the firm can file a fresh suit. The
(h) Regulating the elimination of registers and documents; provision is - ‘before a suit is filed in the court, registration
(i) Providing for the maintenance and form of an index must have been effected’.]
to the Register of Firms; and 7. A and B purchased a taxi to ply it in partnership. They plied
(j) Generally, to carry out the purposes of this Chapter. the taxi for a year. When A, without the consent of B,
(3) All rules made under this section shall be subject to the disposed of the taxi, B brought an action to recover his
condition of previous publication. Every rule made by share in sale proceeds. A resisted B’s claim on the ground
the State Government under this section shall be laid, as that the firn1 was not registered.
soon as it is made, before the State Legislature. Will B succeed in his claim?
Attempt the following problems for a better understanding: [B. Com. (H), 1982]
1. X, a publisher, agrees to publish at his own expense, a [Hint - B will succeed in his claim because partner of an
book written by Y and to pay Y half the net profits. Is unregistered firm can sue for his share on dissolution of the
there a partnership between X and Y? firm.]
8. An unregistered firm filed a suit against a debtor to recover
[Hint. No partnership, mere profit-sharing is not conclusive test
Rs. 500. The court dismissed firm’s application on the
of partnership.]
ground of non-registration. Can the firm get its
2. Two trading firms, each having twelve partners join hands registration now and file a fresh suit against the debtor to
and make a partnership form having twenty-four partners. recover the amount? [B. Com. (H.), 2000]
Is it a valid entity?
[Hint: Yes, the partners can get the firm registered and then file
[Hint. No, it’s an illegal association as per section 11 of the a fresh suit against the debtor.]
companies Act, as the number of members exceeds 20]
9. A, B and C were partners in a firm. A died. Z, who did
3. A and B separately tender for a contract to cut and remove know about the death of A, made a deal with the firm.
bamboos form a certain jungle. They mutually agree that The firm committed a default in meeting out the deal. Z
each one of them shall be entitled to a certain share of sued upon A’s estate, B and C for compensation of his
bamboos, no matter whosoever is granted the contract. Is damages. Is A’s estate liable for the damages?
it a partnership agreement?
[Hint - No, A’s estate is not liable for the dealings of the firm
[Hint. No] after A’ death.]
4. A agreed with B, a goldsmith, to buy and deliver gold to B, 10. A, a holding out partner in the firm of X & Y is
where B will make ornaments out of it and sell them, and adjudicated as insolvent. The firm caused heavy losses to Z
they shall share the resulting profit and losses. Is it a by breaching a contract. Z sued X, Y and A for the
partnership agreement? damages. Is A liable to share such damages?
[Hint. Yes.] [Hint - No, A partner by holding out who is an insolvent,
cannot be held liable for the claims on the firm.]
Notes
LESSON 26:
INDIAN PARTNERSHIP ACT, 1932
TYPES OF PARTNERS AND THEIR RIGHTS AND OBLIGATIONS
Learning Objectives partner of the firm only for profits. In case the firm suffers
At the end of this chapter, you will able to know: loss, he shall not be liable for the loss. These type of
• The types of partners partners have no say in the management of the firm.
However, the liability of such partner towards third party is
• The rights of partners
similar to active partner .
• The obligations of partners
5. Sub Partner:- When a partner agrees to share his profit in a
• The minor’s status in the partnership partnerships firm with an outsider such a outsider in called
Introduction sub partner. The outsider cannot interfere business of the
We are now well versed what we mean by partnership. Its nature firm nor he is liable to third party as an active partner.
and formation and registration formalities. 6. Partner by estoppel or holding all :- Section 28 – “Anyone
Today we will discuss about the kinds of partners and their who by words spoken or written or by conduct represent
rights and obligations as provided under the Act. himself or knowingly permit himself to be represented
Kinds of Partners in a partnership terms himself to be a partner in a firm, is liable as a partner in
that firm to anyone who has on the faith of any such
The partners of partnership firm may be classified in following representation gives credits to the firm, whether the person
categories: - representing himself or represented to be a partner does or
1. Actual/Active partner does not know that the representation has reached the
2. Dormant or sleeping partner person so giving credit”
3. Nominal partner Thus if the behavior of such person cause misunderstanding
4. Partner in profit only to third parties that he is partner of a particular firm. Later on
such a person is estopped from denying the fact that he is a
5. Sub Partner
partner in that particular firm, shall be called partner by estop-
6. Partner by estoppels or partner by holding out. pels.
1. Actual/Active Partner Partners actively engaged in the Example:- ABC are partners in a partnership firm named XYZ.
conduct on business are known as “active partners”. They A tells in the market that D is partners of the firm. D does not
are full fledged partners in the real sense. If such partner c cant contradict his statement: XYZ gets a loan from Y and
wants to retire from the firm he must give public notice of later on become insolvent. In the instant case D is partner in the
his retirement from the firm in order to get himself firm and is estopped from the fact that he is partner of XYZ.
absolved from the responsibly of the firm.
Holding out means a partner retires from the firm and does not
2. Dormant of Sleeping Partner: Some times, there are give notice of retirement. If transactions are taking place treating
persons who merely become partners in a firm by the retired partner as active partner of the firm, he shall be
contributing capital or even without capital and donot take estopped from denying the fact.
active pact in the conduct of the partnership business. Such
Let us now talk about the rights and liabilities of partners
partners are liable to third parties as actual partner
Rights and liabilities/ obligations of partners
Such partners can retire from the firm without giving notice but
they have assess to the books of the accounts of the firm and We would be discussing the rights and liabilities/ obligations
can have a copy of the same. of the partners in term of Indian Partnership Act 1932 as
amended up to date.
Example:- A&B start a partnership firm wherein A is active
partners and B is dormant partner. This is valid partnership Section 9-12 deals with the mutual relation pf partners.
3. Nominal Partner:- These are the partners who have no real Section 9- General duties of partners
interest in the firm . They donot invest or participate in the Partners are bound to carry on the business of the firm to the
business of the firm but give their name as partner of the greatest common advantage, to be just and faithful to each
firm. other, and to render true accounts and full information of all
things affecting the firm to any partner or his legal representa-
Example:- A is a renowned businessman. His son B starts the
tive.
business in which A has given consent to become partner of
the firm which is to be run by his son with the sole purpose to Section 10- Duty to indemnify for loss caused by
help his son. A is only a nominal partner. fraud
4. Partner in profits only:- Some times the partnership firm Every partner shall indemnify the firm for any loss caused to it
is formed to carryon business wherein a partner becomes by his fraud in the conduct of the business of the firm.
party, or any penalty is incurred, the firm is liable therefor to the Partnership Act, a minor can be admitted to the partnership for
same extent as the partner. his benefit. Section 30 lays down certain condition which are
discussed as under:-
Section 27- Liability of firm for misapplication by
partners Section 30- Minors Admitted to the Benefits of
Where Partnership
(a) A partner acting within his apparent authority receives (1) A person who is a minor according to the law to which
money or property from a third party and misapplies he is subject may not be a partner in a firm, but, with
it, or the consent of all the partners for the time being, he
(b) A firm in the course of its business receives money or may be admitted to the benefits of partnership.
property from a third party, and the money or property (2) Such minor has a right to such share of the property
is misapplied by any of the partners while it is in the and of the profits of the firm as may be agreed upon,
custody of the firm, the firm is liable to make good and he may have access to and inspect and copy any of
the loss. the accounts of the firm.
Section 28- Holding out (3) Such minor’s share is liable for the acts of the firm, but
the minor is not personally liable for any such act.
(1) Anyone who by words spoken or written or by
conduct represents himself or knowingly permits (4) Such minor may not sue the partners for an account or
himself to be represented, to be a partner in a firm, is payment of his share of the property or profits of the
liable as a partner in that firm to any one who has on firm, save when severing his connection with the firm,
the faith of any such representation given credit to the and in such case the amount of his share shall be
firm, whether the person representing himself or determined by a valuation made as far as possible in
represented to be a partner does or does not know that accordance with the rules contained in section 48:
the representation has reached the person so giving It is provided that all the partners acting together or any partner
credit. entitled to dissolve the firm upon notice to other partners may
(2) Where after a partner’s death the business is continued elect in such suit to dissolve the firm, and thereupon the court
in the old firm name, the continued use of that name shall proceed with the suit as one for dissolution and for
or of the deceased partner’s name as a part thereof settling accounts between the partners, and the amount of the
shall not of itself make his legal representative or his share of the minor shall be determined along with the shares
estate liable for any act of the firm done after his death. of the partners.
Section 29- Rights of transferee or a partner’s (5) At any time within six months of his attaining
interest majority, or of his obtaining knowledge that he had
been admitted to the benefits of partnership,
(1) A transfer by a partner of his interest in the firm, either
whichever date is later, such person may give public
absolute or by mortgage, or by the creation by him of a
notice that he has elected to become or that he has
charge on such interest, does not entitle the transferee,
elected not to become a partner in the firm, and such
during the continuance of the firm, to interfere in the
notice shall determine his position as regards the firm:
conduct of the business, or to require accounts, or to
inspect the books of the firm, but entitles the It is provided that, if he fails to give such notice, he shall
transferee only to receive the share of profits of the become a partner in the firm on the expiry of the said six
transferring partner, and the transferee shall accept the months.
account of profits agreed to by the partners. (6) Where any person has been admitted as a minor to the
(2) If the firm is dissolved or if the transferring partner benefits of partnership in a firm, the burden of
ceases to be a partner, the transferee is entitled as proving the fact that such person had no knowledge of
against the remaining partners to receive the share of such admission until a particular date after the expiry
the assets of the firm to which the transferring partner of six months of his attaining majority shall lie on the
is entitled, and, for the purpose of ascertaining that persons asserting that fact.
share, to an account as from the date of the (7) Where such person becomes a partner-
dissolution. (a) His rights and liabilities as a minor continue up to
This was all about the rights and obligations of partners. the date on which he becomes a partner, but he also
Do you think that minor can be a partner in the partnership becomes personally liable to third parties for all acts
firm? of the firm done since he was admitted to the
benefits of partnership, and
Minor’s status in partnership firm
(b) His share in the property and profits of the firm
Partnership is based on mutual contract and only those who are
shall be the share to which he was entitled as a
competent to contract can become partners of a firm. As per
minor.
Indian Contract Act, any agreement with a minor is void ab-
(8) Where such person elects not to become a partner,-
LESSON 27:
INDIAN PARTNERSHIP ACT, 1932
DISSOLUTION OF PARTNERSHIP
Learning Objectives (a) If constituted for a fixed term, by the expiry of that
At the end of this chapter, you will able to know: term;
• The modes of dissolution of partnership (b) If constituted to carry out one or more adventures or
• The consequences of dissolution of partnership undertakings, by the completion thereof;
• The settlement of accounts on dissolution of (c) By the death of a partner; and
partnership (d) By the adjudication of a partner as an insolvent.
Introduction Section 43- Dissolution by notice of partnership at
Today, we will be discussing dissolution of partnership will
business. (1) Where the partnership is at will, any partner giving
But before going ahead you need to understand that there is a notice in writing to all the other partners of his
difference between the dissolution of partnership and dissolu- intention to dissolve the firm may dissolve the firm.
tion of firm. (2) The firm is dissolved as from the date mentioned in
Section 39 of the Act provides that there is a difference between the notice as the date of dissolution or, if no date is so
the dissolution of partnership and the dissolution of the firm. mentioned, as from the date of the communication of
Partnership is a relation between the partners and the partner- the notice.
ship firm is an entity which exists because of partnership
Section 44- Dissolution by the court
relations. Thus, whenever a partner leaves the firm, partnership
At the suit of a partner, the court may dissolve a firm on any of
is dissolved but the firm continues until the partnership firm is
the following grounds, namely-
dissolved. After starting the business, partners may feel like
closing the business, may be because the business is not (a) That a partner has become of unsound mind, in which
lucrative or it is not going the way they predicted or for any case the suit may be brought as well by the next friend
other reason. When a partner close down the firm, dissolution of the partner who has become of unsound mind as
of the partnership firm takes place. Thus , when partners close by any other partner;
down the business, dissolution of the partnership firm takes (b) That a partner, other than the partner suing, has
place. The dissolution of partnership between all the partners become in any way permanently incapable of
of the firms occurs is called dissolution of the firm. performing his duties as partner;
Let us now concentrate on the modes of dissolution of the (c) That a partner, other than the partner suing, is guilty
firm. of conduct which is likely to affect prejudicially the
carrying on of the business, regard being had to the
Modes of Dissolution of the Firm nature of the business;
Section 40- Dissolution by Agreement (d) That a partner, other than the partner suing, willfully or
A firm may be dissolved with the consent of all the partners or persistently commits breach of agreements relating to
in accordance with a contract between the partners. the management of the affairs of the firm or the
Section 41- Compulsory dissolution conduct of its business, or otherwise so conducts
A firm is dissolved- himself in matters relating to the business that it is not
(a) By the adjudication of all the partners or of all the reasonably practicable for the other partners to carry on
partners but one as insolvent, or the business in partnership with him;
(b) By the happening of any event which makes it (e) That a partner, other than the partner suing, has in any
unlawful for the business of the firm to be carried on way transferred the whole of his interest in the firm to
or for the partners to carry it on in partnership: a third party, or has allowed his share to be charged
under the provisions of rule 49 of Order XXI of the
It is further provided that, where more than one separate First Schedule to the Code of Civil Procedure, 1908 (5
adventure or undertaking is carried on by the firm the illegality of 1908) or has allowed it to be sold in the recovery of
of one or more shall not of itself cause the dissolution of the arrears of land revenue or of any dues recoverable as
firm in respect of its lawful adventures and undertakings. arrears of land revenue due by the partner;
Section 42- Dissolution on the Happening of Certain (f) That the business of the firm cannot be carried on save
Contingencies at a loss; or
Subject to contract between the partners a firm is dissolved-
(g) On any other ground which renders it just and
equitable that the firm should be dissolved.
purchase of a share in the firm and for any capital partnership. Can he do so?
contributed to him; [Hint. No, however, under Section 44, the court may, at the suit
(b) To rank as a creditor of the firm in respect of any of A, dissolve the firm on certain grounds.]
payment made by him towards the debts of the firm; 2. X and Y started business in partnership. After a couple of
and years they found that the firm is incurring continues losses.
(c) To be indemnified by the partner or partners guilty of Can it be a ground for dissolution of a firm?
the fraud or misrepresentation against all the debts of [Hint- Yes, the dissolution can be applied for on the ground
the firm. that business cannot be carried on except losses. See section
Section 53- Right to Restrain from use of Firm name 44(f)]
or firm Property 3. X, Y and Z are partners in a firm. X and Y always behave
After a firm is dissolved, every partner or his representative may, arrogantly with each other and do not also co-operate in
in the absence of a contract between the partners to the contrary, business matters. Z applies to court for dissolution of the
restrain any other partner or his representative from carrying on firm. Will he succeed?
a similar business in the firm name or from using any of the [Hint- Yes, on ‘Just and Equitable grounds’.]
property of the firm for his own benefit, until the affairs of the
firm have been completely wound up: 4. X and Y form a partnership firm. After 5 years, Delhi
police for trading in narcotics detains Y. He is later
It is provided that where any partner or his representative has convicted for the same. Will the court dissolve the firm on
bought the goodwill of the firm, nothing in this section shall the application of X before the expiry of the term? Advice.
affect his right to use the firm name.
[Hint – Yes. It is possible on the ground ‘Conduct prejudicial
Section 54- Agreements in Restraint of Trade to partnership business’. See Section 44]
Partners may, upon or in anticipation of the dissolution of the 5. X and Y were carrying on a printing business as partners.
firm, make an agreement that some or all of them will not carry They decided to dissolve the firm, and it was provided in
on a business similar to that of the firm within a specified the dissolution deed that even after the sale of goodwill of
period or within specified local limits; and notwithstanding the firm to one of them, nothing should prevent the other
anything contained in section 27 of the Indian Contract Act, partner from carrying on the similar business in the
1872 (9 of 1872), such agreement shall be valid if the restric- neighborhood. X purchased the goodwill of the firm, and
tions imposed are reasonable. Y opened another printing house nearby and started
Section 55- Sale of Goodwill after Dissolution soliciting the customers of the old firm. X objects. Advice.
In settling the accounts of a firm after dissolution, the goodwill [Hint- Y is legally justified in opening a printing house in the
shall, subject to contract between the partners, be included in neighborhood, but after the sale of goodwill, Y has no right to
the assets, and it may be sold either separately or along with solicit the customers of the firm. X can take an injunction order
other property of the firm. from the court to stop Y from soliciting the firm’s customers.]
Rights of buyer and seller of goodwill-Where the goodwill of a 6. A, B and C were partners in a firm sharing profits in the
firm is sold after dissolution, a partner may carry on a business ratio of 4:3:2. After 15 years they agree to dissolve the firm.
competing with that of the buyer and he may advertise such After paying outside liabilities and the capital of partners,
business, but, subject to agreement between him and the buyer, there is a surplus of Rs. 40,000. What will be the share of
he may not- A, B and C?
(a) Use the firm name, [Hint. They will share the surplus in the ratio of 4:3:2.]
(b Represent himself as carrying on the business of the
References
firm, or
• Kapoor, N.D. (2003), “Elements of Mercantile Law,”
(c) Solicit the custom of persons who were dealing with
Sultan Chand and Sons, New Delhi.
the firm before its dissolution.
• http://www.indialawinfo.com/bareacts/soga.html
Agreement in restraint of trade -Any partner may, upon the sale
of the goodwill of a firm, make an agreement with the buyer • M.C. Kucchal ( 2002), “ Business Law”, Vikas Publishing
that such partner will not carry on any business similar to that House Pvt. Ltd, Delhi.
of the firm within a specified period or within specified local • P.C. Tulsian (2002), “ Business Law”, Tata Mc. Graw Hill
limits and, notwithstanding anything contained in section 27 of Pvt. Ltd, Delhi.
the Indian Contract Act, 1872 (9 of 1872), such agreement shall • Aggarwal, Rohini (2003), “Student’s Guide to Mercantile
be valid if the restrictions imposed are reasonable. and Commercial Laws,” Taxmann’s, New Delhi
Attempt the following Problems for a Better
Understanding:
1. A and B partners under an agreement, which provided that
the partnership could be terminated by mutual
LESSON 29:
THE COMPANIES ACT, 1956
DEFINITION AND NATURE OF A COMPANY
Notes:
Learning Objectives of which the entire paid up share capital is held by the one
At the end of this chapter, you will be able to or more body corporate incorporated outside India, no
• Identify the different types of company person other than the member of the company concerned
shall be entitled to inspect or obtain the copies of profit
Introduction and loss account of that company.
Today we will learn about the important types of company.
8. Minimum number of directors is only two. (3 in case of a
There are various basis to classify companies. public company)
On the basis of the number of the members, The Company Law Board on being satisfied that the infringe-
companies can be divided in two: ment of the aforesaid 3 conditions was accidental or due to
• A Private Company inadvertence or that on other grounds, it just an equitable to
• A Public Company grant relief, may grant relief to the company from the conse-
quences of such infringement. The infringement of the
Public Company means a company which not a private
aforesaid 3 conditions does not automatically convert a private
company.
company into a public company. It continues to remain a
Private Company means a company which by its articles of private company; it merely ceases to be entitled to the privileges
association: - and exemptions available to a private company.
a. Restricts the right of members to transfer its shares Companies Deemed to be Public limited Company
b. Limits the number of its members to fifty. In A private company will be treated as a deemed public limited
determining this number of 50, employee-members company in any of the following circumstances :-
and ex-employee members are not to be considered. 1. Where at least 25% of the paid up share capital of a private
c. Prohibits an invitation to the public to subscribe to any company is held by one or more bodies corporate, the
shares in or the debentures of the company. private company shall automatically become the public
If a private company contravenes any of the aforesaid three company on and from the date on which the aforesaid
provisions, it ceases to be private company and loses all the percentage is so held.
exemptions and privileges, which a private company is entitled. 2. Where the annual average turnover of the private company
Following are some of the privileges and exemptions of a during the period of three consecutive financial years is not
private limited company:- less than Rs 25 crores, the private company shall be,
1. Minimum number is members is 2 (7 in case of public irrespective of its paid up share capital, become a deemed
companies) public company.
2. Prohibition of allotment of the shares or debentures in 3. Where not less than 25% of the paid up capital of a public
certain cases unless statement in lieu of prospectus has company limited is held by the private company, then the
been delivered to the Registrar of Companies does not private company shall become a public company on and
apply. from the date on which the aforesaid percentage is so held.
3. Restriction contained in Section 81 related to the rights 4. Where a private company accepts deposits after the
issues of share capital does not apply. A special resolution invitation is made by advertisement or renews deposits
to issue shares to non-members is not required in case of a from the public (other than from its members or directors
private company. or their relatives), such companies shall become public
company on and from date such acceptance or renewal is
4. Restriction contained in Section 149 on commencement of first made.
business by a company does not apply. A private company
does not need a separate certificate of commencement of On the basis of the liability of the members, a company can be
business. classified in
be called upon to pay more than the face value of shares or It means any company in which not less than 51% of the paid
so much of it as is remaining unpaid. Members have no up share capital is held by the Central Government or any State
liability in case of fully paid up shares. Government or partly by the Central Government and partly by
b. Company limited by the guarantee A company limited by the one or more State Governments and includes a company
guarantee is a registered company having the liability of its which is a subsidiary of a government company. Government
members limited by its memorandum of association to Companies are also governed by the provisions of the Compa-
such amount as the members may respectively thereby nies Act. However, the Central Government may direct that
undertake to pay if necessary on liquidation of the certain provisions of the Companies Act shall not apply or shall
company. The liability of the members to pay the apply only with such exceptions, modifications and adaptions
guaranteed amount arises only when the company has as may be specified to such government companies.
gone into liquidation and not when it is a going concern. A Non Government Companies
guarantee company may be a company with share capital or It is controlled and operated by a private capital
without share capital.
Foreign Companies
Unlimited Company: The liability of members of an unlimited By this, we mean a company incorporated in a country outside
company is unlimited. Therefore their liability is similar to that India under the law of that other country and has established
of the liability of the partners of a partnership firm. It may or the place of business in India.
may not have a share capital.
There is another important type of company which is called as
Under the Companies Act, 1956, the name of a public limited One Man Company
company must end with the word ‘Limited’ and the name of a
One man company is a company in which one man holds
private limited company must end with the word ‘Private
practically the whole of the share capital of the company, and in
Limited’. However, under Section 25, the Central Government
order to meet the statutory requirement of minimum number
may allow companies to remove the word “Limited / Private
of members, some dummy members who are mostly his
Limited” from the name if the following conditions are
friends or relations, hold just 1or 2 shares each. It is like any
satisfied :-
other company is a legal entity distinct from its members. The
1. The company is formed for promoting commerce, science, dummy members are usually nominees of the principal
art, religion, charity or other socially useful objects shareholder who is the virtual owner of the business and who
2. The company does not intend to pay dividend to its carries it on with limited liability.
members but apply its profits and other income in Now attempt the following problems.
promotion of its objects.
Practical Problems
On the basis of the control, we can classify company as Holding
Attempt the following problems, giving reasons :
and Subsidiary companies
1. A, a trader, carried on business under the name of A& Co.
Holding and Subsidiary companies (Sec 4) Ltd. Without being registered as a company with limited
A company shall be deemed to be subsidiary of another liability. Discuss the consequences of the act of A.
company if: -
2. An association of 12 members starts a banking business
1. That other company controls the composition of its board without being registered. 4 members retire and thereafter a
of directors; or suit is instituted by one of the continuing members for
2. That other company holds more than half in face value of the partitions of assets of the business. Is the suit valid?
its equity share capital [Hint. No]
3. Where the first mentioned company is subsidiary company 3. 35 percent of the paid up capita of a private company is
of any company, which that other’s subsidiary. eg Company held by a public company. Does the private company
B is subsidiary of the Company A and Company C is become a public company? Give reasons for your answer.
subsidiary of Company B, therefore Company C is
[Hint. Yes(Badri Prasad v.Nagarmal)]
subsidiary of Company A.
4. X & Co. and Y & co. are 2 firms roistered under the Indian
The control of the composition of the Board of Directors of
partnership act, 1932, each consisting of 12 partners. The
the company means that the holding company has the power at
firms desire to carry on business jointly as partners under
its discretion to appoint or remove all or majority of directors
the name XY & co. Does XY & co. require registration and,
of the subsidiary company without consent or concurrence of
if so, under what provisions of the companies act?
any other person.
[Hint. Yes]
On the basis of the ownership, a company can be classified as
• Government Companies
• Non Government Companies
• Foreign Companies
Notes:
LESSON 31:
THE COMPANIES ACT, 1956
PROMOTION AND FORMATION OF A COMPANY
of all that it contains, in law the company was formed on 6th Attempt the following problems, giving reasons:
January and, therefore, the allotment of shares was valid. 1. The promoters of a company, before its incorporation,
Commencement of Business enter into an agreement with P to buy A Plot of land on
A private company or a company having no share capital can behalf of the company, after incorporation the company
commence its business immediately after it has been incorpo- refuses to buy the said plot of land. Has P any remedy
rated. However, other companies can commence their activities either against the promoters or against the company?
only after they have obtained Certificate of Commencement of [Hint. P has no remedy against the company. The promoters are
Business. For this purpose, the following additional formalities personally liable on the contract],
have to be complied with: - 2. 6 of the 7 signatures to the memorandum of association
1. If a company has share capital and has issued a prospectus, of a company were forged. The memorandum was duly
then: - presented, registered and a certificated of incorporation was
a. issued. Can the existence of the of the company be
b. Shares up to the amount of minimum subscription subsequently attacked on the ground that the registration
must be allotted. was void. Decide.
d. Every director has paid to the company on each of the 3. The memorandum of association of a company was
shares, which he has taken the same amount as the presented to the registrar of companies for registration and
public has paid on such shares. the registrar issued the certificate of incorporation. The
company after complying with all the prescribed legal
e. formalities started a business. The company contends that
f. No money is or may become payable to the applicants the nature of business cannot be one into as the certificate
of shares or debentures for failure to apply for or to of incorporation is conclusive. Discuss.
obtain permission to deal in those shares or [Hint. The company’s contention is untenable and the nature
debentures in any recognized stock exchange. of the business can be gone into.]
g. 4. The memorandum of association of a company was
h. A statutory declaration in Form 19 signed by one signed by 2 adult members and by a guardian of the other
director or the employee - company secretary or a 5 minor members. The guardian signing separately for each
Company secretary in whole time practice that the minor member. The registrar registered the company and
above provisions have been complied with must be issued under his hand a certificate of incorporation, the
filed. plaintiff contended that
2. If a company has share capital but has not issued a (a) Conditions of registration were not duly complied
prospectus, then: - with, and
a. (b) There were no 7 subscribes to the memorandum.
b. It must file a statement in lieu of prospectus with the Will the court uphold his contention?
Registrar of Companies [Hint. No (peel’s case)]
c. 5. The express newspapers (Pvt.) Ltd., leading publishers of
d. Every director has paid to the company on each of the newspapers and weeklies, sold its undertaking to a new
shares, which he has taken the same amount as the company. Andhra Prabha (Pvt). Ltd; consequent upon the
other members have paid on such shares Government adopting certain recommendations of the
e. wage board for improvement in the terms of service and
f. A statutory declaration in Form 20 signed by one salaries of the working journalists. Shall the registration of
director or the employee - company secretary or a the company be declared void on the plea that new
Company secretary in whole time practice that the company was formed for the purpose of evading the new
above provisions have been complied with must be obligations imposed by the wage board?
filed. Hint. No (T.V. Krishna v. Andhra Prabha [Pvt.] Ltd; (1902) 2
Once the above provisions have been complied with, the Ch 809)]
Registrar of Companies grants “Certificate of Commencement References
of Business” after which the company can commence its • Kapoor, N.D. (2003), “Elements of Mercantile Law,”
activities. Sultan Chand and Sons, New Delhi.
Now attempt the following problems • http://www.vakilno1.com
• http://www.saarclawnet.com/saarclawnet/osca20.html
and buildings. private limited company ) and the company has carried on
The company entered into a contract with Riche for the business for more than 6 months, while the number is so
financing of the construction of a railway line in Belgium. The reduced, the members for the time being constituting the
question raised was whether that contract was covered within company would be personally liable for the debts of the
the meaning of general contractors. The house of lords held company contracted during that time.
that the contract was ultra virus the company and void so that Capital clause The amount of share capital with which the
not even the subsequent assent of the whole body of share- company is to be registered divided into shares must be
holders could ratify it. specified giving details of the number of shares and types of
However, the doctrine of ultra-vires does not apply in the shares. A company cannot issue share capital greater than the
following cases :- maximum amount of share capital mentioned in this clause
without altering the memorandum.
1. If an act is ultra-vires of powers the directors but intra-
vires of company, the company is liable. A company limited by shares can alter the capital clause of its
Memorandum in any of the following ways provided that such
2. If an act is ultra-vires the articles of the company but it
alteration is authorized by the articles of association of the
is intra-vires of the memorandum, the articles can be
company: -
altered to rectify the error.
1. Increase in share capital by such amount as it thinks
3. If an act is within the powers of the company but is
expedient by issuing new shares.
irregualarly done, consent of the shareholders will
validate it. 2. Consolidate and divide all or any of its share capital
into shares of larger amount than its existing shares.
4. Where there is ultra-vires borrowing by the company or
eg, if the company has 100 shares of Rs.10 each (
it obtains deliver of the property under an ultra-vires
aggregating to Rs. 1000/-) it may consolidate those
contract, then the third party has no claim against the
shares into 10 shares of Rs100 each.
company on the basis of the loan but he has right to
follow his money or property if it exist as it is and 3. Convert all or any of its fully paid shares into stock and
obtain an injunction from the Court restraining the re-convert stock into fully paid shares of any
company from parting with it provided that he denomination.
intervenes before is money spent on or the identity of 4. Subdivide shares or any of shares into smaller
the property is lost. amounts fixed by the Memorandum so that in
5. The lender of the money to a company under the subdivision the proportion between the amount paid
ultra-vires contract has a right to make director and the amount if any unpaid on each reduced shares
personally liable. shall be same as it was in case of from which the
reduced share is derived.
Liability clause A declaration that the liability of the members is
limited in case of the company limited by the shares or 5. Cancel shares which have been not been taken or agreed
guarantee must be given. The MA of a company limited by to be taken by any person and diminish the amount of
guarantee must also state that each member undertakes to share capital by the amount of the shares so cancelled.
contribute to the assets of the company such amount not The alteration of the capital of the company in any of the
exceeding specified amounts as may be required in the event of manner specified above can be done by passing a resolution at
the liquidation of the company. A declaration that the liability the general meeting of the company and does not require any
of the members is unlimited in case of the unlimted compa- confirmation by the court.
nies must be given. The effect of this clause is that in a Reduction of the share capital can be effected only in the
company limited by shares, no member can be called upon to manners specified in Section 100-104 of the Act or by way of
pay more than the uncalled amount on his shares. If his shares buy back under Section 77A and 77B of the Act. Notice of
are already fully paid up, he has no liabilty towards the company. alteration to share capital is required to be filed with the registrar
The following are exceptions to the rule of limited liability of of the company in Form no 5 within 30 days of the alteration
members :- of the capital clause of the MA. The Registrar shall record the
1. If a member agrees in writing to be bound by the notice and make necessary alteration in Memorandum and
alteration of MA / AA requiring him to take more shares Articles of Association of the company. Any default in giving
or increasing his liability, he shall be liable upto the amount notice to the registrar renders company and its officers in default
agreed to by him. liable to punishment with fine which may extend to the Rs50
for each day of default.
2. If every member agrees in writing to re-register the
company as an unlimited company and the company is re- Association clause A declaration by the persons for subscribing
registered as such, such members will have unlimited to the Memorandum that they desire to form into a company
liability. and agree to take the shares place against their respective name
must be given by the promoters.
3. If to the knowledge of a member, the number of
shareholders has fallen below the legal minimum, (seven in
company are its agents they are not employees or servants shareholder. The shareholder sued to have the sale set
of the company for being entitled to privileges and aside. Held, the sale was binding, as the directors were
benefits, which are granted under the Companies Act to the under no obligation to disclose the negotiations to the
employees. But there is nothing to prevent a director form shareholder.
being a servant of the company under a special contract of Quasi- trustees. Directors are really only quasi trustees because
service, which he may enter into with the company.
• They are not vested with ownership of the company’s
The Companies Act itself indicates many situations where property.
a director may be in the employment of a company.
• Their functions are not the same as those of trustees.
Directors as officers For certain matters under the
• Their duties of care are not as onerous as those of
Companies Act, the directors are treated as officers of the
trustees.
company [Sec 2 (30)]. As such they are liable to certain
penalties if the provisions of the Companies Act are not To sum up we can say: “Directors have sometimes been called
strictly complied with. as trustees or commercial trustees, and sometimes they have
been called managing partners; it does not matter much what
Directors as trustees Directors are treated as trustees
you call them so long as you understand what their real
• Of the company’s money and property; and position is, which is that they are really commercial men
• Of the powers entrusted to them. managing a trading concern for the benefit of themselves and
Directors are trustees of the company’s money and of all the shareholders in it. They stand in a fiduciary position
property in the sense that they must account for all the towards the company in respect of their powers and capital
company’s money and property over which they exercise under their control.”
control. They have also to refund to the company any of The remaining directors in the case of any such company, and
its money or property, which they have improperly paid the directors generally in the case of a private company which is
away or transferred. not a subsidiary of a public company, must also be appointed
Directors are, however, not trustees in the real sense of the by the company in general meeting, unless otherwise provided
word because they are not vested with the ownership of in any regulations in the articles of the company.
the company’s property. It is only as regards some of their There are some important restrictions on the appointment of
obligations to the company and certain powers that they director. Let us learn about them.
are regarded as trustees of the company.
Restrictions on Appointment or Advertisement of
Directors are trustees of the power entrusted to them in Director (Sec. 266)
the sense that they must exercise their powers honestly and A person shall not be capable of being appointed director of a
in the interest of the company and the shareholders and company by the articles, unless before the registration of the
not in their own interest. articles, the publication of the prospectus, or the filing of the
Alexander v. Automatic Telephone Co; (1900) 2 CH. 56 statement in lieu of prospectus, as the case may be , he has, by
The directors of a company paid up nothing on their own himself or by his agent authorized in writing
shares. They however made all the other shareholders pay (a) Signed and filed with the Registrar a consent in writing to
3s. 6d. on each share. They did not tell the other act as such director; and
shareholders of the difference. Held, this was a breach of (b) Either
trust, and the directors were bound to pay to the company
i. Signed the memorandum for shares not being less in
3s. 6d. on each of their shares.
number or value than that of his qualification shares,
Piercy v. S. Mills & Co. Ltd…(1920) Ch 77 if any, or
The directors of a company had the power to issue the ii. Taken his qualification shares, if any, from the
unissued shares of the company. The company was in no company and paid or agreed to pay for them; or
need of further capital but the directors made a fresh issue
iii. Signed and filed with the Registrar and undertaking in
to themselves and their supporters with a view to
writing to take from the company his qualification
maintaining control of the company Held, the allotment
shares, if any, and pay for them; or
was invalid and void.
iv. Made and filed with the Registrar an affidavit to the
Trustees for the company Directors are trustees for the
effect that shares, not being less in number or value
company and not for third persons who have made
than that of his qualification shares, if any, are
contracts with the company (City Equitable Fire Ins. Co.
registered in his name.
Ltd., Re (1925) Ch. 407] or for the individual shareholders.
Qualification shares are the minimum number of shares a
The leading case on the point is :
person must own, as provided in the articles of the company, in
Percival v. Wright, (1902 )2 Ch. 421 The directors of a order to qualify to become a director of the company. A director
company bought shares from a shareholder, while they must acquire qualification shares within 2 months of his
were negotiating for the sale of the company to another at appointment. The articles cannot require a director to acquire
Notes:
have taken place in the names, addresses and occupations capital should also state in the notice that a member is entitled
of the above since the date of incorporation.(f) Particulars to attend and vote at the meeting and is also entitled to appoint
of any contracts to be submitted to the meeting for proxies in his absence. A proxy need not be a member of that
approval and modifications done or proposed.(g) If the company. A proxy form should be enclosed with the notice.
company has entered into any underwriting contracts, the The proxy forms are required to be submitted to the company
extent, if any, to which they have not been carried out and at least 48 hours before the meeting.
the reasons for the failure.(h) The arrears, if any, due on The AGM must be held on a working day during business
calls from every director and from the manager.(i) The hours at the registered office of the company or at some other
particulars of any commission or brokerage paid or to be place within the city, town or village in which the registered
paid, in connection with the issue or sale of shares or office of the company is situated. The Central Government
debentures to any director or to the manager. may, however, exempt any class of companies from the above
The auditors have to certify that all information regarding calls provisions. If any day is declared by the Central government to
and allotment of shares are correct. be a public holiday after the issue of the notice convening such
meeting, such a day will be treated as a working day.
B. Annual General Meeting (Secs. 166 and 167)
It must be held by every type of company, public or private, A company may, by appropriate provisions in its articles, fix the
limited by shares or by guarantee, with or without share capital time for its annual general meeting and may also by a resolution
or unlimited company, once a year. Every company must in each passed in one annual general meeting fix the time for its
year hold an annual general meeting. Not more than 15 months subsequent annual general meetings.
must elapse between two annual general meetings. However, a Companies licensed under Section 25 are exempt from the
company may hold its first annual general meeting within 18 above provisions provided that the time, date and place of each
months from the date of its incorporation. In such a case, it annual general meeting are decided upon beforehand by the
need not hold any annual general meeting in the year of its Board of Directors having regard to the directions, if any, given
incorporation as well as in the following year only. in this regard by the company in general meeting.
Note the following case: In case of default in holding an annual general meeting, the
Sree Meenakshi Mills Co. Ltd. V. Assistant Registrar of following are the consequences: -
Companies. A.I.R. (1938) Mad 640. The annual general 1. Any member of the company may apply to the Company
meeting of a company called in December 1934 was adjourned Law Board. The Company Law Board may call, or direct the
and held in march 1935, the next meeting was held in January, calling of the meeting, and give such ancillary or
1936, no other meeting being held in 1935. the company consequential directions as it may consider expedient in
contended that it did hold a meeting in the year 1935. but it was relation to the calling, holding and conducting of the
held by the court that the meeting of march 1935 was the meeting. The Company Law Board may direct that one
adjourned meeting of 1934. member present in person or by proxy shall be deemed to
In the case there is any difficulty in holding any annual general constitute the meeting. A meeting held in pursuance of
meeting (except the first annual meeting), the Registrar may, for this order will be deemed to be an annual general meeting
any special reasons shown, grant an extension of time for of the company. An application by a member of the
holding the meeting by a period not exceeding 3 months company for this purpose must be made to the concerned
provided the application for the purpose is made before the due Regional Bench of the Company Law Board by way of
date of the annual general meeting. However, generally delay in petition in Form No. 1 in Annexure II to the CLB
the completion of the audit of the annual accounts of the Regulations with a fee of rupees fifty accompanied by (i)
company is not treated as “special reason” for granting exten- affidavit verifying the petition, (ii) bank draft for payment
sion of time for holding its annual general meeting. Generally, of application fee.
in such circumstances, an AGM is convened and held at the 2. Fine which may extend to Rs. 5,000 on the company and
proper time . all matters other than the accounts are discussed. every officer of the company who is in default may be
All other resolutions are passed and the meeting is adjourned levied and for continuing default, a further fine of Rs. 250
to a later date for discussing the final accounts of the company. per day during which the default continues may be levied.
However, the adjourned meeting must be held before the last
Business to be Transacted at Annual General
day of holding the AGM.
Meeting
A notice of at least 21 days before the meeting must be given to At every AGM, the following matters must be discussed and
members unless members, holding not less than 95% of decided. Since such matters are discussed at every AGM, they are
voting rights in the company, accord consent to a shorter notice. known as ordinary business. All other matters and business to
The notice must state that the meeting is an annual general be discussed at the AGM are specila business.
meeting. The time, date and place of the meeting must be
The following matters constitute ordinary business at an AGM
mentioned in the notice. The notice of the meeting must be
accompanied by a copy of the annual accounts of the company, a. Consideration of annual accounts, director’s report and
director’s report on the position of the company for the year the auditor’s report
- Meeting of the Board of Directors at the meeting. In respect of any other meeting, it may be called
and held with a shorter notice, if at least members holding 95
- Meeting of a Committee of the Board
percent of the total voting power of the Company consent to a
III. Other Meetings shorter notice.
A. Meeting of debenture holders Notice of every meeting of company must be sent to all
A company issuing debentures may provide for the holding of members entitled to attend and vote at the meeting. Notice of
meetings of the debentureholders. At such meetings, generally the AGM must be given to the statutory auditor of the
nmmatters pertaining to the variation in terms of security or to company.
alteration of their rights are discussed. All matters connected Accidental omission to give notice to, or the non-receipt of
with the holding, conduct and proceedings of the meetings of notice by, any member or any other person on whom it should
the debentureholders are normally specified in the Debenture be given will not invalidate the proceedings of the meeting. The
Trust Deed. The decisions at the meeting made by the pre- notice may be given to any member either personally or by
scribed majority are valid and lawful and binding upon the sending it by post to him at his registered address, or if there is
minority. none in India, to any address within India supplied by him for
B. Meeting of Creditors the purpose. Where notice is sent by post, properly addressing,
Sometimes, a company, either as a running concern or in the pre-paying and posting the notice affect service. A notice may be
event of winding up, has to make certain arrangements with its given to joint holders by giving it to the joint holder first
creditors. Meetings of creditors may be called for this purpose. named in the register of members. A notice of meeting may
Eg U/s 393, a company may enter into arrangements with also be given by advertising the same in a newspaper circulating
creditors with the sanction of the Court for reconstruction or in the neighborhood of the registered office of the company
any arrangement with its creditors. The court, on application, and it shall be deemed to be served on every member who has
may order the holding of a creditors’ s meeting. If the scheme to registered address in India for the giving of notices to him.
of arrangement is agreed to by majority in number of holding A notice calling a meeting must state the place, day and hour of
debts to value of the three-fourth of the total value of the the meeting and must contain the agenda of the meeting. If the
debts, the court may sanction the scheme. A certified copy of meeting is a statutory or annual general meeting, notice must
the court’s order is then filed with the Registrar and it is binding describe it as such. Where any items of special business are to be
on all the creditors and the company only after it is filed with transacted at the meeting, an explanatory statement setting out
Registrar. all materials facts concerning each item of the special business
Similarly, in case of winding up of a company, a meeting of including the concern or interest, if any, therein of every director
creditors and of contributories is held to ascertain the total and manager, is any, must be annexed to the notice. If it is
amount due by the company and also to appoint a liquidator to intended to propose any resolution as a special resolution, such
wind up the affairs of the company. intention should be specified.
however does not have the power to stop or adjourn the demand a poll. A poll must be ordered by the chairman if it is
meeting at his own will and pleasure. If he adjourns the demanded:-
meeting prematurely, the members present may decide to a. In the case of a public company having a share capital,
continue the meeting and elect another chairman and by any member or members present in person or by
proceed with the business for which it was convened. proxy and holding shares in the company-
6. He must exercise his power to order a poll correctly and i. Which confer a power to vote on the resolution not
must order it to be taken when demanded properly. being less than one-tenth of the total voting power in
7. He must exercise his casting vote bonafide in the respect of the resolution, or
interest of the company. ii. on which an aggregate sum of not less than fifty
Motion thousand rupees has been paid up.
Motion means a proposal to be discussed at a meeting by the b. In the case of a private company having a share capital, by
members. A resolution may be passed accepting the motion, one member having the right to vote on the resolution and
with or without modifications or a motion may be entirely present in person or by proxy if not more than seven such
rejected. A motion, on being passed, as a resolution becomes a members are personally present, and by two such members
decision. A motion must be in writing and signed by the mover present in person or by proxy, if more than seven such
and put to the vote of the meeting by the chairman. Only those members are personally present.
motions, which are mentioned in the agenda to the meeting, c. In the case of any other, by any member or members
can be discussed at the meeting. However, motions incidental or present in person or by proxy and having not less than
ancillary to the matter under discussion may be moved and one-tenth of the total voting power in respect of the
passed. Generally, a motion is proposed by one member and resolution.
seconded by another member.
Now we are going to discuss about resolutions.
The motions proposed in a general meeting of a company are
decided on the votes of the members of the company. Resolutions
Resolutions mean decisions taken at a meeting. A motion, with
The Voting may be:
or without amendments is put to vote at a meeting. Once the
• Voting by a show of hands motion is passed, it becomes a resolution. A valid resolution
• Voting by poll can be passed at a properly convened meeting with the required
Voting by a show of hands (Secs . 177 and 178). At any general quorum. There are broadly three types of resolutions: -
meeting, motions put to vote are in the first instance decided by 1. Ordinary Resolution [Sec. 189(1)]
a show of hands, unless a poll is demanded (sec. 177) in taking An ordinary resolution is one which can be passed by a simple
a vote by show of hands. The duty of the chairman is to count majority. I.e. if the votes (including the casting vote, if any, of
the hands raised and to declare the result accordingly, without the chairman), at a general meeting cast by members entitled to
regard to the number of votes that a member raising the hand vote in its favour are more than votes cast against it. Voting may
possesses. Proxies cannot be used on a show of hands [Earnest be by way of a show of hands or by a poll provided 21 days
v. Loma Gold Mines. (1906) 2 Ch. 572.] notice has been given for the meeting.
Voting and Demand for Poll (Sec. 179) 2. Special Resolution [Sec. 189(2)]
Generally, initially matters are decided at a general meeting by a A special resolution is one in regard to which is passed by a 75
show of hands. If the majority of the hands raise their hands % majority only i.e. the number of votes cast in favour of the
in favor of a particular resolution, then unless a poll is de- resolution is at least three times the number of votes cast
manded, it is taken as passed. Voting by a show of hands against it, either by a show of hands or on a poll in person or
operates on the principle of “One Member-One Vote”. by proxy. The intention to propose a resolution as a special
However, since the fundamental voting principle in a company resolution must be specifically mentioned in the notice of the
is “One Share-One Vote”, if a poll is demanded, voting takes general meeting. Special resolutions are needed to decide on
place by a poll. Before or on declaration of the result of the important matters of the company. Examples where special
voting on any resolution on a show of hands, the chairman resolutions are required are :-
may order suo motu (of his own motion) that a poll be taken. a. To alter the domicile clause of the memorandum from
However, when a demand for poll is made, he must order the one State to another or to alter the objects clause of the
poll be taken. The chairman may order a poll when a resolution memorandum.
proposed by the Board is lost on the show of hands or if he is
of the opinion that the decision taken on the show of hands is b. To alter / change the name of the company with the
likely to be reversed by poll. When a poll is taken, The decision approval of the central government
arrived by poll is final and the decision on the show of hands c. To alter the articles of association
has no effect. d. To change the name of the company by omitting
“Limited” or “Private Limited”. The Central
Government may allow a company with charitable
c. To remove a director before the expiry of his period of It is required to register the resolutions and agreements.
office. Registration of Resolutions and Agreements
d. To appoint another director in place of removed A copy of each of the following resolutions along with the
director. explanatory statement in case of a special business and agree-
ments must, within 30 days after the passing or making thereof,
e. Where the articles of a company provide for the giving
be printed or typewritten and duly certified under the signature
of a special notice for a resolution, in respect of any
of an officer of the company and filed with the Registrar of
specified matter or matters.
Companies who shall record the same :-
Please note that a resolution requiring special notice may be
1. All special resolutions
passed either as an ordinary resolution (Simple majority) or as a
special resolution (75 % majority). 2. All resolutions which have been unanimously agreed
to by all the members but which, if not so agreed,
Circulation of Member’s Resolution would not have been effective unless passed as special
Generally, the Board of Directors prepare the agenda of the resolutions
meeting to be sent to all members of the meeting. A member,
3. All resolutions of the board of directors of a company
by himself has very little say in deciding the agenda. However,
or agreement executed by a company, relating to the
there are provisions in the Companies Act which enable
appointment, re-appointment or renewal of the
members to introduce motions at a meeting and give prior
appointment, or variation of the terms of
notice of their intention to do so to all other members of the
appointment, of a managing director
company. If members having one twentieth of the total voting
rights of all members having the right to vote on a resolution 4. All resolutions or agreements which have been agreed
or if 100 members having the right to vote and holding paid- to by all members of any class of members but which,
up capital of Rs1,00,000 or more, require the company to do so, if not so agreed, would not have been effective unless
the company must :- passed by a particular majority or in a particular manner
and all resolutions or agreements which effectively bind
1. Give to the members entitled to receive notice of the
all members of any class of shareholders though not
next annual general meeting, notice of any resolution
agreed to by all of those members
which may be properly moved and is intended to be
moved at that meeting; and 5. All resolutions passed by a company conferring power
2. Circulate to members entitled to have notice of any upon its directors to sell or dispose of the whole or
general meeting sent to them, any statement of not any part of the company’s undertaking; or to borrow
more than 1,000 words with respect to the matter money beyond the limit of the paid-up share capital
and free reserves of the company; or to contribute to
net profits must be initialed or signed and last page of the record of
6. All resolutions approving the appointment of sole proceedings of each meeting in such books must be dated and
selling agents of the company signed by :-
7. All copies of the terms and conditions of a. In the case of the meeting of the Board of directors or
appointment of a sole selling agent or sole buying or committee thereof, by the chairman of that meeting or
purchasing agent that of the succeeding meeting, and
8. Resolutions for voluntary winding up of a company b. In the case of a general meeting, by the chairman of
the same meeting within the aforesaid 30 days or in the
We will know discuss some important terms related to
event of the death or inability of that chairman within
meetings of company in brief.
the period, by a director duly authorised by the Board
Adjournment of directors for the purpose.
Adjournment means suspending the proceedings of a meeting The Company Law Board, however, may not object if minutes
for the time being so that the meeting may be continued at a are maintained in loose-leaf form provided all other procedural
later date and time fixed in that meeting itself at the time of requirements are complied with and all possible safeguards
such adjournment or to decided later on. Only the business not against manipulation or interpolation of the minutes are
finished at the original meeting can be transacted at the ad- ensured. The loose leaves must be bound at reasonable
journed meeting. intervals. Entering the minutes in a bound minute book by a
The majority of members at a meeting may move an adjourn- chemical process, which does not amount to attachment to any
ment motion at a meeting. If the chairman adjourns the book by pasting or otherwise is permissible provided on the
meeting, ignoring the views of the majority, the remaining mechanical impression of the minutes, the original signatures
members can continue the meeting. The chairman cannot of the Chairman are given on each page. All appointments of
adjourn the meeting at his own discretion without there being a officers made at any of the meetings must be included in the
good cause for such an adjournment. Where the chairman, minutes of the meeting. In the case of a meeting of the Board
acting bona fide within his powers, adjourns the meeting as per of directors or its Committee, the minutes must also state the
the view of the majority, the minority members cannot to names of directors present at the meeting and the names of
continue with such meeting and, if they do the proceedings directors, if any, dissenting from, or not concurring with a
there will be null and void. resolution passed at the meeting.
An adjourned meeting is merely the continuation of the The chairman may exclude from the minutes any matters which
original meeting and therefore, a fresh notice is not necessary, if are defamatory, irrelevant or immaterial or which are detrimental
the time, date and place for holding the adjourned meeting are to the interests of the company. The discretion of the Chair-
decided and declared at the time of adjourning it. If a meeting man with regard to the inclusion or exclusion of any matter is
is adjourned without stipulation as to when it will be contin- absolute and unfettered.
ued, fresh notice of the adjourned meeting must be given. Where minutes of the proceedings of any meeting have been
Postponement kept properly, they are, unless the contrary is proved, presumed
Postponement of a meeting means deferring the holding of to be correct, and are valid evidence that the meeting was duly
the meeting itself at a later date. Postponement is done by the called and held, and all proceedings thereat have actually taken
Board of Directors or by the person convening the meeting. In place, and in particular, all appointments of directors or
case of adjournment, it is the decision of the majority of the liquidators made at the meeting shall be deemed to be valid.
members present at the meeting itself. The minute books of the proceedings of general meetings
Dissolution must be kept the registered office of the company. Any member
Dissolution of a meeting means termination of a meeting. The has a right to inspect, free of cost during business hours at the
meeting no longer exists once it has been dissolved. If within registered office of the company, the minutes books containing
half an hour after the time appointed for holding a general the proceedings of the general meetings of the company.
meeting; the quorum is not present, the meeting shall stand Further, any member shall be entitled to be furnished, within 7
dissolved if it was called on requisition by members. days after he has made a request to the company, with a copy of
any minutes on payment of Rupee One for every hundred
Minutes of Proceedings of Meetings words or fraction thereof. If any inspection is refused or copy
Every company must keep minutes of the proceedings of not furnished within the time specified, every officer in default
general meetings and of the meetings of board of directors and shall be punishable with fine up to Rs. 500 for each offence. The
its committees. The minutes are a record of the discussions Company Law Board may also by order compel an immediate
made at the meeting and the final decisions taken thereat. inspection or furnishing of a copy forthwith. But the minutes
Every company must keep minutes containing details of all books of the board meetings are not open for inspection of
proceedings at the meetings. The pages of the minute books members.
must be consecutively numbered and the minutes must be
Practical Problems
recorded therein within 30 days of the meeting. They have to be
Attempt the following problems, giving reasons
written directly on the numbered pages. Pasting or attaching of
Notes:
LESSON 35:
THE COMPANIES ACT, 1956
THE WINDING UP OF A COMPANY
MODES OF WINDING UP OF A COMPANY
employee on account of winding up. however, be subject of the rights of secured creditors.
(d) All amounts due in respect of contributors payable during Now, we will learn about the proof and ranking of claims.
the 12 months before the winding up order under the
Proof and Ranking of Claims
employees’ state insurance act. 1948. This,however does
not apply when the company is being wound up Debts of all Descriptions to be Admitted to Proof
voluntarily for the purpose of reconstruction or Section 528 requires that in every winding up (subject, in the
amalgamation with another company. case of insolvent companies, to the application in accordance
with the provisions of this Act of the law of insolvency), all
(e) All amounts due in respect of any compensation or
debts payable on a contingency, and all claims against the
liability under the workmen’s compensation act. 1923, in
company, present or future, certain or contingent, ascertained or
respect of death or disablement of any employee of the
sounding only in damages, shall be admissible to proof against
company.
the company, a just estimate being made, so far as possible, of
(f) All sums due to any employee form a provident fund, a the value of such debts or claims as may be subject to any
pension fund, a gratuity fund or any other fund for the contingency, or may sound only in damages, or for some other
welfare of the employees maintained by the company. reason may not bear a certain value.
(g) The expenses of any investigation held in pursuance of Application of insolvency rules in winding up of insolvent
sec. 235 or 237 in as far as they are payable by the company. companies.
Advances made by a third person to pay wages or salary to any Section 529 lays down that in the winding up of an insolvent
employee, or in the case of his death to any other person in his company, the same rules shall prevail and be observed with
right on account of holiday remuneration, shall, in a winding regard to-
up, have the same priority as the persons to whom these
payments are made out of money advanced have priority. (a) Debts provable;
Primrose (Builders) Ltd; Re. (1950) Ch. 561 A bank allowed (b) The valuation of annuities and future and contingent
overdrafts to a company for the purpose of paying the wages liabilities; and
of the company on the understanding that an amount equal to (c) The respective rights of secured and unsecured creditors; as
the loan would shortly be paid in order to reduce the overdraft. are in force for the time being under the law of insolvency
Held, the bank was entitled to preferential payment in respect with respect to the estates of persons adjudged insolvent:
of the overdrafts The security of every secured creditor shall be deemed to be
3. Consequences as to servants and officers. subject to a pari passu charge in favour of the workmen to the
A winding up order shall be deemed to be a notice of discharge extent of the workmen’s portion therein, and, where a secured
to the officers and employees of the company, except when the creditor, instead of relinquishing his security and proving his
business of the company is continued. Such a discharge shall debt, opts to realise his security,-
relieve them of all obligations under their contract of service. A (a) The liquidator shall be entitled to represent the workmen
voluntary winding up shall also operate as a notice of discharge and enforce such charge;
to the company’s servants. (b) Any amount realised by the liquidator by way of
4. Consequences as to Proceedings Against the enforcement of such charge shall be applied rateably for the
Company discharge of workmen’s dues; and
When a winding up order has been made or the official (c) So much of the debt due to such secured creditor as could
liquidator, has been appointed as provisional liqudator, no suit not be realised by him by virtue of the foregoing
or other legal proceeding against the company shall be com- provisions of this proviso or the amount of the
menced except by leave of the tribunal. Similarly if a suit is workmen’s portion in his security, whichever is less, shall
pending against the company at the date of the winding up rank pari passu with the workmen’s dues for the purposes
order, it shall not be proceeded with against the company, of section 529A.
except by leave of the tribunal. In a voluntary winding up also, (2) All persons who in any such case would be entitled to
the tribunal may restrain proceedings against the company if it prove for and receive dividends out of the assets of the
thinks fit. company, may come in under the winding up, and make
5. Consequences as to Costs such claims against the company as they respectively are
If assets are insufficient to satisfy liabilities, the tribunal may entitled to make by virtue of this section:
order for payment of the costs, charges and expenses of the If a secured creditor instead of relinquishing his security and
winding up out of the assets of the company. The payment proving for his debt proceeds to realize his security, he shall be
shall be made in such order of priority inter se as the tribunal liable to pay 53[his portion of] the expenses incurred by the
thinks just. Similarly all costs, charges and expenses property liquidator (including a provisional liquidator, if any) for the
incurred in a voluntary winding up, including the remuneration preservation of the security before its realization by the secured
of the liquidator, shall be paid out of the assets of the creditor.]
having been made. mencement of this Act, and in such a case, the provisions
(5) The foregoing debts shall- relating to preferential payments which would have applied if
this Act had not been passed, shall be deemed to remain in full
(a) Rank equally among themselves and be paid in full, unless
force.
the assets are insufficient to meet them, in which case they
shall abate in equal proportions; and There is another important term which you could find in regard
to winding up of company.
(b) So far as the assets of the company available for payment
of general creditors are insufficient to meet them, have Defunct company
priority over the claims of holders of debentures under A company is a said to be ‘defunct ’ when it is not carrying on
any floating charged created by the company, and be paid business or when it is not in operation. Sec. 560 deals with
accordingly out of any property comprised in or subject to defunct companies. If a company has ceased to carry on
that charge. business, the registrar may strike it off the register as a defunct
(6) Subject to the retention of such sums as may be necessary company in accordance with Sec. 560.
for the costs and expenses of the winding up, the Practical Problems
foregoing debts shall be discharged forthwith so far as the Attempt the following problems, giving reasons
assets are sufficient to meet them, and in the case of the 1. S, a builder, wrote to a hotel company offering to take 300
debts to which priority is given by clause (d) of sub-section shares in the company, if a contract for the renovation of
(1), formal proof thereof small not be required except in the hotel was given to him. His offer was accepted. 300
so far as may be otherwise prescribed. shares were allotted to him and the directors passed a
(7) In the event of a landlord or other person distraining or resolution that S should have the contract. S paid his
having distrained on any goods or effects of the company deposit on shares and attended 2 meetings of the
within three months next before the date of a winding up shareholders. No such contract was made and the company
order, the debts to which priority is given by this section went into liquidation. Is S liable as contributory.
shall be a first charge on the goods or effects so distrained [Hint. No ( Aldborough Hotel Co., Re. Simpson’s Case)]
on, or the proceeds of the sale thereof
2. A creditor of a company applied for winding up of the
(8) For the purposes of this section- company for its inability to pay his claim after proper
(a) Any remuneration in respect of a period of holiday or of demand had been made by him and on the lapse of the 3
absence from work through sickness or other goods cause weeks from the dare of such demand. It was proved to the
shall be deemed to be wages in respect of services rendered satisfaction of the tribunal during inquiry, that the
to the company during that period; company was commercially solvent, will the tribunal order
(b) The expression “accrued holiday remuneration” includes, in for the winding up of the company?
relation to any person, all sums which, by virtue either or [Hint. The tribunal may order for the winding up of the
his contract of employment or of any enactment (including company Secs. 433 (e) and 434].
any order made or direction given under any enactment), 3. An application was made by a father as guardian of his
are payable on account of the remuneration which would, minor daughter for shares and the company registered the
in the ordinary course, have become payable to him in shares in the name of the daughter describing her as
respect of a period of holiday, had his employment with minor. The company went into liquidation and the father
the company continued until he became entitled to be of the minor was placed on the list of contributories. The
allowed the holiday; father resists this. Decide.
You must understand that [Hint. The father cannot be placed on the list of
• The expression “employee” does not include a contributories ( Palaniappa Mudaliar v. Official Liquidator,
workman; and Pasupathi Bank Ltd)].
• The expression “the relevant date” means- 4. Ever since its incorporation in 1969 and for 30 years
(i) In the case of a company ordered to be wound up thereafter, a company never met either in a shareholders’ or
compulsorily, the date of the appointment (or first in a directors’ meeting, did not file for more than 10 years
appointment) of a provisional liquidator, or if no such any summaries or list of shareholders, treated the
appointment was made, the date of the company’s properties as though they were properties as
winding up order, unless in either case the company had though they were properties belonging to the individual
commenced to be wound up voluntarily before that date; members, and sales, transfers and various dealing with
and these properties took place for all over those 30 years as will
(ii) In any case where sub-clause (i) does not apply, the date of the registrar be justified in striking off the name of the
the passing of the resolution for the voluntary winding up company from the register?
of the company. [Hint. Yes. ( Rai Sahib V.N. Mandal’s Estates Ltd. Re.)].
This section shall not apply in the case of a winding the dated 5. A company, in ignorance of the fact that it had been struck
referred to in sub-section (5) of section 230 of the Indian off the register, borrowed money on the security of a
Notes:
LESSON 37:
TUTORIAL
THE COMPANIES ACT, 1956
Notes:
-To provide simple, speedy and inexpensive redressal of The State Council meets as and when necessary but not less
consumer grievances, the Act envisages a three- tier quasi- than two meetings must be held every year.
judicial machinery at the National, State and District levels. Redressal Machinery under the Act
• National Consumer Disputes Redressal Commission - The CPA provides for a 3 tier approach in resolving consumer
known as “National Commission”. disputes. The District Forum has jurisdiction to entertain
• Consumer Disputes Redressal Commissions known as complaints where the value of goods / services complained
“State Commission. against and the compensation claimed is less than Rs. 5 lakhs,
the State Commission for claims exceeding Rs. 5 lakhs but not
• Consumer Disputes Redressal Forums- known as “District exceeding Rs. 20 lakhs and the National Commission for claims
Forum. exceeding Rs. 20 lakhs.
-The provisions of this Act are in addition to and not in
District Forum
derogation of the provisions of any other law for the time
Under the CPA, the State Government has to set up a district
being in force
Forum in each district of the State. The overnment may
What Constitutes a Complaint? establish more than one District Forum in a district if it deems
Under the Act, a complaint means any allegation in writing fit. Each District Forum consists of :-
made by a complainant in regard to one or more of the (a) A person who is, or who has been, or is qualified to be, a
following:- District Judge who shall be its President
- Any unfair trade practice as defined in the Act or restrictive (b) Two other members who shall be persons of ability,
trade practices like tie-up sales adopted by any trader. integrity and standing and have adequate knowledge or
- One or more defects in goods. The goods hazardous to experience of or have shown capacity in dealing with
life and safety, when used,are being offered for sale to problems relating to economics, law, commerce,
public in contravention of provisions of any law for the accountancy, industry, public affairs or administration, one
time being in force. of whom shall be a woman.
- Deficiencies in services. Appointments to the State Commission shall be made by the
- A trader charging excess of price. State Goverrnment on the recommendation of a Selection
(i) Fixed by or under any law for the time being in force; or Committee consisting of the President of the State Committee,
the Secretary - Law Department of the State and the secretary in
(ii) Displayed on goods; or charge of Consumer Affairs
(iii) Displayed on any packet containing such good;
Every member of the District Forum holds office for 5 years or
Where to file a complaint upto the age of 65 years, whichever is earlier and is not eligilbe
Consumer Protection Councils for re-appointment. A member may resign by giving notice in
The interests of consumers are enforced through various writing to the State Government whereupon the vacancy will be
authorities set up under the CPA. The CPA provides for the filled up by the State Government.
setting up of the Central Consumer Protection Council, the The District Forum can entertain complaints where the value of
State Consumer Protection Council and the District Forum goods or services and the compensation, if any, claimed is less
than rupees five lakhs. However, in addition to jurisdiction over
Central Consumer Protection Council
consumer goods services valued upto Rs. 5 lakhs, the District
The Central Government has set up the Central Consumer
Forum also may pass orders against traders indulging in unfair
Protection Council which consists of the following members :-
trade practices, sale of defective goods or render deficient
(a) The Minister in charge of Consumer Affairs in the Central services provided the turnover of goods or value of services
Government who is its Chairman, and does not exceed rupees five lakhs.
(b) Other official and non-official members representing varied A complaint shall be instituted in the District Forum within the
interests local limits of whose jurisdiction -
The Central council consists of 150 members and its term is 3 (a) The opposite party or the defendant actually and
years. The Council meets as and when necessary but at least one voluntarily resides or carries on business or has a branch
meeting is held in a year. office or personally works for gain at the time of
institution of the complaint; or
one) actually and voluntarily resides or carries on business problems relating to economics, law, commerce,
or has a branch office or personally works for gain, at the accountancy, industry, public affairs or administration, one
time of institution of the complaint provided that the of whom shall be a woman
other opposite party/parties acquiescence in such Appointments shall be by the Central Government on the
institution or the permission of the Forum is obtained in recommendation of a Selection Committee consisting of a
respect of such opposite parties; or Judge of the Supreme Court to be nominated by the Chief
(c) The cause of action arises, wholly or in part. Justice of India, the Secretary in the Department of Legal
Affairs and the Secretary in charge of Consumer Affairs in the
State Commission
Government of India.
The Act provides for the establishment of the State Consumer
Disputes Redressal Commission by the State Government in Every member of the National Commission shall hold office
the State by notification. Each State Commission shall consist for a term of five years or upto seventy years of age, whichever
of:- is earlier and shall not be eligible for reappointment.
(a) A person who is or has been a judge of a High Court The National Commission shall have jurisdiction :-
appointed by State Government (in consultation with the (a) To entertain complaints where the value of the goods or
Chief Justice of the High Court ) who shall be its services and the compensation, if any, claimed exceeds
President; rupees twenty lakhs:
(b) Two other members who shall be persons of ability, (b) To entertain appeals against the orders of any State
integrity, and standing and have adequate knowledge or Commission; and
experience of, or have shown capacity in dealing with, (c) To call for the records and pass appropriate orders in any
problems relating to economics, law, commerce, consumer dispute which is pending before, or has been
accountancy, industry, public affairs or administration, one decided by any State Commission where it appears to the
of whom must be a woman. National Commission that such Commission has exercised
Every appointment made under this hall be made by the State a jurisdiction not vested in it by law, or has failed to exercise
Government on the recommendation of a Selection Committee a jurisdiction so vested, or has acted in the exercise of its
consisting of the President of the State Commission, Secretary - jurisdiction illegally or with material irregularity.
Law Department of the State and Secretary in charge of Complaints may be filed with the District Forum by :-
Consumer Affairs in the State.
1. The consumer to whom such goods are sold or delivered
Every member of the District Forum holds office for 5 years or or agreed to be sold or delivered or such service provided
upto the age of 65 years, whichever is earlier and is not eligilbe or agreed to be provided
for re-appointment. A member may resign by giving notice in
2. Any recognised consumer association, whether the
writing to the State Government whereupon the vacancy will be
consumer to whom goods sold or delivered or agreed to
filled up by the State Government.
be sold or delivered or service provided or agreed to be
The State Commission can entertain complaints where the value provided, is a member of such association or not
of goods or services and the compensation, if any claimed
3. One or more consumers, where there are numerous
exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs;
consumers having the same interest with the permission
The State Commission also has the jurisdiction to entertain of the District Forum, on behalf of or for the benefit of,
appeal against the orders of any District Forum within the State all consumers so interested
The State Commission also has the power to call for the records 4. The Central or the State Government.
and appropriate orders in any consumer dispute which is
On receipt of a complaint, a copy of the complaint is to be
pending before or has been decided by any District Forum
referred to the opposite party, directing him to give his version
within the State if it appears that such District Forum has
of the case within 30 days. This period may be extended by
exercised any power not vested in it by law or has failed to
another 15 days. If the opposite party admits the allegations
exercise a power rightfully vested in it by law or has acted illegally
contained in the complaint, the complaint will be decided on
or with material irregularity.
the basis of materials on the record. Where the opposite party
National Commission denies or disputes the allegations or omits or fails to take any
The Central Government provides for the establishment of the action to represent his case within the time provided, the
National Consumer Disputes Redressal Commission The dispute will be settled in the following manner :-
National Commission shall consist of :- I. In case of dispute relating to any goods : Where the
(a) A person who is or has been a judge of the Supreme complaint alleges a defect in the goods which cannot be
Court, to be appoint by the Central Government (in determined without proper analysis or test of the goods, a
consultation with the Chief Justice of India ) who be its sample of the goods shall be obtained from the
President; complainant, sealed and authenticated in the manner
(b) Four other members who shall be persons of ability, prescribed for referring to the appropriate laboratory for the
integrity and standing and have adequate knolwiedge or purpose of any analysis or test whichever may be necessary,
Relief Available to the Consumers Q1. I have instituted a complaint before the Consumer Court
Depending on the nature of relief sought by the consumer and against a Medical Practitioner. My complaint has been
facts, the Redressal Forums may give orders for one or more of challenge on the ground that a Medical Practitioner cannot
the following reliefs:- be sued under the Consumer Act. What does law provide?
(a) Removal of defects from the goods, A. Yes, a medical practitioner can be sued under the Consumer
Protection Act 1986 for his or her professional negligence
(b) Replacement of the goods; resulting in damage to patient. Section 2 (d) in defining a
(c) Refund of the price paid; consumer in Clause (ii) uses the expression ‘hires and avails
(d) Award of compensation for the loss or injury suffered; of”. The word “hire” means employ of wages or fees”.
(e) Removal of defects or deficiencies in the services; Secondly the words “any service” in s. 2 (d) (ii) in Consumer
Protection Act. A eloquent to bring the delinquent medical
(f) discontinuance of unfair trade practices or restrictive trade
practitioners within the ambit of Consumer Protection Act.
practices or direction not to repeat them;
Thirdly, s. 2 (o), Consumer Protection Act which defines service
(g) Withdrawal of the hazardous goods from being offered to exempts only two types of services, one “service free of charge”
sale; or and another “contract of personal service” postulates a
(h) Award for adequate costs to parties. relationship of master and servant. A medical man whose
service is requisitioned for a patient answers the clause “ contract
Procedure for Filing the Appeal
of service” but never “a contract of personal service”. So, a
Procedure for filing the appeal :-
negligent medical professional can be proceeded under the
- Appeal against the decision of a District Forum can be Consumer Protection Act 1986.
filed before the State Commission within a period of thirty
days. Appeal against the decision of a State Commission
germinate. The other party took the plea that I was not a of pay.
consumer. Whether purchase of seeds for the purpose of Q9. I had applied for subscription in Rajlakshmi scheme of
agriculture is purchase for commercial purpose? UTI. The essence of the scheme was that the sum of
A. Purchase made for agriculture is not for commercial purpose. money deposited with the UTI would grow 21 times in 28
Therefore, the complainant is a consumer and entitled to seek years. However subsequently, the UTI extended the
redressal of his grievance in a Consumer Court against the party maturity date by two years. Can I approach a Consumer
which supplied defective seed to him. Court?
Q3. I had got a confirmed ticket on Sahara Airways. The flight A. Unilateral alteration of terms of payment by the UTI in their
was later cancelled on account of technical snag. Is it a above scheme is “Deficiency in Service” for which you can seek
deficiency in service? relief in a consumer court.
A. Cancellation of flight on account of technical snag is not Q10. My car met with an accident. The insurance claim was
deficiency in service as it is due to unavoidable circumstances. rejected on the ground that my driver was not holding
However, you ought to be allowed refund of the fare but no valid driving license. Should I approach a Consumer Court
compensation can be granted on account of any loss suffered by for seeking the Insurance claim?
you (if any) because of the said cancellation. A. The Consumer Court will not be able to grant you any relief
Q4. I was allotted a Maruti Car. There was a delay in delivery of since the driver employed by you did not have a driving license.
the car. Subsequently, the dealer called upon me to make You were bound under law to check the ability of the person
further payment as the price of the car had gone up. Am I employed by you and the failure in holding a license for driving
liable to bear the price increase on account of delay caused well debar you from claiming the Insurance Claims.
by the dealer? Q11. I had purchased a fridge, which suffered from several
A. You are not liable to pay any price increase in the above defects, and those defects could not be removed or repaired
mentioned circumstances since the increase in price is totally on by the Company. Can I seek redressal of my grievance?
account of the delay on the part of the dealer for which a A. You can certainly seek redressal before the Consumer Forum.
consumer cannot be made to suffer. In a similar case as yours, the Forum appointed a Local
Q5. Does rejection of application for grant of loan by a Bank Commissioner who corroborated the version of the complain-
constitute deficiency in service for which I can approach the ant. It was held by the Forum that the fridge was found to be
Consumer Court? defective within the period of warranty. The opposite party was
A. The Bank has a wide discretion in the matter of granting directed to replace the unit with a new one.
loans and advances and continuing disbursement of loans Q12. I filed a complaint before the State Commission regarding
sanctioned .The Consumer Courts cannot sit in judgement over payment of policy amount in death claim, which was
the discretion exercised by the Bank and as such you will not allowed to me by the State Commission. I wish to file
succeed in any such action, if taken by you. another complaint claiming the Double Accident Benefit.
Q6. The transformer, which was supplying electricity to me, got Can I do so?
burned and was replaced by the department after about A. It is well-settled principal of law that one can not educate the
two months. However, However I was billed with same cause of action before a court of law or before another
consumption charges. Am I liable to pay any such charges adjudicating Forum after it had already been adjudicating upon
when there was no consumption of electricity by me? earlier. This is the basis for the relevant provisions under the
A. When the electricity was not supplied and the electricity bills Code of Civil Procedure, 1908 (CPC) which embody a sound
produced by you showed that there was no consumption of principal of law to obviate multiplicity of litigation. Even
electricity by you and admittedly the reason for that was burning though Consumer Forums are not governed by the CPC yet the
of the transformer, you are not liable to pay any minimum sound principles of law and procedure embody in that CPC are
charges. followed by the Forums. Consequently, second complaint filed
on the same cause of action would not be maintainable.
Q7. I had applied for electricity connection. However, power
supply was not provided to me. Can I seek redressal of my Q13. I had applied for allotment for a plot and paid Rs.100 as
grievance in Consumer Court? registration fees. At the time of draw my name was not
included. I lodged a complaint before the Consumer
A. Your grievances is that you application for electricity connec-
Forum, wherein the Housing Board argued that I was not
tion was not granted. Electricity may be a service but the hiring
a “Consumer” since no allotment had taken place. What is
of the service is not complete till the Electricity Board sanctions
the correct position in law?
service. Hence, you can’t approach a Consumer Court for
redressal of your said grievance. Your remedy is to file a civil suit A. Where the complainant had paid for the cost of application
in the Court of law against the Electricity Board. form as well as the registration fee, he is the potential user and
the nature of transaction is covered by the expression “service
Q8. Can Consumer Forums adjudicate disputes involving scale
of any description”. As such the complaint is maintainable. The
of pay?
Housing Board is deemed to have undertaken to include your
name in the draw of lots for allotment of a plot. However,
against the order of the Consumer Forum. Since the cause of and the Dealer as parties to the complaint. Replacement is
action arose at Delhi, i.e.; the Distributor was located at Delhi allowed by Forum if the defect is such that it is not possible to
and money also seems to have been paid at Delhi the Delhi rectify the same. Give the Delhi address of the company and file
Consumer Forum had the jurisdiction in case the distributors the complaint at Delhi.
(who work at Delhi) have been made parties to the said Q28. I injured my knee in a game of football on 31st December
petition. You should file an appeal against both the manufac- 1997. It was diagnosed as ACL TEAR. For that I was
turers as well as the distributors, i.e.; Prem Nath Motors against operated upon in the knee on 2nd March 1998. After the
the order. operation my knee developed stiffness, which is unusual in
Q25. I purchased on 1.1.2000 from a shop in Panjim, Goa a such cases even after undergoing physiotherapy for two
bottle of Scotch Whiskey. I find that it is not original in months I was unable to bend or straighten my knee. So
that it tastes too sweat. It appears to be spurious. I have after two months of operation my knee was manipulated
written letters to the MD, Goa Tourism but there is no under anesthesia to relieve stiffness. A plaster was put on
reply. What remedy is available to me to the relief. the knee for one month. I was told to start walking . I
A. You can certainly file a complaint before the Consumer used to walk with a limp. For about 8 months I continued
Forum against supply of Spurious Whisky supplied to you as to walk with a limp but then my condition deteriorated &
well as also lodge a Criminal Complaint in this regard. How- in March-99 I had to start using crutches to move around.
ever, the difficulty (which is a major one) is that since the bottle To find out the cause of this pain I underwent
of Whisky has been open, it will be virtually impossible to investigative arthoscopy in June-99 which revealed the
prove that the contents of the Whisky are the same as they were following 1. ACL Laxity 2. meniscus tear 3. patellofemoral
when the bottle was sealed. Since, the legal system is totally osteoarthritis . I was advised by the doctor to do
based on evidence / proof, it would not be a worthwhile physiotherapy, and take painkillers for the pain, I am still
exercise to institute any legal proceedings in the facts and doing physiotherapy, but neither the pain has reduced nor
circumstances of the present case. am I able to walk without crutches, this whole experience
has affected my life badly. Can I sue the doctors for
Q26. I understand that under the Consumer Protection Act, a
negligence / inefficiency. My both operations were carried
complain has to be made within 2 years from the date on
out in military hospitals, and they were done free of cost
which the cause of action arose. What happens in a case
since I am serving in army. So I can not go to Consumer
where the 2 year period has elapsed because the I spent the
protection court. Please advise?.
time writing(and replying to) to the manufacturer in the
hope that he would replace the good? What argument can I A. You can file a writ petition in the High Court of judicature
give to the Forum in response to the plea of 2 years which against the hospital, making doctors responsible for your
I know will be taken by the manufacturer? condition a party. You can also seek damages alongwith the
appropriate action against the doctors and the management in
A. It is correct that the Consumer Protection Act, provides for a
the writ petition .
limitation period of two years for filing a complaint and the
said period starts from the date when the cause of action arose. References
The same is provided under Section 24-A of the Consumer • http://www.vakilno1.com/consumerprotect_qns.htm
Protection Act, 1986. However, the Consumer Forum has the • http://fcamin.nic.in/cpa.htm
power to entertain a complaint even after the said period in case
it is convinced that the complaint could not be filed within the • http://www.indiainfoline.com/lega/cptc/ch01.html
said period on account of certain sufficient cause. Thus you
would have to give a good explanation in order to have the Notes:
delay condoned from the Consumer Forum. In case the only
ground pleaded by you is that you were corresponding with the
Manufacturer and hoping to get the goods replaced, the same
would not be construed as sufficient reasons for condoning the
delay.
Q27. Can I claim for replacement. If they do not replace the
vehicle can I move to consumer forum. Who should I
make a party i.e. the dealer, or the LML company or both
of them. The dealer is in Karol Bagh the company office in
Greater Kailash and factory’s regd. office in Kanpur in
which Jurisdiction/Zone should I file the complaint. Or
any other detail which you feel Justified to provide me.
A. You should again inform the Company about all the facts
and steps taken by them for removing the defect in writing and
further pursue the matter with the Company and try to get the
defect rectified. In case your efforts fail you can file the complaint
Learning Objectives person resident in India and owed to a person resident outside
After reading the lesson, you will be able to know about the: India.
• The brief outline of Fema “Currency” includes all currency notes, postal notes, postal
• The brief outline of Trade and Copyrights Act orders, money orders, cheques, drafts, travelers cheques, letters
of credit, bills of exchange and promissory notes, credit cards or
Introduction such other similar instruments, as may be notified by the
Today, we will discuss the two Acts as outlined above in brief Reserve Bank;
just to give you an idea as to the purpose of these Acts and the
brief introduction of these Acts. “Currency Notes” means and includes cash in the form of coins
and bank notes;
Let us first talk about FEMA
“Current Account Transaction” means a transaction other than a
FEMA (Foreign Exchange Management capital account transaction and includes :-
Act) i. Payments due in connection with foreign trade, other
The Foreign Exchange Management Act (FEMA) is a law to
current business, services, and short-term banking and
replace the draconian Foreign Exchange Regulation Act, 1973.
credit facilities in the ordinary course of business,
Any offense under FERA was a criminal offense liable to
imprisonment, whereas FEMA seeks to make offenses relating ii. Payments due as interest on loans and as net income
to foreign exchange civil offenses. Unlike other laws where from investments,
everything is permitted unless specifically prohibited, under iii. remittances for living expenses of parents, spouse and
FERA nothing was permitted unless specifically permitted. children residing abroad,
Hence the tenor and tone of the Act was very drastic. It iv. expenses in connection with foreign travel, education
provided for imprisonment of even a very minor offense. and medical care of parents, spouse and children;
Under FERA, a person was presumed guilty unless he proved “Export”, with its grammatical variations and cognate expres-
himself innocent whereas under other laws, a person is sions, means :-
presumed innocent unless he is proven guilty.
i. The taking out of India to a place outside India any
With liberalization, a need was felt to remove the drastic goods,
measures of FERA and replace them by a set of liberal foreign
exchange management regulations. Therefore FEMA was ii. Provision of services from India to any person outside
enacted to replace FERA. India;
FEMA extends to the whole of India. It applies to all branches, “Foreign currency” means any currency other than Indian
offices and agencies outside India owned or controlled by a currency;
person resident in India and also to any contravention there “Foreign Exchange” means foreign currency and includes :-
under committed outside India by any person to whom this i. Deposits, credits and balances payable in any foreign
Act applies. currency,
FEMA contains definitions of certain terms, which have been ii. Drafts, travelers cheques, letters of credit or bills of
used throughout the Act. The meaning of these terms may exchange, expressed or drawn in Indian currency but
differ under other laws or under common language. But for the payable in any foreign currency,
purposes of FEMA, the terms will signify the meaning as iii. Drafts, travelers cheques, letters of credit or bills of
defined there under. Let us take up some of the more impor- exchange drawn by banks, institutions or persons
tant ones. outside India, but payable in Indian currency;
“Authorized person” means an authorized dealer, money “Foreign Security “ means any security, in the form of shares,
changer, off-shore banking unit or any other person for the stocks, bonds, debentures or any other instrument denomi-
time being authorized to deal in foreign exchange or foreign nated or expressed in foreign currency and includes securities
securities; expressed in foreign currency, but where redemption or any
“Capital Account Transaction” means a transaction which alters form of return such as interest or dividends is payable in Indian
the assets or liabilities, including contingent liabilities, outside currency;
India of persons resident in India or assets or liabilities in India “Import”, with its grammatical variations and cognate expres-
of persons resident outside India, and includes transactions by sions, means bringing into India any goods or services;
way of giving guarantees or surety for any debt, obligation or
other liability of (1) a person resident outside India or (2) of a “Indian currency” means currency which is expressed or drawn
in Indian .rupees but does not include special bank notes and
Bank of India Act, 1934 by the Ministry of Finance. medical assistance, legal assistance, chit fund, real estate,
“Person” includes an individual, a Hindu undivided family, a transport, processing, supply of electrical or other energy,
company, a firm, an association of persons or a body of boarding or lodging or both, entertainment, amusement or the
individuals, whether incorporated or not, every artificial juridical purveying of news or other information, but does not include
person and any agency, office or branch owned or controlled by the rendering of any service free of charge or under a contract of
such person; personal service;
“Transfer” includes sale, purchase, exchange, mortgage, pledge,
“Person Resident in India” Means
gift, loan or any other form of transfer of right, title, posses-
i. a person residing in India for more than one hundred and sion or lien.
eighty-two days during the course of the preceding
What this Act actually regulates?
Financial year but does not include :-
(a) a person who has gone out of India or who stays Regulation and Management of Foreign Exchange
outside India, Except with the general or special permission of the Reserve
Bank, no person can :-
i. For or on taking up employment outside India, or
a. Deal in or transfer any foreign exchange or foreign
ii. For carrying on outside India a business or vocation
security to any person not being an authorized person;
outside India, or
b. Make any payment to or for the credit of any person
iii. For any other purpose, in such circumstances as would
resident outside India in any manner;
indicate his intention to stay outside India for an
uncertain period; c. Receive otherwise through an authorized person, any
payment by order or on behalf of any person resident
a. A person who has come to or stays in India, otherwise
outside India in any manner;
than
d. Where any person in, or resident in India receives any
i. For or on taking up employment in India, or
payment by order or on behalf of any person resident
ii. For carrying on in India a business or vocation in outside India through any other person (including an
India, or authorized person) without a corresponding inward
iii. For any other purpose, in such circumstances as would remittance from any place outside India, then, such
indicate his intention to stay in India for an uncertain person shall be deemed to have received such payment
period; otherwise than through an authorized
i. Any person or body corporate registered or incorporated in e. Enter into any financial transaction in India as
India, consideration for or in association with acquisition or
ii. An office, branch or agency in India owned or controlled by creation or transfer of a right to acquire, any asset
a person resident outside India, outside India by any person
iii. An office, branch or agency outside India owned or Financial transaction means making any payment to, or for the
controlled by a person resident in India. credit of any person, or receiving any payment for, by order or
on behalf of any person, or drawing, issuing or negotiating any
“Repatriate to India” means bringing into India the realized
bill of exchange or promissory note, or transferring any security
foreign exchange and
or acknowledging any debt.
i. The selling of such foreign exchange to an authorized
No person resident in India can acquire, hold, own, possess or
person in India in exchange for rupees, or
transfer any foreign exchange, foreign security or any immovable
ii. The holding of realized amount in an account with an property situated outside India except with the general or special
authorized person in India to the extent notified by permission of the Reserve Bank.
the Reserve Bank, and includes use of the realized
Any person may sell or draw foreign exchange to or from an
amount for discharge of a debt or liability
authorized person if such sale or drawal is a current account
denominated in foreign exchange and the expression
transaction. However, the Central Government may, in public
“repatriation” shall be construed accordingly:
interest and in consultation with the Reserve Bank, impose
“Security” means shares, stocks, bonds and debentures, such reasonable restrictions for current account transactions as
Government securities, savings certificates, deposit receipts in may be prescribed.
respect of deposits of securities and units of the Unit Trust of
Any person may sell or draw foreign exchange to or from an
India or of any mutual fund and includes certificates of title to
authorized person for a capital account transaction. The Reserve
securities, but does not include bills of exchange or promissory
Bank may, in consultation with the Central Government, specify
notes other than Government promissory notes or any other
instruments which may be notified by the Reserve Bank as a. Any class or classes of capital account transactions
security for the purposes of this Act; which are permissible;
“Service” means service of any description which is made b. The limit up to which foreign exchange shall be admis
available to potential users and includes the provision of sible for such transactions:
to appear before him on the date specified in the notice and to detention, he shall, if the defaulter is under arrest, direct his
show cause why he should not be committed to the civil release.
prison, and unless the Adjudicating Authority, for reasons in Every person detained in the civil prison in execution of the
writing, is satisfied :- certificate may be so detained ;-
a. That the defaulter, with the object or effect of a. Where the certificate is for a demand of an amount
obstructing the recovery of penalty, has after the issue exceeding rupees one crore, up to three years, and
of notice by the Adjudicating Authority, dishonestly
b. In any other case, up to six months
transferred, concealed or removed any part of his
property ; or However he shall be released from such detention on the
amount mentioned in the warrant for his detention being paid
b. That the defaulter has, or has had since the issuing of
to the officer-in-charge of the civil prison.
notice by the Adjudicating Authority, the means to pay
the arrears or some substantial part thereof and refuses A defaulter released from detention shall not, merely by reason
or neglects or has reused or neglected to pay the same. of is/release, be discharged from his liability for the arrears, but
he shall not be liable to be arrested under the certificate in
A warrant for the arrest of the defaulter may be issued by the
execution of which he was detained in the civil prison.
Adjudicating Authority if the Adjudicating Authority is
satisfied, by affidavit or otherwise, that with the object or effect A detention order may be executed at any place in India in the
of delaying the execution of the certificate the defaulter is likely manner provided for the execution of warrant of arrest under
to abscond or leave the local limits of the jurisdiction of the the Code of Criminal Procedure, 1973.
Adjudicating Authority. Any such contravention may, on an application made by the
Where appearance is not made pursuant to a notice issued and person committing such contravention, be compounded (i.e.
served, the Adjudicating Authority may issue a warrant for the fine paid in lieu of imprisonment) within one hundred and
arrest of the defaulter. eighty days from the date of receipt of application by the
Director of Enforcement or such other officers of the Director-
A warrant of arrest issued by the Adjudicating Authority may
ate of Enforcement and officers of the Reserve Bank as may be
also be executed by any other Adjudicating Authority within
authorized in this behalf by the Central Government in such
whose jurisdiction the defaulter may for the time being be
manner as may be prescribed.
found.
Where a contravention has been compounded, no proceeding
Every person arrested in pursuance of a warrant of arrest shall
or further proceeding, as the case may be, shall be initiated or
be brought before the Adjudicating Authority issuing the
continued, as the case may be, against the person committing
warrant as soon as practicable and in any event within twenty-
such contravention, in respect of the contravention so com-
four hours of his arrest (exclusive of the time required for the
pounded.
journey). However, if the defaulter pays the amount entered in
the warrant of arrest as due and the costs of the arrest to the What are the adjudication authorities and where the appeal can
officer arresting him, such officer shall at once release him. be filed?
When a defaulter appears before the Adjudicating Authority Adjudication and Appeal
pursuant to a notice to show cause or is brought before the For the purpose of adjudication, the Central Government may,
Adjudicating Authority, the Adjudicating Authority shall give by an order published in the Official Gazette, appoint as many
the defaulter an opportunity showing cause why he should not officers of the Central Government as it may think fit, as the
be committed to the civil prison. Adjudicating Authorities for holding an inquiry in the manner
Pending the conclusion of the inquiry, the Adjudicating prescribed after giving the person alleged to have committed
Authority may, in his discretion, order the defaulter to be contravention, against whom a complaint has been made a
detained in the custody of such officer as the Adjudicating reasonable opportunity of being heard for the purpose of
Authority may think fit or release him on his furnishing the imposing any penalty.However where the Adjudicating
security to the satisfaction of the Adjudicating Authority for his Authority is of opinion that the said person is likely to abscond
appearance as and when required. or is likely to evade in any manner, the payment of penalty, if
levied, it may direct the said person to furnish a bond or
Upon the conclusion of the inquiry, the Adjudicating Authority guarantee for such amount and subject to such conditions as it
may make an order for the detention of the defaulter in the civil may deem fit.
prison and shall in that event cause him to be arrested if he is
not already under arrest. However in order to give a defaulter an No Adjudicating Authority shall hold an enquiry except upon a
opportunity of satisfying the arrears, the Adjudicating Author- complaint in writing made by any officer authorized by a general
ity may, before making the order of detention, leave the or special order by the Central Government.
defaulter in the custody of the officer arresting him or of any The said person may appear either in person or take the
other officer for a specified period not exceeding fifteen days, or assistance of a legal practitioner or a chartered accountant of his
release him on his furnishing security to the satisfaction of the choice for presenting his case before the Adjudicating Authority.
Adjudicating Authority for his appearance at the expiration of Every Adjudicating Authority shall have the same powers of a
the specified period if the arrears are not satisfied. civil court and :-
LESSON 40:
Notes: