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18635902 Lesson 1 Introduction to Law and the Meaning and Essentials[1]

18635902 Lesson 1 Introduction to Law and the Meaning and Essentials[1]

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LEGAL ASPECTS OF BUSINESS UNIT I LESSON 1: INTRODUCTION TO LAW AND THE MEANING AND ESSENTIALS OF CONTRACT Learning Outcomes

At the end of this chapter, you will be able to know: · The meaning of law · The main sources of mercantile law · The meaning of contract · The essential elements of valid contract Introduction Business laws are essential for the students of management to understand the legal rules and aspects of business. Just like any other study even business management is incomplete without a proper study of its laws. Any form of business needs legal sanction. Therefore, it is imperative that a manager understands the various ways in which businesses can be organized. This subject introduces some of the common forms of business organizations, including some forms unique to India like the Joint Hindu Undivided Family firm. Different types of organizations like Sole Ownership, Partnership, Private Limited Company, Public Limited Company, Joint Stock Company along with the rationale for adopting these forms are explored. What form of business organization is the best under a particular set of conditions? What advantage or disadvantage does it have over other forms of business? Formalities to be gone through and some the quasi-legal processes required for starting a business will be discussed in detail in this subject. For the proper working of the society, there must exist a code of conduct. As you all know, in the ancient times the society was not organized. The rights of the individuals were not recognized. Gradually, the society evolved and the state came into being. As we all know, to regulate the state, there should be a specific code of conduct, which should be followed by everyone. As a result of which law evolved as a system of rights and obligations including all the rules and principles, which regulate our relations with other persons and with the state. These rules and regulations took the form of statutes. To enforce the law and to resolve the conflicts arising there from, courts of law were setup by the state. Laws were made to govern almost every walk of life. You all must know that criminal laws were made to control criminal activities in the society like Indian Penal Code, which enumerates which activities are considered criminal and what will be the punishment for committing a crime. Likewise, mercantile law was evolved to govern and regulate trade and commerce. Hence, the term mercantile law can be defined as that branch of law, which comprises laws concerning trade, industry and commerce. It is an ever-growing branch of law with the changing circumstances of trade and commerce.

Now the question arises as to what are the sources of mercantile law in India. The answer is The Indian statutes on mercantile law English/ Foreign law Precedents(previous judgments of the courts.) Customs and usage I must tell you that most of the Indian Mercantile Law is contained in the statutes. The prime legislation is the Indian Contract Act 1872 but it is not exhaustive to deal with all kinds of contracts. In addition to this there are the Sale of Goods Act, 1930, The Indian Partnership Act 1932, The Negotiable Instruments Act 1881 etc. wherever the Indian Contract Act is silent, the Indian courts may apply the principles of the English Common Law. It is interesting to know that in England there is no English Contract Act in the form of a statute. It has been derived from common law, the usage of merchants and traders in different spheres of trade, substantiated or ratified by decisions in the court of law. The judicial precedents are an important source of law. Sometimes, there is no provision, which can answer a particular question of law. In such cases the court will look into the previous decisions on similar matters to find the relevant law. Custom and usage of a trade play an important role in business dealings of that trade. To have a binding force, the custom or usage must be certain, reasonable and well known. Now it is more than a century that that the mercantile laws are governing trade and commerce. The law of contract is the foundation upon which the superstructure of modern business is built. It is common knowledge that in business transactions quite often promises are made at one time and the performance follows later. In such a situation if either of the parties were free to go back on its promise without incurring any liability, there would be endless complications and it would be impossible to carry on trade and commerce. Hence the law of contract was enacted which lays down the legal rules relating to promises, their formation, their performance, and their enforceability. Explaining the object of the law of contract Sir William Anson observes. The law of contract is intended to ensure that what a man has been led to expect shall come to pass, that what has been promised to him shall be performed . The law of contract is applicable not only to the business community but also to others. Every one of us enters into a number of contracts almost everyday, and most of the time we do so without even realizing what we are doing from the point of law. A person seldom realizes that when he entrusts his scooter to the mechanic for repairs, he is entering into a contract of bailment; or when he buys a packet of cigarettes, he is making a contract of the sale of good; or again when he goes to the cinema to see a movie, he is making yet another contract; and so on.

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Besides, the law of contract furnishes the basis for the other branches of mercantile law. The enactments relating to sale of goods, negotiable instruments, insurance, partnership and insolvency are all founded upon the general principles of contract law. That is why the study of the law of contract precedes the study of all other sub-division of mercantile law. The Indian contract act was enacted from the 1st day of September; 1872.it is applicable to the whole of India except the state of Jammu and Kashmir. There may be some occasions where Indian law disagrees with the English laws. In such cases, the Indian law will prevail. Now we will move on to the definition and concept of the contract. The Indian Contract Act, 1972 The law of contract in India is contained in the Indian Contract Act 1872. This Act is based mainly on English common law, which is to a large extent made up of judicial precedents. (there being a separate contract act in England). It extends to the whole of India except the state of Jammu and Kashmir and came into force on the first day of September 1872(Sec.1 Indian Contract Act 1872). The act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate acts, which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc. Again the act does not affect any usage or custom of trade (Sec.1). Scheme of the Act. The scheme of the Act may be divided into two main groups. 1. General principles of the law of contract (Secs. 1-75). 2. Specific kinds of contracts, Viz; (a) Contracts of indemnity and Guarantee (Secs. 124-147). (b) Contracts of Bailment and pledge (Secs. 148-181). (c) Contracts of Agency (Secs. 182-238). Before 1930 the Act also contained provisions relating to contracts of sale of goods and partnership. Sections 76-123 relating to sale of goods were repealed in 1930 and a relating to partnership were repealed in 1932 when the Indian separate Act called the Sale of Goods Act was enacted. Similarly, sections 239-266 partnership Act was passed. But we will not study the specific kinds of contracts for the time being but only concentrate on contracts generally. Before we take up the discussion of the various provisions of the Indian contract Act. It will be proper to see some of the basic assumptions underlying the Act. Definition of contract According to section 2(h) of the Indian Contract Act: An

agreement enforceable by law is a contract. A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. From the above definition, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine these elements detail. 1. Agreement. As per section 2 (e): Every promise and every set of promises, forming the consideration for each other, is an agreement. Thus it is clear from this definition that a promise is an agreement. What is a promise ? the answer to this question is contained in section 2 (b) which defines the term. When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise. An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i.e., gives his acceptance) thereto. In short, an agreement is the sum total of offer and acceptance . On analyzing the above definition the following characteristics of an agreement become evident: (a) At least two persons. There must be two or more persons to make an agreement because one person cannot inter into an agreement with himself. (b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. 2. Legal obligation. As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract. All contracts are agreements but all agreements are not contracts, Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend s house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences. I shall give you a very simple example to explain this point. An agreement to sell a car may be a contract but an agreement to go for lunch may be a mere agreement not enforceable by law. Thus all agreements are not contracts. In business agreements the presumption is usually that the parties intend to create legal relations. Thus an agreement to buy certain specific goods at an 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 default through a court provided other essential elements of a contract was made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object .

Thus it may be concluded that the Act restricts the use of the word contract to only those agreements, which give, rise to legal obligations between the parties. It will be appropriate to point out here that the law of contract deals only with such legal obligations which arise form agreements, obligations which are not contractual in nature are outside the purview of the law of contract. Before moving further we must know the conditions which must be satisfied for the contract to become valid. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 2 11.555

Essential Elements of a Valid Contract A contract has been defined in section 2(h) as an agreement enforceable by law. To be enforceable by law, an agreement must possess the essential elements of a valid contract as contained in sections 10, 29 and 56. According to section 10, all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by the Act to be void, and where necessary, satisfy the requirements of any law as to writing or attention or registration. As the details of these essentials form the subject matter of our subsequent chapters, we propose to discuss them in brief here. The essential elements of a valid contract are as follows. 1. Offer and acceptance. There must a lawful offer and a lawful acceptance of the offer, thus resulting in an agreement. The adjective lawful implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto. 2. Intention to create legal relations. There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Agreements of a social or domestic nature do not contemplate legal relations, and as such they do not give rise to a contract. An agreement to dine at a friend s house in not an agreement intended to create legal relations and therefore is not a contract. Agreements between husband and wife also lack the intention to create legal relationship and thus do not result in contracts. Try to work out the solution in the following cases and then go to the answer. Illustrations. (a) M promises his wife N to get her a necklace if she will sing a song. N sang the song M did not bring the necklace for her. (b) The defendant was a civil servant in Ceylon. He and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, his wife could not accompany him because of her health. The defendant agreed to send her £ 30 a month as maintenance expenses during the time they were thus forced to live apart. She sued for breach of this agreement. Answers (a) N cannot bring an action in a court to enforce the agreement as it lacked the intention to create legal relations. (b) Her action was dismissed on the ground that no legal relations had been contemplated and therefore there was no contract.(Balfour vs. Balfour) In commercial agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends

to create legal relationship hence is a contract, provided other requisites of a valid contract are present. But if the parties are under a legal obligation, even a business agreement does not amount to a contract. The case of Rose & Frank co, vs. Crompton & Brothers Ltd. Provides a good illustration on the point. Illustration In the above case R Company entered into an agreement with C Company. By means of which the former was appointed as the agent of the latter. One clause of the agreement was as follows. This arrangement is not entered into as a formal or legal agreement. And shall not be subject to legal jurisdiction in the law courts. It was held that there was no intention to create legal relations on the part of parties to the agreement and hence there was no contract. Now let us go to the third essential of a contract i.e. 3. Lawful consideration. The third essential element of a valid contract is the presence of consideration . Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is called consideration subject to certain exceptions; gratuitous promises are not enforceable at law. The consideration may be an act (doing something) or forbearance (not doing something) or a promise to do or not to do something. It may be past, present or future. But only those considerations are valid which are lawful . The consideration is lawful . unless it is forbidden by law; or is of such a nature that, if permitted it would defeat The provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or is immoral; or is opposed to public policy (sec.23). 4. Capacity of parties. The parties to an agreement must be competent to contract. But the question that arises now is that what parties are competent and what are not. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject (sec.11). If any of the parties to the agreement suffers form minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate (sec 68). 5. Free consent. Free consent of all the parties to an agreement is another essential element. This concept has two aspects.(1) consent should be made and (2) it should be free of any pressure or misunderstanding. Consent means that the parties must have agreed upon the same thing in the same sense (sec. 13). There is absence of free consent, if the agreement is induced by (i)coercion, (ii) undue influence, (iii) fraud, (iv) mis-representation, or (v)

mistake (sec. 14). If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void (sec. 20) LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 3

6. Lawful object. For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must mot imply injury to the person or the other of the reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law. 7. Writing and registration. According to the Indian contract Act, a contract to be valid, must be in writing and registered. For example, it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed. 8. Certainty. Section 29 of the contract Act provides that Agreements, the meaning of which is not certain or capable of being made certain, are void. In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced Illustation. A, agrees to sell B a hundred ton of oil there is nothing whatever to show what kind of oil was intended. The 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. 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 understanding:

1. Comment that the all contracts are agreements but all agreements are not contract. 2. What are the essential elements of a valid contract? 3. A invites B to see a picture with him. B accepts the offer. A purchase a ticket for B and waits for him outside the cinema hall. B does not turn up has A any cause of action against B. [Hint: No] 4. A agrees with B to murder C for Rs. 10,000. Is this a valid contract? [Hint: No] 5. X agrees to pay Y Rs. 1000 if Y writes 100 pages for him in one minute. Is it a valid contract? [Hint: No] 6. State whether there is any valid contract in the following cases? 7. (i) X boards a DTC bus at Mayur Vihar for Shalimar Bagh. (ii) X and Y agree to go for fishing (iii) X buys an evening paper (iv) X a minor borrows Rs. 5000 from Yand agreed to repay back the same within a week. 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), Pvt. Ltd, Delhi. Notes: Business Law , Tata Mc. Graw Hill

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Such a contract is voidable at the option of the aggrieved party i. Thus. it is an agreement enforceable by law . but the aggrieved party must exercise his option of rejecting the contract (i) within a reasonable time. 2. validity and formation Introduction First of all we will study [I] Kinds of contracts from the point of view of Enforceability Valid contract Voidable contract. Illustration. it is a valid contract. Void contract Unenforceable contract Illegal or unlawful contract From the point of view of enforceability a contract may be valid. unenforceable or illegal.LESSON 2 KINDS OF CONTRACTS Learning Outcomes other circumstances under which a contract becomes By the end of the lecture we should be able to answer the following questions: The different types of contracts with respect to performance. voidable. Voidable contract. Until it is avoided or rescinded by the party entitled to do so by exercising his option in that behalf. If one or more of these elements is/are missing the contract is either void. is a voidable contract. a voidable contract is one which is enforceable by law at the option of one of the parties only. and (ii) before the rights of third parties intervene. void. enforceability. illegal or unenforceable. an agreement becomes enforceable by law when all the essential elements of a valid contract as were enumerated in the last lesson are present. undue influence. an agreement which is enforceable by law at the option of one or more of the parties thereto. According to section 2(i). but not at the option of the other or others. Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion. According to section 2(i). misrepresentation or fraud.. the party whose consent was so caused (secs.e. . Valid contract. otherwise the contract cannot be repudiated. 1. voidable. 19 and 19A).

(b) A. Section 2(j) defines: A contract which ceases to be enforceable by law becomes void. The contract has been caused by fraud and is voidable at the option of B. The contract becomes voidable at the option of Y. 100. The section states that when a person at whose option a contract has become has received any benefit from another party to such contract. The contract has been brought about by coercion and is voidable at the option of B. and thereby induces B to buy the factory. (i) When a contract contains reciprocal promises. 3. A. For example. but fails to do it. If the intention of the parties was that time should be of the essence of the contract. B agrees. (ii) When a party to the contract promises to do a certain thing within a specified time. A. 2. (sec. But X does not supply the wheat within the specified time. such earnest money deposit is not to be returned if the contract becomes voidable under section 55 on account of the promisor s failure to complete the contract at the time agreed and has been rescinded by the promisee because it is not a benefit received under the contract.000.55) Illustration. and one party to the contract prevents the other from performing his promises. then the contract becomes voidable at the option of the promisee. If an amount has been received as a security for the due performance of the contract. Contracts with B that A shall whitewash B s house for Rs. Illustration.5000 within one week. Section 64 lays down the rights and obligations of the parties to a voidable contract after it is rescinded. Such a contract is a nullity. Literally the word void means not binding in law .(a) A : threatens to shoot B if he does not sell his new Bajaj scooter to A for Rs. It follows form the definition that a void contract is not void from its inception and that it is valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid and destitute of legal effect because of certain reasons. Accordingly the term. Consequences of rescission of voidable contract. 53). 2. intending to deceive B. but B prevents him from doing so. voidable. The reasons which transform a valid contract into a void . X Agrees to sell and deliver 10 bags of wheat to Y for Rs. he must restore such benefit. is ready and willing to execute the work accordingly. falsely represents that five hundred quintals of indigo are made annually at A s factory. when it ceases to be enforceable. The contract becomes voidable at the option of A. then the contract becomes voidable at the option at the party so prevented (sec. as for there has been no contract at all. Void contract. The Indian contract act has laid down certain other situations also under which a contract becomes voidable. void contract implies a useless contract which has no legal effect at all.

A and B contract to marry LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. as given in the contract Act. (a) Supervening impossibility (sec.contract. 56) A contract becomes void by impossibility of performance after the formation of the of contract for example. Are as follows.555 5 .

2 (g)]. C dies without being married to B. In case B decides to rescind the contract. (b) Subsequent illegality (sec. B may either affirm or reject the contract.32). Obligation of person who has received advantage under void agreement or contract that becomes void.g. Before the time fixed for the marriage. A void agreement never amounts to a contract as it is void ab-initio. The contract becomes void. A void contract is valid when it is entered into. notice that a contract cannot be void ab-initio and only an agreement can be void abinitio. Thus both parties may stand uneffected by the transaction in the following two cases. .An agreement not enforceable by law is said to be void [sec. of course with certain exceptions as laid down in section 25. an agreement without consideration is void ab-initio. for example. A contracts to give Rs. 56) A contract also becomes void by subsequent illegality. Before delivery the government bans private trading in wheat. 1. A contingent contract to do or not to do something on the happening of an uncertain future event. this section provides for restitution of the benefit received. Thus. A void agreement should be distinguished from a void contract . it becomes void..000 for a sum of Rs. Void agreement. 30. agreements which are in restraint of trade or of marriage or of legal proceedings or which are by way or wager. except that of free consent. 10. There is absence of one or more essential elements of a valid contract. whose consent is not free. (c) Repudiation of a voidable contract. Thus. The contract to marry becomes void. in the case of a void agreement. makes B agree to sell his car worth Rs. because a minor lacks the capacity to contract. being the result or coercion. Thus. a void agreement does not give rise to any legal consequences and is void agreement does not give rise to any legal consequences and is void ab-initio. 650 per bag. For example. A goes mad.000 as loan to B marries C. becomes void. but subsequent to its formation something happens which makes it unenforceable by law.each other. Similarly. the contract becomes void. (d) In the case of a contract contingent on the happening of an uncertain future event. In this connection section 65 lays down that when an agreement is discovered to be void or when a contract becomes void. Certain agreements have been expressly declared void in the contract act e. when the party. repudiates the contract. The contract. M by threatening to murder B s son. is voidable at the option of B. In the eye of law such an agreement is no agreement at all from its very inception. if that event becomes impossible.000 only. A agrees to sell B 100 hags of wheat at Rs. any person who has received any advantage under such agreement or contract is bound to restore it. A voidable contract becomes void. For example. when the event becomes impossible (sec. an agreement with a minor is void abinitio as against him.

becomes unenforceable after three years from the date the bill or note falls due. etc. though valid in itself. 500 as advance. the money cannot be recovered.) restoration is allowed in specie on equitable grounds because a minor cannot be allowed to cheat people. such an . registration. because it means something like this an agreement enforceable by law and contrary to law. 1. (ii) In the case of an agreement with a minor who commits fraud by misrepresenting his age (although agreement with a minor is known to be void. through neither party was aware of the fact. it should. an oral arbitration agreement is unenforceable because the law requires an arbitration agreement to be in writing. be noted that agreements which are known to be void or illegal. (b) When a contract becomes void. a bill of exchange or promissory note.000 to M to murder Z. Similarly. and also because the other party has not lost his title to the thing in question. Similarly. There is apparent contradiction in terms. In this case the agreement is discovered to be void and B must repay to A Rs. For example. 5. For example.. Illegal or unlawful contract. or time barred by the law of limitation. Similarly. The word illegal means contrary to law and the term contract means an agreement enforceable by law . 4.000 rupees paid in advance. As such to speak of an illegal contract involves a contradiction in terms. restitution is also allowed in the case of a void contract. A pays B Rs. A is not bound to make compensation to B for the loss of the profits which B would have made if A would have been able to sing. In other words. being time barred under the limitation act.(a) When an agreement is discovered to be void. but is not capable of being enforced in a court of law because of some technical defect such as absence of writing. where after accepting Rs. are excluded from the purview of this section. Thus. A is too ill to sing. requisite stamp. 1. A agrees to sell B after one month 10 quintals of wheat at Rs. (i) In the case of an agreement caused by bilateral mistake of essential fact (although it is expressly declared void under section 20) restitution is allowed as it comes under the category of an agreement discovered to be void. subject to the following exceptions. Soon after the contract.000 for B s agreeing to sell his horse to him. Unenforceable contract. It turns out that the horse was dead at the time of the bargain. however. when they are entered into. but A must refund to B the 1. private sales of wheat becomes void but A must return the sum of Rs. if L pays Rs. being of unlawful nature. when an agreement is void being discovered at a later stage. 625 per quintal and receives Rs. 10. 1. nothing can be recovered in the case of expressly declared void agreements. Moreover.000 as advance for singing at a convert for B. For example. of course. 500 to B. An unenforceable contract is one which is valid in itself.000.

agreement can never attain the status of a contract.555 . Thus. it will be proper if we use the term illegal agreement in place of illegal contract an illegal agreement is void ab-initio. Some important comparisons LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 6 11.

initio and cannot be enforced by law. All illegal ag reements are void. Differences Enforceability An agreement may or my not be enforceable at law.Agreement and Contract agreement with a minor is void as against him but not An agreement is a promise or set of promises (s). an agreement the terms of which are uncertain is void but such an agreement the . Effect on collateral transaction Collateral transaction of an illegal contract also becomes illegal and contract not be enforced. social agreements are generally not enforceable while business agreements are enforceable at law. I will explain the above points in detail now. an illegal. Punishment Parties may be punished for making illegal agreement. Effect An agreement is not always a binding on the concerned parties. Again. (i) An illegal agreement is narrower in scope than a void agreement. A contract is always concluded and binding on the concerned parties. an agreement may not be contrary to law but may still be void.. i. A contract is an agreement which is enforceable at law. Agreement Illegal and Void Agreements Similarities These agreements are not enforceable at law. For example. All contracts are agreements. a promise or set of promise (s). Scope All agreements are not contracts. all illegal agreements are void but all void agreements are not necessarily illegal. For example.e. The object or consideration of an agreement way not be contrary to law but may still be void. Differences Scope-These agreements are narrower in scope. Illegal agreement Void agreement Despite the similarity between an illegal and a void agreement that in either case the agreement is void ab. For example. A contract is essentially an agreement.

000 from D to pay B. allowed to invoke the aid of the court if he is himself implicated in the illegality. On the other hand. option of one or more parties thereof. These agreements are wider in scope. An agreement may be void because of a reason other than illegality. Void and Voidable Contract Void Agreement and Void Contract Similarities Restitution If any benefit is passed between the If any benefit is passed betwee n the parties. but not at the . D is aware of the purpose of the loan. provided the third parties have the knowledge of the illegal or immoral design of the main transaction. Here the agreement between A and B.terms of which are uncertain is void an agreement is not illegal. The reason underlying this rule is that no person shall be These agreements are not enforces able at law. But the position will change if D is not aware of the purpose of the loan. (ii) An illegal agreement is wider in effect in relation to collateral transactions than a void agreement. hence void. Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law. Being void does not make a contract punishable. it becomes void contract. 5. Illustrations. when an agreement is void (but not illegal). it may be restored back. other agreement which are Contract incidental or collateral to it are also tainted with illegality. restored back. When an agreement is illegal. As such the loan transaction is illegal and void and D cannot recover the money. D is aware of the purpose of the loan. agreements which are collateral to it are not invalidated and remain valid. Here the agreement between A and B is illegal and the agreement between A and D is collateral to an illegal agreement. In that case the loan transaction is not collateral to the illegal agreement and is a valid contract. it may be parties. (a) A engages B to Murder C and borrows Rs. Differences Definition When a contract ceases to be enforceable It is a contract which is en forceable by law at the at law.

A voidable contract does not effect the collateral transactions. A voidable contract gives rights to the aggrieved party Effect When a contract is void because of illegality.555 7 .option of others. etc. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. or subsequently it becomes void due to one reason or may subsequently become voidable. the other. and claim the damages. Status A void contract cannot create any legal rights. A voidable contract takes its full It is a total nullity. entitled to do so. to rescind the contract. Rights A void contract is valid when it is made. in its collateral transactions also becomes void. But subsequently it becomes void due to one reason or disputed and set aside by the person the other. and proper legal effect unless it is Nature A void contract is valid when it is made. certain cases. But A contract may be voidable since very beginning.

It is a contract. that is. a coolie in uniform takes up the luggage of B to be carried out of the railway station without being asked by B. offer and acceptance. For example. obligation to finder of lost goods to return them to the true owner or liability or person to whom . It is a total nullity. Where both the offer and acceptance constituting an agreement enforceable at law are made otherwise than in words i. For example. It never takes form of a contract. where out of the two components of an agreement. 4. total nullity. Such contracts may be called as contracts of mixed character. Implied contract. It is a contract of mixed character. When it is formed it is perfectly valid. it is an implied contract. 20. 1. allows him to do so.Similarities A void agreement cannot create any legal rights. A tells B on telephone that he offers to sell his car for Rs. and there comes into existence an implied contract and N is under obligation to pay to M. A offers to buy B s scooter for Rs. It is a nullity since very beginning. it is an express contract. then the law implies that B agrees to pay for the services of A. Here A s offer is expressed in words and B s acceptance is implied form his conduct. Thus. It is relevant to state in respect of mode of creation. Express contract. one is expressed in words and the other is implied from acts and circumstances. Subsequently it becomes a nullity. Differences It is an agreement. 2. by acts and conduct of the parties. It is a A void contract cannot create any legal rights. express or implied between the parties but the law infers or recognizes a contract under certain special circumstances. For example.000 and B in reply informs A that he accepts the offer.000 and B accepts the offer by sending the scooter itself. Kinds of contracts from the point of view of mode of creation From the point of view of mode of creation a contract may be express or implied or constructive. the cases grouped under this type of contracts have little or affinity with contract. and B.e. there is an express contract. Such a contract does not arise by virtue of any agreement. Where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written. Constructive or quasi contract. 1. certain contracts may be a mixture of the express and implied types of contracts. where A.. namely. The term constructive or quasi contract is a misnomer.

by printing on a ticket. A quasi contract is based upon the equitable principle that a person shall not be allowed to retain unjust benefit at the expense of another. from a practical point of view and for the sake of convenience. it will amount to his acceptance a contract will be formed where both parties will be bound by their performance. however. Before I end the discussion on kinds of contracts I would like to discuss another kind of contract called the Standard Form Contract When a large number of contracts have got to be entered into by a person. A has committed himself to pay Rs. This arrangement is not bilateral. If you dig my garden next Sunday.. I am not sure that I shall be able to. I will pay you Rs. If B does not turn up on Sunday to dig the garden. Marlborough Court.e. If. shares or a railway ticket are few examples of such standardized contracts.money is paid under mistake to repay it back cannot be said to arise out of a consent. The contract act has rightly named such contracts as certain relations resembling those created by contract . I shall be happy to take Rs. or obtaining signatures on the document containing terms. or otherwise explaining the the terms. but these are very mush conversed under quasi contracts as per sections 71 and 72 respectively. Ltd. For conditions see back . He is totally free to decide whether he wants to dig A s garden or not. they will not be enforced. but says. obligation which is fundamental or core of the contract. but B has made no commitment at all. 500. Thus.) (3) Terms of contract should be reasonable if the terms of the contract are unreasonable and opposed to public policy. 500. if the cloth is altogether lost. The special terms and conditions become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of the contract. B makes no commitment. An insurance policy. but if I do. the courts and the legislature have evolved certain rules to protect the interest of the weaker party: (1) Reasonable notice e. 500 in certain circumstances. (2) Notice should be contemporaneous with the contract if a party to the contract wants to have exemption from liability he must give a notice about the exemption while the contract is being entered into and not thereafter ( Olley Vs. even if the contract contains all sorts of exemption clauses. (4) Fundamental breach of contract no exemption clause is allowed to permit the non-compliance of the basic contractual obligation i. and A says to B. Where an adequate notice is not given the offeree is not bound by the terms. example. A cannot do anything about is.g. Sections 68-72 of the contract act describe . the dry cleaner has to be answerable . a standard form for the numerous contracts may be used. In view of the unequal bargaining power of the two parties. B reaches to A s place on Sunday to do the work.

555 . (6) Statutory protection The English Unfair Contract Terms Act. and any ambiguity is to be resolved in favour of the weaker party. 1977 severely limits the right of the contracting parties LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 8 11.the cases which are to be deemed Now we come to quasi contracts . (5) Strict construction a strict construction shall be applied to exemption clause.

C paid A Rs. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship.B beats C but A refuses to pay. Can X sue Y for the damage? Solution: X cannot claim any damages from Y because the agreement between X and Y is not enforceable by law. [Hint. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship. Can A sue B for the loss he has suffered?.) 4.to exclude or limit their liability through exemption clauses in the agreement. Y accepts the invitation but fails to turn up. Can B recover the amount? ( Hint : No as the agreement is illegal. Can Y claim the . No. It is a void agreement because as per section 56 an agreement to do an act impossible in itself is void. C orally offered to pay A. X fails to give the ring.500 if beats C. A made elaborate arrangement but B failed to turn up. No.] 2. 100 and in consideration N agrees in write for him 100 pages within five minutes. he stops making the payment. an auto mechanic. Is the agreement between A and C (a) Express or implied (b) Executed or executory (c) Valid. 6. voidable or void 6. 50 in cash for his services. Practical Problems Attempt the following problems.50 for testing a used car which C was about to purchase from D. X promises Y to give a diamond ring at the time of his marriage. M agrees to pay N Rs. X invites Y to dinner. B accepts the invitation. A agreed and tested the car. A cannot sue B for the loss he suffered because the agreement was of a social nature and hence lacked the intention to create legal relationship one of the essentials of a valid contract. After 6 months. Can Y claim damages from X Solution: Y cannot claim any damages from X because the agreement between X and Y is not enforceable by law. giving reasons for your answers. Is it a valid contract? [Hint. India lacks such an Act.000 per month. it is not valid contract. A invites B to a dinner. X makes a promise to his wife Y to give her pocket money of Rs 1. 1. 5. ] 3. Rs. A promises to pay B Rs.

Sultan Chand and Sons.D. Since the main agreement between X and Y is illegal. Elements of Mercantile Law. X threatens to kill Y if he does not sell his house to X for Rs 1.000 from W who is also aware of the purpose of the loan. by not stopping X from polishing the shoes).e. Solution: X cannot recover anything. X borrows Rs 1. X agreed to sell a particular horse to Y. Business Law . To pay Y. Is Y bound to make payment to X? Solution: Y is bound to pay because he has accepted X s implied offer by conduct (i. Later on. X also refuses to repay the loan to W. What is the nature of the agreement between X and Y. 9. Y agrees. 8. 7.C. the agreement between X and W which is collateral to the main agreement is also void and hence W cannot recover anything from X. References Kapoor. Y kills Z but X refuses to pay. Vikas Publishing . After 3 months. Solution:. 10.000 if Y kills Z.ring? Solution: Y cannot claim the diamond ring because there is no consideration from Y. X borrows Rs 1. http://www. Advise Y and W.000 from Z who is also aware of the purpose of the loan. The agreement between X and Y is void because the object of the agreement is unlawful.e. 9. The agreement is void because both the parties were under a mistake of fact regarding existence of the subject matter.00. and X and Z? Solution: The contract between X and Y is a contract which is voidable at the option of Y because Y s consent is not free as it has been obtained by coercion.com/bareacts/soga. Kucchal ( 2002). X polished Y s shoes without being asked by Y to do so. The contract between X and Z is a valid contract because the object of contract (i.000.00.html M.00.000. New Delhi. Advise X. X agrees to pay Y Rs 1.00. borrowing for the purchase of a house) is lawful.indialawinfo. Hence. Advise the parties. Y does not make any attempt to stop X from polishing the shoes. X agrees to let his flat to Y for use as a gambling den on a monthly rent of Rs 10. Solution: The agreement between X and Y is an illegal agreement because its object is unlawful. (2003). Y stops making the payment of rent. N. Y cannot recover anything from X. it was discovered that the horse was dead at the time of making the contract.

Tata Mc. Ltd. Pvt. Student s Guide To Mercantile And Commercial Laws. Delhi. Ltd. P. Graw Hill Rohini Aggarwal(2003).555 9 . Ltd. Business Law . Graw Hill Pvt. Delhi. Tata Mc. Tulsian (2002).C.House Pvt. Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Delhi.

There can be no proposal by a person to himself (iii) The expression of willingness to do or to abstain from doing some-thing must be made with a view to obtaining the assent of the other person to such act or abstinence. (ii) The expression of willingness to do or to abstain form doing some thing must be to another person. Thus a casual enquiry do you intend to sell your motorcycle? is not a proposal . a mere statement . when one person signifies to another his willingness to do or to abstain form doing anything. We propose to discuss now the legal rules relating to a lawful offer . The Proposal or Offer The words proposal and offer are synonymous and are used interchangeably. Section 2 (a) of the Indian contract act defines a proposal as. 200 and B accepts the offer. (i) One person signifies to another. acceptance. According to section 3 to signify means that the proposal must be communicated to the other party.LESSON 3: ACCEPTANCE Learning Outcomes After todays class you should be able to answer the following questions: The meaning of offer and acceptance The communication of offer and acceptance The revocation of offer and acceptance Introduction By now you must be aware of the essentials of a contract. it must be an expression of the willingness to do or to abstain from doing something. etc. While discussing the essential elements of a valid contract in the preceding chapter we observed that as a first step in the making of a contract there must be a lawful offer by one party and a lawful acceptance of the offer by the other party. Similarly. consideration and contractual capacity out of which we shall study the first one in this lesson. he is said to make a proposal . This definition reveals the following three essentials of a proposal . offers to sell a wrist watch to B for Rs. are present. with a view to obtaining the assent of that other to such act or abstinence. thus where A. In today s lecture we shall do a detailed study of the concept of offer The four basic elements of a contract are offer. a contract comes into being provided other essentials of a valid contract like that of competency of parties to contract.

(b) X writes to Y he offers to sell his house to him for Rs. spoken or written is called an express offer and the one which is inferred form the conduct of a person or the circumstances of the case is called an implied offer. The second essential of a valid offer is intention. An offer must contemplate to give rise to legal consequences and be capable of creating legal relations. in such circumstances that any reasonable man could guess that he expects to be paid for this. This is an implied offer by the D. 14.000. An offer to a friend to dine at the offeror s place. Thus stepping into a taxi and consuming eatables at a restaurant both create implied promise to pay for benefits employed. (a) The Delhi Transport Corporation runs omnibuses on different routes to carry passengers at the scheduled fare. because in social agreements or domestic arrangements the presumption is that the parties do not intend legal consequences to follow the breach of agreement.000. An offer may be express or implied . the person to whom the offer is made is called the offeree . Illustration (a) M says to N that he is willing to sell his motorcycle to him for Rs. or an offer to one s wife to show her a movie is not a valid offer and as such cannot give rise to a binding agreement.of intention I may sell my motorcycle if I can get Rs. 14. he makes an implied offer. a fire broke out in the defendant s farm . 80. it is not a valid offer in the eyes of law. 20. If the offer does not intend to give rise to legal consequences. In Upton Rural District Council v Powell. (b) A shoe shiner starts shining some one s shoes. even though it is accepted and there is consideration. Upton claimed compensation for its services. I will give a few more illustrations in this regard. there is an express offer. An offer which is expressed by words. believing that he was entitled to the free service of Upton Fire Brigade (which he was not) he summoned it. will you buy my motorcycle fro Rs.C. this is an express offer. Legal Rules Regarding a Valid Offer A valid offer must be in conformity with the following rules: 1. 14. 2. Held services were rendered on an implied promise to pay for them.000.000 for it is not a proposal . The person making the proposal or offer is called the promisor or offeror . we have a proposal as it has been made with the object of obtaining the assent of N.000 . But if M says to N. An offer may be made either by words or by conduct.T. or I am willing to sell my motorcycle to you for Rs. and the person accepting the offer is called the promisee or acceptor . But in . without being asked to do so.

Even in the case of a business agreement if the parties agree that the breach of the agreement would not confer on either of the parties a right to enforce the agreement in a court LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 10 11.555 .the case of agreements regulating business agreements it is taken for granted that parties intend legal consequences to follow.

It merely invites offers. If B does a particular work for him. and when the hammer falls on the higher bid. An invitation to offer is not an offer. (a) X purchased a horse form Y and promised to buy another. thus it is not a valid offer. (b) A offers to B lavish entertainment. because the terms of agreement are uncertain as they are yet to be settled.) 3. An advertisement for an auction sale does not even bind the auctioneer to hold the auction and the prospective bidders have no legal right to complaint if they have wasted their time and money in coming to the advertised place of the auction sale (Harries vs. 3. We may give some examples of them here. X refused to buy the second horse. there is no contract (Rose & Frank Co. In the eyes of law and do not become agreements by their acceptance. there is an acceptance and the contract becomes complete. The terms of the offer must be certain and not vague (sec 29). 1000 Answers (a) Y could not enforce the agreement. (c) A agrees to sell to B my white horse for Rs. if the first one proves lucky. vs. In the case of an invitation to offer the person sending out the invitation does not make an offer but only invites the other party to make an offer. there is no binding obligation. Actual bids made at the auction are offers . on such information.of law. Let us try to work out these problems on our own Illustrations. 500 or Rs. (c) There is nothing to show which of the two prices was to be given. Mangham L. Porting ton) (b) A s offer does not amount to lawful offer being vague and uncertain. is willing to open negotiations with him. (a) An advertisement for sale of goods by auction does not amount to an offer to hold such sale. The terms of the offer must be certain and not loose or vague. it being loose and vague (Taylor vs. Thus an agreement to agree in future is not a contract. Such invitations for offers are therefore not offers. has rightly observed: unless all the material terms of the contract are agreed. His object is merely to circulate information that he is willing to deal with anybody who. Nickerson) . An offer must be distinguished form an invitation to receive offer or as it is sometimes expressed in judicial language an invitation to treat. each higher bid superseding the previous one.J. Crompton & Brothers Ltd.

after having used their smoke Balls three times daily for two weeks. but when the cashier accepts the offer by accepting the payment. while a general offer is made to the world or public at large. She sued the company for the promised reward. The court observed that the defendants had made no offer. but that was never accepted by the defendants. A general offer on the enter hand is one which is made to the world at large or public in general and may be accepted by and person who fulfils the requisite conditions. The defendants replied. but she nevertheless subsequently suffered from influenza. The defendants. It is only an attempt to ascertain whether an offer can be obtained within such a margin as the seller is willing to adopt (Spencer vs. The plaintiffs last telegram was an offer to buy. on the faith of the advertisement. The specific order is made to a specific person. Illustration In the above case the carbolic smoke Ball co. not when the customer selects the goods. according to the printed directions.(b) There is a self-service system in a shop.general and specific. in case of general offers the contract is made only with that person who comes forward and performs the conditions of the proposal as such performance amounts to the acceptance of performance. Thus. 5. also by a telegram: Lowest price for pen. Boots cash Chemists (southern). Such an offer can be accepted only by the person or persons to whom it is made. There are two kinds of offers . issued an advertisement in which the company offered to pay £ 100 to any person who contract influenza. However. 200. there is a specific offer and N alone can accept it. (d) In Mc Pherson vs Appanna it was held that mere statement of the lowest price at which the offerer would sell contains no implied contract to sell at that price. The selection of goods by the customer constitutes an implied offer to buy goods and the acceptance of payment by the cashier constitutes acceptance of the offer. The cashier totals the price and accepts the amount. The contract. however. Mrs. in this case in made. Ltd.] (c) A notice that goods will be sold by tender does not amount to an offer. A customer selects the goods and takes them to the cashier for payment of the price. (e) In the case of Harvey vs Facey the plaintiffs telegraphed to the defendants writing. £900 . The plaintiffs immediately sent their last telegram stating: We agree to buy Pen for £900 asked by you . will you sell us Bumper Hall Pen? Telegraph lowest cash price. The leading case on the subject of general offer is that of Carlill vs Carbolic smoke Ball co. Carlill. bought and used the Balls according to the directions. The company was held . Harding) the tenders to accept them or not. [Pharmaceutical society of Great Britain vs. refused to sell the plot of land at that price. An offer may be a specific or general . where M makes an offer to N to sell his bicycle for Rs.

addressed to the public at large. or the restoration of lost article are also examples of general offers. Offers of reward made by way of advertisement. If a large number of persons accepted a general offers of continuing nature.liable. for the rendering of certain services. It is worth noting that there cannot result into a contract until it has been accepted by an ascertained person. as it was in the smoke Ball LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 11 . Such offers may be accepted by performance of the conditions by an individual person in order to give rise to a contractual obligation to pay the reward.

8. the performance of the act raises an inference of acceptance. 7. 1989 A wrote to B offering to sell him 100 tons of iron at Rs. After the servant had left. the servant claimed it. His suit was dismissed on the ground that he could not accept the offer. 501 to anybody giving information relating to the boy. An offer is effective only when it is communicated to the offeree. In case of general offer of reward for some information or restoration of a missing thing. the plaintiff. But in the case of Lalman Shukla vs Gauri Dutt . A cannot recover the reward as he cannot be said to have accepted the offer when he was not at all aware of it. The letters crossed in the post. For eg.company case discussed above. without knowing that a reward has been offered for the arrest of a particular criminal. . Later. for there was never a consensus of wills. The servant. she was allowed to recover.800 per ton. On the same day. B wrote to A offering to buy the same goods. Illustrations (a) A. the offers are cross offers. the offer is open for acceptance to only one individual who performs the required condition first of all. This applies to both specific and general offers. unless he had knowledge of it. and as soon as the condition is first performed the offer is closed. which can be accepted by number of persons. An offer must be communicated to the offeree. before seeing the announcement. A wrote to B offering to sell him certain goods. the plaintiff being a servant was already under an obligation to do what he did and therefore the performance of act cannot be regarded as a consideration for defendant s promise. On the same day. Such offers do not constitute acceptance of one s offer by the other and as such there is no completed agreement. 6. The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made (Secn 4). There is no concluded contract between A and B. The court further observed that in the case of public advertisements offering a reward. on reading the notice of reward. Let me give you an example so that you can understand it better. In Lalman Shukla vs. The defendant announced a reward of Rs. Suppose on 15 October. not so much for reward. He sent his servant. had traced the boy and informed the defendant. in search of the boy. the defendant s nephew absconded from home. there can be no acceptance and no contract. Until the offer is made known to the offeree. Cross offers when two parties make identical offers to each other. but to assuage her feelings. Carwardine where information was given about the murderers of her husband of a woman. Doing anything in ignorance of the offer can never be treated as its acceptance. The court observed: where an offer has been accepted with knowledge of the reward the fact that the informer was influenced by motives other than the reward will be immaterial. Gauri Datt. In Williams vs. catches the criminal and gives the information to the superintendent of police. in ignorance of each other s offer.

room P s bag was lost and he claimed the actual value of the lost bag. they are not binding upon the acceptor. It was held that. the more important rules adopted by the courts are as follows. On the back of the ticket there was a condition that.B wrote to A offering to buy 100 tons of iron at Rs. Each being made in ignorance of the other. because a reasonably sufficient notice has been given to him by suitable words on the document. It was held that the plaintiff was entitled to recover his loss from the company as there was not sufficient communication of the terms and conditions contained on the back of the ticket. The plaintiff never looked at the back of the ticket bore no reference to the back. the plaintiff bought a steamer ticket which bore on its face the words. see back . and there is no acceptance of each other s offer. Again. Illustration.800 per ton. he was bound by it. These are called standard form contracts we have already discussed them in brief but now I would like to take up a few examples of such contracts. before or at the time of the contract. The leading case on the point is Parker vs. You all must be thinking about the contracts which are entered into a by large number of people at the same time. He claimed damages for its loss. South Eastern Railway co. (i) If the acceptor or the promisee had no knowledge of special terms. Stevenson. Illustration In Handerson vs. injury or delay to the passenger or his luggage. Dublin to white haven on the back of the ticket certain special terms were printed one of which excluded the liability of the company for loss. admitted knowledge of the printed matter on the ticket. receipt. in the above case P deposited his bag at the cloak room at a railway station and received a ticket containing on its face the words. The plaintiffs luggage was lost in the shipwreck caused by the fault of the company s servants. where the terms are printed in a language which the . 8. even though he had not read the exemption clause. Communication of special terms (Standard Form Contracts) Regarding the communication of the special terms of the contract as contained in a ticket. Before or at the time of the contract. because the offers were simulta neous. The letters crossed in the post. standard form documents . A notice to the same effect was hung up in the cloak. but denied having read it. £ 24 sh 10 P. There is no concluded contract between A and B. the company will not be responsible for any exceeding the value of £10 unless extra charge was paid . As the defendants had done what was reasonably sufficient to give him notice of its existence. (ii) If the acceptor or the promisee had the knowledge or may be presumed to have the knowledge. the terms are binding upon the acceptor whether he has read them or not is immaterial. and therefore P was entitle the recover only £ 10. or. of special terms.

) similarly. It is the acceptor s duty to ask for a translation of the terms before he actually accepts the offer and if he did not ask.555 . provided the notice is reasonably LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 12 11. the acceptor cannot plead that he was illiterate or blind. the Compagnie Markemas de France. he must suffer for his ignorance (MacKillican vs. provided his attention is drawn to them by suitable words on the document.acceptor does not understand. he cannot set up this fact as a reason for not being bound by the terms.

Illustration. The facts of olley vs. When they went to occupy the room there was a notice on one of the walls which contained the clause. The offeree will have to accept all the terms of the offer.) It is important to note that the special terms and conditions become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of contract. on the grounds of justice. unless all the terms of the offer are complied with and accepted in the mode . in the above case Olley and her husband hired a room at a hotel and paid for a week s board and lodging in advance. the acceptor cannot plead that he was illiterate of blind the contracting party unless he has assented thereto. for any damage to or loss of garments has been held to be unreasonable (M.sufficient for the class of persons to which he belongs (Thomp son vs. Marlborough court Ltd. we must note that even where adequate notice of the terms and conditions in a document has been given.M. An offer can be made subject to any terms and conditions. Again. The facts of Olley vs. Nataraj). Case provide a good illustration on the point. Thus an offeror cannot say that if acceptance is not communicated up to a certain date. the companies Marukemas de France) similarly. Thus a dry-cleaner s terms that he will pay only eight times the amount of cleaning charges. L. where the terms are printed in a language which the acceptor does not understand. The owner of the hotel was held liable since the notice formed no part of the contract as it came to the knowledge of the plaintiff after the contract had been entered into. T. An offeror may attach any terms and conditions to the offer he makes. Marlborough court LTD. the offer would be presumed to have been accepted. because no obligation to reply can be imposed on him. unless handed to the manageress for safe custody. siddalingappa vs. If the offeree does not reply. He must suffer for his ignorance (Mackillican vs. the doctrine of fundamental breach and strict construction protects the contracting party form the unreasonable consequences of wide and sweeping exemption clauses. Finally. Railway co. There is no contract. The question that comes up now is whether any terms or conditions can be attached to an offer: 8. there is no contract.compliance of which would amount to acceptance. Owing to the negligence of the hotel staff. 7. a thief entered the room and stole some of their property. Case provide a good illustration on the point. he cannot set up this fact as defence. He may even prescribe the mode of acceptance. & S. An offer should not contain a term the non. A subsequent communication will not bind the contracting party unless he has assented thereto. the proprietors will not hold themselves responsible for articles lost or stolen.

the offer does not lapse automatically. An application for allotment of shares was made on 8 June. If he does not inform the offeree as to this effect. by words spoken or written. [sec. An offer lapses by not being accepted in the mode prescribed. he is deemed to have accepted the deviated acceptance. an offer made by telegram suggests that a reply is required urgently and if the offeree delays the communication of his acceptance even by a day or two. 7) Now we come to revocation of the offer Lapse and Revocation of offer An offer lapses and becomes invalid (i. declined to . What is a reasonable time is a question of fact depending upon the circumstances of each case. or (b) where the offeree gives a conditional acceptance. 90. the offer will be considered to have lapsed.000. An offer lapses after stipulated or reasonable time. How about some examples in this context (i) A offered to sell his house to B for Rs. He refused to accept them.000 for which price A refused to sell. the offer does not accept the offer according to the mode prescribed. An offer lapses if acceptance is not communicated within the time prescribed in the offer. it must be noted that in case of deviated acceptance. if the offeror asks for sending the acceptance by telegram and the offeree sends the acceptance by post the offeror may decline to treat that acceptance as valid acceptance provided the gives a notice to that effect to the offeree within a reasonable time after the acceptance is communicated to him. or if no made is prescribed.. or implied. comes to an end) in the following circumstances. if the offeree does not accept the offer according to the mode prescribed.e. or if no time is prescribed. A.90. The applicant was informed on the 23 November that shares were allotted to him. 3. An offer lapses if it has been rejected by the offeree.. Montefiore. It is for the offeror to insist that his proposal shall be accepted only in the prescribed offeror to insist that his proposal shall be accepted only in the prescribed manner. The rejection may be express i. in some usual and reasonable manner. In Ramsgate Victoria Hotel Co. But. according to section 7. An offer lapses by rejection. Subsequently B offered to purchase the house for Rs.prescribed. for example. As regards mode of acceptance. and if he fails to do so he is deemed to have accepted the acceptance. for example. vs. 1. 2. 6 (2)]. (sec. B offered Rs. within a reasonable time. Implied rejection is one(a) where either the offeree makes a counter offer.000. and that he was not bound to accept the shares. It was held that his offer had lapsed by reason of the delay of the company in notifying their acceptance.80.e.

For example.000 could be no acceptance of A s offer as there was no offer to accept. B filled a suit to obtain specific performance of the alleged contract. wrench). Dismissing the suit. the court held that A was justified because no contract had come into existence.555 13 . Subsequent willingness to pay Rs. Immediately on receiving the letter D writes a letter rejecting the offer. 90. C makes an offer to D by letter. as B. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. B said that the he accepted the offer if he was offeror. by offering Rs. (ii) A offered to sell his motorcar to B for Rs. has rejected the original offer.000. 25. 80.adhere to his original offer.000. The original offer had already come to an end on account of counter ( Hyde vs.

D changes his mind and telephones his acceptance. Revocation of an offer must be communicated or made known to the offeree. 1. For example. There would be a contract between C and D and the rejection shall not be effective. For example. Thus the fact of death or insanity of the offeror would not put an end to the offer until it comes to the notice of the acceptor before acceptance.40. An offer lapses by revocation. If the offeror dies or becomes insane before acceptance. Before the rejection reaches C. 4. The effect of facing a time for acceptance is merely to fix a tie beyond which the offer cannot be accepted. is called an option an option is in effect a separate contract making the promisor liable for breach if he revokes the offer before the expiry o f agreed time. supported by consideration. Revocation of a general offer must be made through the same channel by which the original offer was made. otherwise the revocation does not prevent acceptance. There would be a contract C and D and the rejection shall not be effective. 6 (4)]. An offer is revoked when it is retracted back by the communication of notice of revocation by the offeror to the other party [sec. an offer. it may be inferred that an acceptance in ignorance of the death or insanity of the offeror. M agrees M cannot revoke the offer before the expiry of 10 days. at an auction sale. Where no time limit is set. D changes his mind hand telephones his acceptance. But he withdraws the bid before the fall of the hammer. Immediately on receiving the letter D writes a letter rejecting the offer. Atherton). M.Before the rejection reaches C. revocation must always be express and must be . is a valid acceptance. unless there is some consideration for so keeping it open. There cannot be a concluded contract because the offer has been revoked before acceptance. and hence not offer open. Further. the offer lapsed provided that the fact of his death or insanity comes to the knowledge of the acceptor before acceptance [sec. 1. N says to M that if he agree the offer open for 10 days he (N) will pay him Rs. It is worth noting that a rejection is effective only when it comes to the knowledge of the offeror. An offeree s death or insanity before accepting the offer puts an end to offer and his heirs cannot accept for him (Reynolds vs. may be revoked even before the expiry of that period. offers to sell his house to N for Rs. agreed to be kept open for a definite period. unsupported by consideration. If M revokes the offer before the expiry of 10 days. He can be sued for breach of option contract. 5. Again.000. is regarded as a bare pact. Illustration. C makes an offer to D by letter.000. the offer open for a definite period. and gives rise to a contract. A makes the highest bid. as N has obtained an option to purchase the house within 10 days. An offer lapses by the death or insanity of the offeror or the offeree before acceptance. From the language of the section. 6(1).

A standing offer is in the nature of an open or continuing offer. Solve the following problems giving reasons (1) A garment store gave a following advertisement in the . 6 (3)]. II. In the same manner. Where a person offers to another to supply specific goods. and before it is accepted. at any time. an offer may lapse if the thing. offers to sell his scooter to B for Rs. at a certain rate. Revocation of standing offer or tender. a law prohibiting the sale of wheat by private individuals is enacted. Thus. How does an offer get terminated? IV. is an acceptance of the standing offer as to the quantity ordered.(in default of payment of earnest money. quantities. Define the term offer.) 7. Comment on the following statements (1) Offer must be communicated to the offeree. which is the subject matter of the offer. up to a stated quality or in any quality which may be required. Each successive order given. Revocation by non. if B joins the lions club within a week the offer stands revoked and cannot be accepted be B if B fails to join the lions club. the offeror is free to revoke the standing offer with regard to further supply. is destroyed or substantially impaired before acceptance. where A. 4. In view of this legal position. while the offer remains in force. 6. Practice Questions I. An offer stand revoked if the offeree fails to fulfill a condition precedent to acceptance [sec. 6. Distinguish between (1) General offer and specific offer (2) Offer and an invitation to offer (3) Cross offer and counter offer V. (2) Terms of an offer must be certain. (3) An offer must be distinguished from an invitation to offer. III. Thus. where an offer is made to sell 10 bags of wheat for Rs. An offer lapses by subsequent illegality or destruction of subject matter. during a fixed period.000. he makes a standing offer.500 and before it is accepted. the offer comes to an end. and creates a separate contract. by giving a notice to the offeree.fulfillment of a condition precedent to acceptance. An acceptance of such an offer merely amounts to an intimation that the offer will be accepted from time to time by placing order for specified.communicated by the offeror himself or his duly authorized agent to the other party. Explain the legal rules regarding the term offer. (4) A proposal cannot be revoked otherwise than by communication. except where consideration is given for it. An offer lapses if it becomes illegal after it is made.

15? LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 14 11. (2) A sees a rare book displayed in a shop. a enters the shop and puts Rs.15 .15 on the counter and asks for the book.100 only is it a valid offer or not. The bookseller does not agree to sell saying that the real price of the book is Rs.200 to Rs. It is labelled First Edition Rs. Men s nightsuits reduced from Rs.50and that it had been marked as Rs. Is the bookseller bound to sell the book for Rs.newspaper : Special sale for tomorrow only.555 .50 by mistake.

B sent a reply. Delhi. Vikas Publishing House Pvt. Tulsian (2002). Is there a contract between A and B? References: Kapoor. Ltd. Delhi. Tata Mc.com/bareacts/soga. Business Law . Kucchal ( 2002). lowest price Rs. Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Ltd. I agree to buy your car at Rs. will you sell your car? Quote lowest price. Tata Mc. A sent a second telegram to B. N.C. Ltd. http://www.25000. Student s Guide To Mercantile And Commercial Laws.html M.C. Can a compel B to do so. Graw Hill Pvt. (2003). B thereafter refuses to sell. Pvt.D.555 15 . Sultan Chand and Sons. Business Law .(3) A sent a telegram to B. Elements of Mercantile Law.indialawinfo. Graw Hill Rohini Aggarwal(2003). Delhi. New Delhi. P.25000.

B received the order and executed the same. then B can t substitute himself for A without your consent. 1. Let us suppose A sold his business to his manager B without disclosing the fact to his customers. teachers) can be accepted by any member of that class. Section 2(b) states that A proposal when accepted becomes a promise and defines acceptance as when the person to whom the proposal is made signifies his assent thereto. emerges from the acceptance of an offer. C refused to pay the price. It was held that there was no contract between B and C because c never made any offer to B and as .e. Secondly. Thus there are two essential requirements of a valid acceptance Firstly the offeree to the offeror should communicate acceptance. An offer made to a particular person can be validly accepted by him alone. Thus. An offer can be accepted only by the person or persons to whom it is made and with whom it imports an intention to contract. Similarly an offer made to a class of person s (i.. the proposal is said to be accepted. Legal Rules Regarding a valid Acceptance A valid acceptance must be in conformity with the following rules. Acceptance must be given only by the person to whom the offer is made. a customer. acceptance is the manifestation by the offeree of his assent to the terms of the offer. C. It cannot be accepted by another person without the consent of the offeror. acceptance should be absolute and unqualified. who had a running account with A. An offer made to the world at large can be accepted by any person who has knowledge of the existence of the offer. sent an order for the supply of goods to A by name.LESSON 4: ACCEPTANCE OF AN OFFER Learning Outcomes After today s class you should be able to answer the following questions: The meaning of acceptance The essentials elements of acceptance The communication of an acceptance Introduction Today first we will start with the meaning of acceptance A contract as already observed. The rule of law is clear that if you propose to make a contract with A.

2. he accepts the (deviated) acceptance. the acceptance is effective and complete. In effect a deviated acceptance is regarded as a counter offer in law. But what happens if the offeree deviates from the prescribed mode? The answer to this query is given in section 7(2) itself which states that in cases of deviated acceptances the proposer may. In Felthouse vs Bindley the nephew intended his uncle to have the horse but had not communicated this to the uncle. if an offeror prescribes lighting a match as a mode of acceptance and the offeree accordingly lights the match. Implied acceptance may be given either by doing some required act. 7(2)]. The offeror cannot say that if no answer is received in a certain time the offer is deemed to be accepted. but. It was thereby held that the communication to a stranger like the auctioneer in this would not do. 100 by the evening. I will give you another example. it will be presumed that he has accepted the acceptance and a valid contract will arise. instead he told the auctioneer not to sell the horseas it was already sold to his uncle. Acceptance must be absolute and unqualified [sec. The usual modes of communication are by word spoken or written or by conduct. for example. it is called an implied or tacit acceptance. within a reasonable time after the acceptance is communication to him. [sec. tracing the lost goods for the announced reward. promising to pay the balance of Rs. In order to be legally effective it must be an absolute and unqualified acceptance of all the terms of the offer. the acceptance given accordingly will no doubt be a valid acceptance. insist that his proposal shall be accepted in the prescribed manner. 4. and not otherwise. If the offeror prescribes a mode of acceptance. Even the slightest deviation from the terms of the offer makes the acceptance invalid. Illustration. Jones). If the offeror prescribes no mode of acceptance. Other important features that we must know in respect of acceptance would be 3.such C was not liable to pay the price to B (Boulton vs. . 7(1)]. or by accepting some benefit or service. Thus. there is no acceptance of the offer. But if the offeror fails to do so. A communication to any other person is no communication in the eyes of law.900 cash down. if he fails to do so. Mere silence is no acceptance of the offer. There is no contract. L offered to M his scooter for Rs. if the offeror informs the offeree that the acceptance is not according to the mode prescribed.000 M accepted the offer and tendered Rs. the acceptances must be communicated according to some usual and reasonable mode. for example. even if the prescribed mode is funny. as the acceptance was not absolute and unqualified. unless the proposal prescribes the manner in which it is to be accepted. stepping in a public bus by a passenger. For Example If the offeror prescribes acceptance by telegram and the offeree sends acceptance through a messenger. 3. Acceptance must be expressed in some usual and reasonable manner.

It should be noted that law does not allow an offeror to prescribe silence as the mode of acceptance. Thus, a person cannot say that if within a certain time acceptance is not communicated the offer would be considered as accepted. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 16 11.555

Similarly, a trader who, of his own without receiving any order, sends goods to some person with a letter saying if I do not hear from you by the next Monday, I shall presume that you have bought the goods , cannot impose a contract on the unwilling recipient. It is so because in the absence of such a rule the offeree s will be at the mercy of offeror s, unless they replay all such offers in negative which will certainly be causing a lot of inconvenience and financial burden to them. Now what about the cases where no acceptance is communi cated although there is an intention of entering into a contract. Mental acceptance ineffectual. Mental acceptance or quiet assent not evidenced by words or conduct does not amount to a valid acceptance, and this is so even where the offeror has said that such a mode of acceptance will suffice. Acceptance must be communicated to the offeror, otherwise it has no effect. Thus, if an oral acceptance is spoken into a telephone after the telephone has gone dead, there is in effect no acceptance. This rule is based on the theory of consensus ad idem or of identity of minds. Unless the acceptance of the offer comes to the knowledge of the offeror, there is no identity of mind and therefore no contract. (a) A person received an offer by letter. In reply he wrote a letter of acceptance. Put the letter in his drawer and forgot all about it. Held, this uncommunicated acceptance did not amount to acceptance and so did not complete the contract. (Brogden vs. Metropolitan Rly co) 4. Acceptance must be communicated by the acceptor. For an acceptance to be made it should be made by the offeree but must also be communicated by, or with the authority of, the offeree (or acceptor) to the offeror. In the landmark case of Powell vs. Lee, P was a candidate for the post of headmaster in a school. The managing committee of the school passed a resolution selecting him for the post. A member of the managing committee, acting in his individual capacity, informed P that he had been selected, but P received no other intimation. Subsequently, the resolution was cancelled, and P was not appointed no other intimation. Subsequently, the resolution was cancelled, and P was not appointed to the post. P filed a suit against the committee for breach of contract. The court held that in the absence of an authorized communication form the committee there was no binding contract. 5. Acceptance must be given within a reasonable time and before the offer lapses and/or is revoked. To be legally effective acceptance must be given within the specified time limit, if any, and if no time is stipulated, acceptance must be given within a reasonable time because an offer cannot be kept open indefinitely (shree Jaya Mahal cooperative Housing society vs. Zenith chemical works pvt. Ltd.) where M applied for certain shares in a company in June but the allotment was made in November and he refused to accept the allotted shares. It was held that the offeror M

could refuse to take shares as the offer stood withdrawn and could not be accepted because the reasonable period during which the offer could be accepted had elapsed (Ramsgate Victoria Hotel co. vs. Monteforte). Again the acceptance must be given before the offer is revoked or lapses by reason of offeree s knowledge of the death or insanity of the offeror. 6. Acceptance must succeed the offer. Acceptance must be given after receiving the offer. It should not precede the offer. In a company shares were allotted to a person who had not applied for them. Subsequently he applied for shares being unaware of the previous allotment. It was held that the allotment of shares previous to the application was invalid. 7. Rejected offers can be accepted only, if renewed. Offer once rejected cannot be accepted again unless a fresh offer is made (Hyde vs. Wrench). Communication of Acceptance and Revocation When the contracting parties are face to face and negotiate in person, there is instantaneous communication of offer and acceptance, and a valid contract comes into existence the moment the offeree gives his absolute and unqualified acceptance to the proposal made by the offeror. The question of revocation of either offer or acceptance does not arise, for, in such cases a definite offer is made and accepted instantly at one and the same time. But where services of the post office are utilized for communi cating among themselves by the contracting parties because they are at a distance form one another, it is not always easy to ascertain the exact time at which an offer or /and an acceptance is made or revoked. In these cases the following rules, as laid down in section 4 and 5, will be applicable; 1. Communication of an offer. The communication of an offer is complete when it comes to the knowledge of the person to whom it is made, i.e., when the letter containing the offer reaches the offeree. 2. Communication of an acceptance. The communication of an acceptance has two aspects, viz., as against the proposer and as agonist the acceptor. The communication of an acceptance is complete (a) as against the proposer, when it is put in a course of transmission to him, so as to be out of power of the acceptor, and (b) as against the acceptor, when it comes to the knowledge of the proposer i.e., when the letter of acceptance is received by the proposer. Illustrations (i) A proposes, by letter, to sell a house to B for Rs. 80,000. the letter is posted, on 6th instant. The letter reaches B on 8th instant. The communication on the offer is complete when B, the offeree, receives the letter i.e., on 8th.

(ii) B accept A s proposal, in the above case, by a letter sent by post on 9th instant. The letter reaches A on 11th instant. The communication of the acceptance is complete. As against A when the letter is posted i.e., on 9TH, and as against B, when the letter is received by A. i.e., on 11th. 3. Communication of a revocation. The communication of a revocation is complete. (a) as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the poser of the person revoking, i.e., when the letter of revocation is posted, and (b) as against the person to LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 17

whom it is made, when it comes to his knowledge, I.e., when the letter of revocation is received by him. Illustration (a) In the illustration (i) given above. A revolves his offer by letter on 8th instant. The letter reaches B on 10th instant. The revocation is complete as against A on 8th, when the letter of revocation is received by him. (b) In the illustration (ii) given above, B revokes his acceptance by letter on 10th instant. The letter reaches A on 12th instant. The revocations complete as against B on 10th, the date on which the letter of revocation is posted and as against A on 12th, the date on which the letter reaches him. Time during which an offer or acceptance can be revoked. In the illustrations (a) and (b) given above, there arises a question. Whether the revocation of offer by A is operative or not, or whether the revocation of acceptance by B is operative or not? For answering this question, it is necessary to know the limit of time within which an offer or acceptance can be revoked. Section 5 deals with this question and provides as follows. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards. Applying section 5 to our illustrations given above. A may revoke his offer at any time before or at the moment when B posts his letter of acceptance i.e., 9th, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter of acceptance reaches A. i.e., 11th, but not afterwards. While discussing the rule regarding communication of acceptance is complete as against A on the day of posting itself i.e., 9th, A s revocation of his offer, which is complete as against B on 10th is inoperative. B s acceptance is valid and there shall be a binding contract. For the sake of practice of the rules regarding communication of offer, acceptance and revocation discussed above, we take another illustration. Illustration (i) A offers, by letter, to sell his car to B for Rs. 75,000 on 1st August B receives the letter on 3rd august. (ii) B puts the letter of acceptance in post on 4th August, which reaches A on 6th. (iii) A write a letter of revocation of his offer and posts it on 3rd August i.e., which reaches B on 5th August. Rules Applied (i) Communication of offer is compete on 3rd August i.e.,

when it comes to the knowledge of B. (ii) Communication of acceptance is complete as against the proposer i.e.,. A when the letter of acceptance reaches the proposer i.e., on 6th August. (iii) Revocation of offer is complete as against A on 3rd August, when the letter or revocation is posted, and as against B on 5th August, when the letter of revocation is received by him. (iv) As B has put his acceptance into transmission on 4th August and revocation of offer is communicated to him on 5th August, his acceptance is valid and there shall be a binding contract. A cannot revoke his offer after 4th August, when the communication of acceptance is complete as against him. Effect of delay or loss of letter of acceptance in postal transit. So for as the offeror is concerned, he is bound by the acceptance the moment the letter of acceptance is posted. Although the letters delayed or wholly lost through an accident of the post and the letter never in fact reaches him. But in order to bind the offeror, the letter of acceptance must be correctly addressed, properly stamped and actually posted. If the letter of acceptance is misdirected because it has not been addressed correctly, there would in law, be no communication of the acceptance; but if the wrong address is furnished by the offeror himself, he will be bound. So far as the acceptor is concerned. He is not bound by the letter of acceptance till it reaches the offeror, the contract remains voidable at the instance of the acceptor. He can compel the offeror to enforce the contract or he may revoke his acceptance by communicating his revocation at any time before the letter reaches the offeror. Thus the acceptor is at an advantage if the letter is delayed or lost in transit. Accidental formation of contract. There remains yet another query; what happens if both the letter of acceptance and the telegram of revocation of acceptance are delivered to the to the offeror at the same time? In such a situation the formation of contract will depend on a matter of chance. If the offeror reads the letter of acceptance first and then the telegram, a binding contract will arise. But if the offeror reads the telegram of revocation of acceptance first and then the letter of acceptance, there will be no binding contract because the communication of revocation comes to the offeror s notice first than the communication of acceptance. It will be seen that the formation of contract in the aforesaid circumstance depends on a matter of chance and therefore such contracts are called accidental form of contracts, Contracts Over the Telephone External manifestation or overt act The definition clearly require that the assent should be signified, it may be signified or expressed by an act or omission by which the party accepting intends to communicate his assent or which has the effect of communicating it. A very common instance of an act amounting to acceptance is the fall of the hammer in the case of an auction sale. The principle is that there should be some external manifestation of acceptance. A mere mental determination to accept unaccompanied by any external indication will not be sufficient.

Such manifestation may be in the form of express words, written or spoken or may be signified through conduct. An illustration of acceptance by conduct is the decision of the House of Lords in Brogden v. Metropolitan Railway Co. B had been supplying coal to a railway company without any formal agreement. B suggested that a formal agreement should be drawn up. The agents of both the parties met and drew up a draft agreement. It had some blanks when it was sent to B for LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 18 11.555

his approval. He filled up the blanks, including the name of an arbitrator and then returned it to the company. The agent of the company put the draft in his drawer and it remained there without final approval having been dignified. B kept up his supply of coals but on the new terms and also received payment on the new terms. A dispute having arisen B refused to be bound by the agreement. The conduct of the company agent in keeping the agreement in his drawer was an evidence of the fact that he held mentally accepted it. But he had not expressed his mental determination and retention of the agreement was not be sufficient acceptance. But the subsequent conduct of the parties in supplying and accepting coal on the basis of proposed agreement was a conduct that given. Said Lord CAIRNS LC when the company commenced a course of dealing which is referable only to the contract and when that course of dealing was accepted and acted upon by B in the supply of coals. This rule, that the communication of an acceptance is complete as against the proposer when the letter is posted, is probably intended to apply only when the parties are at a distance and they communicate by post. Where, however, the parties are in each other s presence or, though separated in space , they are in direct communication, as, for example, by telephone, no contract will arise until the offer or receives the notification of acceptance. This appears from the speeches delivered in Entores Ltd. v. Miles Far East Corporation. Denning U observed as follows: Let me first consider a case where two people make a contract by word of mouth in the presence of one another. Suppose, for instance, that I shout an offer to a man across a river or a courtyard but I do not hear his reply because it is drowned by an aircraft flying overhead. There is no contract at that moment. It he wishes to make a contract, he must wait till the aircraft is gone and then shout back his acceptance so that I can hear what he says.... Now take a case where two people make a contract by telephone. Suppose, for instance, that I make an offer to a man by telephone and, in the middle of his reply, the line goes dead so that I do not bear his words of acceptance. There is no contract at that moment. The facts of the case were that an offer was made from London by Telex to a party in Holland and it was duly accepted through the Telex, the only question being as to whether the contract was made in Holland or in England. The Court of Appeal held that Telex is a method of instantaneous communication and the rule about instantaneous communications between the parties is different from the rule about the post. The contract is only complete when the acceptance is received by the offer or and the contract is made at the place where the acceptance is received. Where, however, the proposal and acceptance are made by letters, the contract is made at the place where the letter of acceptance is posted. It has been observed by the Supreme Court that authorities in India exhibit a fairly uniform trend that in case of negotiations by post the contract is complete

when acceptance of the offer is put into a course of transmission to the offeror . Thus where a premium due on a life insurance policy was sent by money order, it was held that the policy had revived from the date of the money order and not from the late of its receipt by the company. The assured having died in the mean times widow recovered the proceeds. Whatever merit this rule may have from the point of view of the assured or the offered, it certainly makes the position of the offer or miserable. The current feeling, therefore, is that even in reference to postal communications the principle of consensus or meeting of minds should be adhered to and there should be no contract till the acceptance is received. Thus in Holwell Securities v. Hughes an option to purchase land was exercisable by notice, it was held that the mere posting of the notice which was never delivered was not a valid exercise of the option. Supreme Court approval of Entores case The principle of the Entores case has been endorsed by the Supreme Court in Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co. In this case, the plaintiffs made an offer from Ahmedabad to the defendants at Khamgaon to purchase certain goods and the defendants accepted the offer. The question was whether the conversation resulted in a contract at Khamgaon at Ahmedabad. A majority of the judges preferred to follow the English rule as laid down in the Entores case and saw no reason for extending the post office rule to telephonic communications but section 4 does not imply that the contract is made qua the proposer at one place and qua the acceptor at another place. The contract becomes complete... when the acceptance of offer is intimated to the offeror. It was further contended, that the draftsman of the Indian Contract Act could not have envisaged use of telephone because it had not yet been invented and, therefore, the words of the section should be confined to communications by post. The judge was, on the other hand, convinced that though the law was framed at a time when telephones, wireless, Telstar and Early Bird were not contemplated , the language of Section 4 is flexible enough to cover telephonic communications. The courts should not completely ignore the language of the Act. When the words of acceptance are spoken into -the telephone, they are put into the course of transmission to- the offeror so as to be beyond the power of the acceptor; the acceptor cannot recall them. The communication being instantaneous the contract immediately arises In the case of contracts over the telephone, each contracting party is able to hear the voice of the other. There is instantaneous communication of offer and acceptance, rejection and counter offer. And therefore, the rule which applies to contracts negotiated orally by the parties in the physical presence of each other i.e., the contract is complete only when the acceptance is received by the offeror also applies to contracts made over the telephone. If the acceptance is not in fact communicated to the offeror because the telephone suddenly goes dead there will be no contract ( Entores Ltd. Vs. miles for east corporation). The offeree, therefore must make sure that his acceptance is received

(heard and understood) by the offeror, otherwise there is no binding contract. The observation made by denning, L. J., in Entores case is enlightening in this connection. Now take a case where two people make a contract by telephone. Suppose for instance, that I make an offer to a man by telephone and in the middle of his reply, the line goes dead LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 19

so that I do not hear his words of acceptance. There is no contract at that moment. The other man may not know the precise moment when the line failed. But he will know that the telephonic conversation was abruptly broken off, because people usually say something to signify the end of the conversation. If he wishes to make a contractor, he must, therefore, get through again so as to make sure that I heard. Suppose next that the line doesn t go dead but it is nevertheless so indistinct that I do not catch what he says and I ask him to repeat it. He 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 is only complete when I have his answer accepting the offer. In Kanhialal vs. Dineshchandra it has been so held in India as well that where a contract is effected by telephonic conversation, the contract is not complete till acceptance of the offer by the offeree is clearly heard and understood by the offeror. No question of revocation. When the parties negotiate a contract over telephone, no question of revocation can possibly arise, for in such instantaneous communication, a definite offer is made and accepted at one and the same time. An offer when accepted, explodes into a contract and cannot be revoked. In the words of sir Anson Acceptance is to an offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone. Here we end our discussion on acceptance of an offer. Test Questions Comment on the following 1. Offer must be communicated to the offeree. 2. Terms of an offer must be certain 3. Counter offer to an offer lapses the offer 4. An invitation to an offer is not an offer Practical Problems Answer the following problems, giving reasons for your answers. 1. Harish says in conversation to suresh that he will give Rs. 10,000 to a person whosoever marries his daughter. Alok marries Harish s daughter and files a suit to recover Rs. 10,000 will he succeed? [Hint. No, Harish has expressed his wish only, and has never made an offer with a view to obtaining the assent of the other party.] 2. X sees a book displayed in a shelf of a book shop with a

X tenders Rs. Is the letter a valid offer by X to Y? Solution: The letter was a mere statement of intention and not an offer at all.] 3. Y supplied the goods to Z. [Leading case: Olley v. Is the notice a valid offer to sell? Solution: The notice was mere a statement of intention and not an offer to seen. M.price tag of Rs. and not an offer itself. 95.] 4. A sues B for the specific performance of the contract. 85. Hence the bookseller is free to accept the offer or not. Marlborough Court Ltd. A notice that the goods stated in the notice will be sold by tender. that his daughter would have a share of what he left after the death of his wife. Fickus] 6. subsequently A agree to purchase the car for Rs. the new owner. they found a notice on the wall disclaiming the owner s liability for damages. X sold his business to Y but this fact was not known to an old customer Z. Will he succeed? [Hint. M is not bound to accept the goods because a specific offer made to P can be accepted only by P and none else (Boulton vs. loss or theft of articles. his would be son-in-law. B offered to sell his car to A for Rs. P sold his business to Q disclosing this to his customers. a display of goods with prices marked thereon is only an invitation for offer. The bookseller r3fuses to sell saying that the book has already been sold to someone else and he does not have another copy of that book in the stock.] 8. was no offer available for acceptance subsequently. Harding] 7 X and Mrs X hired a room in a hotel for a week.500. Discuss the legal position.000 but B refused to sell the car. No. Jones. A accepts to purchase it for Rs.e. Q.] 5. When they entered the room. executed the order. 85 on the counter and asks for the book. B refused to sell the car Rs. Is the bookseller bound to sell the book to X? [Hint. Solution: The owner of the hotel was liable because the special terms (i. [Farina v. an old customer sent an order for goods to P by name. No. Is there a valid contract? . No. [Spencer v. Z placed an order for certain goods to X by name. 94. notice) were communicated after the formation of the contract. Some of their items were stolen.500. and there. B s offer comes to an end by the counter offer of A. Is M bound to accept the goods? [Hint. 95. 94.000. X wrote to Y.

Sadula] 11. Y accepted the offer for one plot.000 to Y. Y replies I will pay Rs 90.000 for it. X refuses to sell at this price. X is not bound to sell his car to Y. F offered by a letter to buy his nephew s horse for Rs 100 saying If I hear LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 20 11. X offered to sell his .Solution: There was no contract at all between Y and Z because Z s offer was a specific offer to X and X alone could accept it.555 . [Bhawan v. Is there a valid contract? Solution: This is not a contract at all because the acceptance was not valid as it was not for the whole of the offer. [Leading case: Boulton v. Y then attempts the original offer but X refuses to sell his car. Discuss the legal position. X offered to sell two plots of land to Y at a certain price. [Leading case: Nihal Chand v. Jones] 9. Solution: Y s first reply is a counter offer and not an acceptance of X s offer and has put an end to the original offer. Hence. After having made the counter offer. Y cannot accept the original offer which has already come to an end.car for Rs 1.00. Amar Nath] 10.

Sultan Chand and Sons. Graw Hill Rohini Aggarwal(2003). Graw Hill Pvt.C. Pvt. (2003). Delhi. N. I shall consider the horse mine. Ltd. B sold the horse by mistake. Tulsian (2002). Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 21 . Business Law .D. Tata Mc. Delhi.indialawinfo. Vikas Publishing House Pvt.html M. Tata Mc. The nephew sent no reply at all but told B his auctioneer not to sell that particular horse as he intended to sell that horse to F. Delhi. Ltd. http://www. Ltd. Kucchal ( 2002). Bindley] References Kapoor.C.no more about him.com/bareacts/soga. New Delhi. Elements of Mercantile Law. Business Law . Will he succeed? Solution: F will not succeed because his nephew had not communicated accep-tance to him. P. Student s Guide To Mercantile And Commercial Laws. [Felt house v. F filed a suit against B.

In the words of Blackstone: A consideration of some sort or other is so necessary to the forming of a contract. This something in return is the consideration for the promise.LESSON 5: CONSIDERATION Learning Outcomes After todays class you should be able to answer the following questions: The meaning of consideration The essentials of consideration The exceptions to the doctrine of consideration Introduction By now you all must have understood the concept and definition of contract and its essentials. of its existence serves to distinguish those promises by which the promisor intends to be legally bound from those which are not seriously meant. Anson said that the offer and acceptance bring the parties together and constitute the outward semblance of a contract but most systems of law require some further evidence of the intention of the parties. Anson said that an offer and acceptance bring the parties together and constitute the outward semblance of a contract. 10). or agreement to do or pay something on one side. and a man cannot be compelled to perform it. Consideration constitutes the very foundation of the contract. As you all know that as per section 10 of the Indian Contract Act there must be a consideration for an agreement to become a contract and that consideration must also be lawful. If I promise a man £ 100 for nothing. that such promise can be enforced by law against the promisor. my promise has no force in law. The fact. he neither doing nor promising anything in return or to compensate me for my money. It may be noted that consideration is a cardinal necessity for the formation of a contract. will not at law support an action. that a nudum pactum. . The law supplies no means nor affords any rem-edy to compel the performance of an agreement made without consideration. Consideration is one of the essential elements of a valid contract (Sec. but no consideraion is necessary for the discharge or modification of a contract. Our next topic of study shall be consideration. The breach of a gratuitous promise cannot be redressed by legal remedies.. which is provided by consideration and form. It is only when a promise is made in return of something from the promisee. In the language of purchase and sale Pollock has observed: Consideration is the price for which the promise of the other is bought . without any compensation on the other. An agreement not supported by consideration is void.

who owes that sum to B. B promises to grant time to C accordingly.Definition Section 2(d) of the Indian Contract Act defines consideration as follows When at the desire of the promisor. (d) Tt must be something to which the law attaches a value. Here B s promise to pay the sum of Rs10. fails to pay it.000 at the end of six months. (v) A promises to type the manuscript of B s book. must be done at the desire of the promisor: (b) It must be done by the promisee or any other person (c) Tt may have been already executed or is in the process of being done or may be still executory. His son promised that if the father would forbear to sell.100 more. The promise to each party is the consideration for the promise of the other party. An analysis of the above definition will show that it consists of the following four components: (a) The act or abstinence or promise which forms the consideration for the promise. Here the promise of each party is the consideration for the promise of the other party.000. Essentials of Valid Consideration The four component parts of the definition of consideration . The father accordingly forbore. Illustrations (i) A agrees to sell his house to B for Rs 10. (iv) A promises his debtor B not to file a suit against him for one year on B s agreeing to pay him Rs. 50. and in return B promises to teach A s son for a month. The abstinence of the father is the consideration for son s promise to pay.000. (vi) A person had a. if C. and A s promise to sell the house is the consideration for B s promise to pay the sum of Rs10.000 yearly for the purpose.000 is the consideration for A s promise to sell the house. Here the promise of each party is the consideration for the promise of the other party. or does or abstains from doing. daughter to marry and in order to raise funds for her marriage he intended to sell a property. (iii) A promises to pay B Rs 1. the promisee or any other person has done or abstained from doing. The abstinence of A is the consideration for B s promise to pay. or promises to do or to abstain from doing something. such act or abstinence or promise is called a consideration for the promise.000. The concept of consideration will become more clear to you after reading these illustrations. (ii) A promises to maintain B s child and B promises to pay A Rs 1. he would pay the father Rs.

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 22 11. We shall now discuss these essentials one by one in detail.555 .(given above) may well be described as the essentials of valid consideration.

The discharge of A s Account was consideration for C s promise (though C the promisor had received no benefit) (National Bank afUpper India vs Bansidhar). We call this concept Privity of Consideration For Example (a) B requests A to sell and deliver to him goods on credit. The shopkeepers in the market promised to pay D a commission on the articles sold by them in the market. When D sued the shopkeepers for the commission. Consideration may move from the promisee or any other . will not amount to valid consideration so as to support a contract. or at the desire of the third party. We shall study some more examples to make this concept clearer Illustrations (a) A sees B s house on fire and helps in extinguishing it. and B credited the amount to A s Account in his books. persuaded C to pass a promissory note for the amount in favour of B. 2. A agrees to do so.000 to B. at his own expense.1. It would be enough if the act or forbearance or promise constituting the consideration was done or given at the promisor s request. it was held that the promise to pay commission did not amount to a contract for want of consideration. Consideration must move at the desire of the promisor. In order to constitute legal consideration the act or abstinance forming the consideration for the promise must be done at the desire or request of the promi-sor. because D (the promisee) had constructed the market not at the desire of the shopkeepers (the promisors) but at the desire of the Collector to please him (Durga Prasad vs Baldeo) It must be noted that this essential does not require that the considera-tion must confer some benefit on the promisor. (b) D had built. which he does not need or require. a market at the request of the Collector of the District. provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment. A s promise to deliver the goods is the consideration for C s promise of guarantee. C promised B that he would pay the amount (by passing on a promissory note). (Illustration appended to Section 127). (b) A. The contract between A and C is a contract of guarantee and is perfectly valid though the benefit which A confers in return of C s guarantee is conferred not on C but on B (in the shape of sale of goods on credit). the benefit may accrue to a third party. He cannot demand payment for his services because B never asked him to come for help. Thus acts done or services rendered voluntarily. The logic for this may be found in the worry and expense to which every one might be subjected. who owed Rs 20. if he were obliged to pay for services.

Let me tell you the facts of that case now.e. a stranger cannot furnish consideration. the daughter. Afterwards she declined to fulfill her promise saying that no consideration had moved from her maternal aunt i. it is immaterial who has furnished it. however there is privity of consideration i. though a stranger to the consideration (as the consideration indirectly moved from her sister) was entitled to maintain the suit. This means that even a stranger to the consideration can sue on a contract. by a deed of gift. This is sometimes called as Doctrine of Constructive Consideration . Held that . on the same day R. Exceptions to the Privity rule . His son(defendant) promised that if he abstains from selling he would pay the daughter £1. Illustration in the. The daughter and her husband (plaintiffs) sued the defendants for the same. consideration must move from the promisee and promisor only. is that consideration need not move from the promisee alone but may proceed from a third person. the plaintiff can sue.000. The second essential of valid consideration. A person may be a stranger to the consideration but he should not be a stranger to the contract because privities of contract is essential for enforcing any of the rights arising out of the contract. with a direction that the daughter should pay an annuity to A s sister C. Thus. The father accordingly forebore but the defendant did not pay. that is sufficient consideration for the promise. above case A. Thus. a person intended to sell wood in order to provide his daughter a marriage portion. as has been done by A. provided he is a party to the contract. It may move from the promisee or from any other person. Under English law. Accordingly. It is a legal common place that if a promise causes some loss to a promisee. Another important illustration that would make you understand the concept better is the case of Dutton vs Poole. made over certain property to her daughter R. C being no party to the contract between A and B (Iswaram Pillai vs Sonnivaveru). C cannot file a suit against B to enforce his promise. It was held that the words the promisee or any other person in Section 2 (d) clearly show that a stranger to consideration may maintain a suit. as long as there is a consideration for a promise. A stranger to a contract cannot sue. executed a writing in favour of her maternal aunt C agreeing to pay the annuity.. The leading case of Chinayya vs Ramayya provides a good illustration the point. the promisee. Hence the maternal aunt. as contained in the definition of consideration in Section 2 (d). It being a fundamental principle of the law of contracts that a stranger to a contract cannot sue only a person who is a party to a contract can sue on it.person. where A mortgages his property to B in consideration of B s promise to A to pay A s debt to C.e. an old lady.as the consideration moved indirectly from the plaintiff to the defendant and the action of the defendant operated to shut out the plaintiff from a certain benefit.

The different exceptions are as follows: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.In the course of time. the courts have introduced a number of exceptions in which the rule of privity of contract does not prevent a person from enforcing a contract. which has been made for his benefit but without he being a party to it.555 23 .

On a suit it was held that the mother was entitled to require her daughter to maintain her. A suit by the wife (not a party to the agreement ) for the recovery of arrears of annuity was upheld. though she was a stranger to the contract (Veeramma vs Appayya). the beneficiary can sue in his own right to enforce his rights under the trust.500 per month in perpetuity for the betel leaf expnses.Trust or Charge Marriage settlement. though not parties to the agreement. (ii) Family settlement. trust (M. partition or other Family arrangements Acknowledgement or Estoppel Covenants running with land Agency · Assignment Now let me discuss them in detail (i) Where an express or implied trust is created. Post Office in case V.of loss. Illustration. M can enforce the agreement i. The daughter subsequently refused to maintain the mother. Where a provision is made in a partition or family arrangement for maintenance or marriage expenses of female mem-bers. In case of a trust. there was an agreement between the lady s father in law and her father that in consideration of her marriage with his son. can sue on the footing of the arrangement.Rapai vs John). (Rose vs Joseph) (iii) When the defendant constitutes himself. Illustrations (a) A transfers certain properties to B to be held by B in trust for the benefit of M. Central Govt). (c) In Khwaja Mohammad Khan vs Hussaini Begum.. A daughter along with her husband entered into a contract with her father whereby it was agreed that she will maintain her mother and the property of the father will be conveyed to them. as on receipt of such article. (b) An addressee of an insured article is entitled to sue the. A trust is the property held and managed by one or more persons for another s benefit as in Chinnaya case. the Post Office becomes in law a constructive trustee for the addressee (Amir ullah vs. Some immovable property was specifically charged for this purpose. he would pay to her Rs.K. it was held that the girl could sue the defendant for damages for the breach of the promiseof marriage even though she was not a party to the agreement. such members.e. as the agent of . Where a girl s father entered into an agreement for her marriage with the defendant. though he was not a party to the contract between the settler and the trustees.

A s abstinence being the consideration for B s promise. Whereby the terms of a contract a party is required to make a payment to a third person (viz. it is called past considera-tion. (v) In case of assignment of rights under a contract in favour of a third party either voluntarily or by operation of law. Consideration may be past. In India sec 25(2) adequately covers a past voluntary service. 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 him for another one year. the assignee can enforce the benefits of the contract. consideration may consist of past.e. Under English law. or does or has abstained from doing. shall be bound by them although he was not a party to the agreement. Now the question that comes up is that what do we mean by past. Now we shall discuss the third essential of consideration i. A person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land. Thus. Consideration may consist of an act or abstinence. Consideration may consist of either a positive act or abstinence i. When something is done or suffered before the date of the agreement. that the consideration may consist of either something done. an agreement between B and A. then C can recover this amount from A who shall be regarded. past consideration is no consideration. used in the definition of consideration clearly indicate. Let us discuss some examples of this. It must be noted that past consideration is good consideration only if it is given by the promisee. the assignee of an insurance policy or the official assignee on the insolvency of a person can sue on the contract even though originally they were not parties to it (vi) Covenants running with land. the principal can sue on it. Thus if A receives some money from B to be paid over to C and he admits of this receipt to C. has done or abstained from doing. e. on failing to pay the debt amount on the due date to A. present or future. or promised to be done or not done in the future. Past consideration. present or future consideration. as the agent of C (Surjan vs Nanat) (iv) In case of agency. 3. or promises to do or to abstain from doing. . or not done in the past. present.. under which B.. acknowledgement can be express or implied. To put it briefly. Where a contract is entered into by an agent.e. at the desire of the promisor.the third party/ Acknowledgement or Estoppel. while making a part payment).g. is a valid contract. a binding obligation is thereby incurred towards him. at the desire of the promisor. or done or not done in the present. The words. or future act or abstinence. a negative act.

and in February B promises to pay A a sum of Rs 200 for his services.Illustrations (a) A teaches the son of B at B s request in the month of January. It was held that there was good past consideration. gave up his practice and served as manager of a landlord at the latter s request in lieu of which the landlord subsequently promised a pension. (b) A lawyer. The services of A will be past consideration.555 . (Shiv Saran vs Kesho Prasad) LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 24 11.

It should. it must be real and competent.of consideration as an evidence in support of such allegation and.e.. The consideration need not be adequate to the promise for the validity of an agreement. it is a case of executed contract (where nothing remains to be done) and not of executed or present consideration. i. It consists of an exchange of promises and each promise is a consid-eration for the other. if the consideration be grossly or shockingly inadequate.g. (i) Physically impossible. will declare the contract void. Inadequacy of consideration being no bar to a valid contract.g. X promises to sell and deliver 10 bags of wheat to Y for Rs 6. it is called future consideration or executory considera-tion . it must be of some value in the eye of law. uncertain or illusory. and if one of the parties to the contract alleges that his consent was obtained by fraud.. For example. with the promise of B.500 after a week. it is not real and therefore shall not be a valid consideration. e. upon B s promise to pay for it at a future date. Consideration which moves simultaneously with the promise. however. coer-cion Or undue influence. upon Y s promise to pay the agreed price at the time of delivery. notwithstanding the inadequacy of the consideration. is called present consideration or executed consideration . e. the agreement is a valid contract. be noted that it is said to be . If both parties have done their part under the contract. 4.. For example. The consideration waiting from A is present or executed consideration since A has done his act of delivering the book simultaneously. present consideration when at the time of the agreement it is executed on one side and executory on the other. unless it is an evidence of un free consent. illegal. it has been correctly observed that in many cases.Present consideration. the doctrine of consideration is a mere technicality irreconcil-able either with business expediency or common sense: Consideration must be real Though consideration need not be ade-quate. where A agrees to sell his motorcar worth Rs 20. where A sells a book to B and B pays its price immediately. A sells and delivers a book to B. the court will treat inadequacy . It is to be observed that in an executed consideration .000 for Rs 1. Future consideration. to make a dead man alive or to .000 only and his consent is free. A promise to do something which is physi-cally impossible. It leaves the people free to make their own bargains. Consideration must be of something The fourth and last essential of valid consideration is that it must be something to which the law attaches a value. The law only insists on the presence of consideration and not on the adequacy of it. the liability is outstanding against only one side whereas in an executory consideration it is outstanding on both ends. However. Where consideration is physically impossible. The promise ofX is supported by promise of Y and the consideration is executory on both ides. Thus. When the consideration on both sides is to move at a future date.

is no consideration. A promise to do something which is too vague and uncertain. a promise to pay a sum of money to a police officer for investigating into the crime will be without consideration. The desertion of a part of the crew is to be considered an emergency of the voyage as much as their death. promised the rest of the crew that. an illusory or deceptive consideration does not amount to a valid consideration.. which a person is already legally bound to do. The agree-ment was held to be void for want of consideration because it was the contractual duty of the mariners who remained with the ship to exert themselves utmost in any emergency of the voyage to bring the ship in safety to her destined port. a promise for illegal cohabitation. (Collins vs Godefroy) (b) Two of the crew of a ship deserted it half way while the ship was on a voyage from London to the Baltic and back.g. being unable to supply their place. G promised him a sum of money for his trouble.g. where a person having received summons to give evidence in a case. does not amount to good considera-tion. there was no. where the police authority provides a special form of protection outside the scope of their public duty (e.run at a speed of 100 kilometres per hour.If A is already bound to perform a particular contractual duty owed to B.. Similarly. a promise to pay such remuneration as shall be deemed right. the wages of the two deserters should be equally divided amongst them. The captain. Doing of something. e. ( iv) Illusory consideration Again. if they would work the vessel home. performing an extraordinary act) they may demand payment of it. However. For instance. e. (ii) Legally impossible A promise to do something which. consideration for the promise and hence the promise is unenforceable. On default by G. C filed the suit for the recovery of the promised sum. (iii) Uncertain consideration. is illegal. is no consideration in the eye of law. Consideration is illusory if it consists in a promise to perform a public duty. Illustrations (a) C (the plaintiff) received a subpoena (a kind of sum-mon) to appear at a trial as a witness on behalf of G (the defendant). It was held that C being under a public duty to attend and give evidence.g. B s promise to pay something additional for the . does not form valid consideration. (2) Performance of Contractual Obligations (a) Pre existing contract with promisor . or to perform a contract already made with the promisor. a promise to pay such a person for appearing in case is o consideration. (Stilk vs Myrick) Performance of Existing Duties (1) Performance of Legal obligation in order to constitute proper consideration there should be a promise to do something more than what a person is already bound to do.

same promise is no consideration. a promise to pay a special reward to a pleader (apart from usual fee) if the suit decided in the promisor s favour. does LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 25 . Likewise.

No consideration is needed for such a promise. I will pay to you £ 150 yearly during my life thereafter A married Nicholl. A s uncle sent him a letter. The majority judgement was that there is a sufficient consideration for the promise. where an agreement without consideration will be perfectly valid and binding. there are certain exceptions to this rule. the plaintiff A had already promised to marry one Miss Nicholl. No Contract Consideration being one of the essential elements of a valid contract the general rule is that an agreement made without consideration is void. No Consideration. But there are a few exceptions to the rule. (c) . for no consideration. However. (b) Pre existing contract with third party Where a person has contracted to do an act. to give to B Rs 1. Thus there are four essential requirements which must be complied with to enforce an agreement made without consideration. as per Section 25 (1). The promise of the annuity might ve intended as an inducement to the marriage. 25 (1)]: An agreement made without consideration is enforceable. These exceptions are as follows: Agreement made on account of natural love and affection [Sec. Rs 1. I am glad to hear of your starting intended marriage with Nicholl.000. is there a consideration for the promise? In Shadwell vs Shadwell. part payment by a third party may be good consideration for the discharge of the whole debt. A puts his promise to B into writing and registers it This is a contract. Thus. In India the promisee may accept in satisfaction of the whole debt an amount smaller than that. promises to give his son B.not constitute consideration. Exceptions to the Rule. If it is (i) Expressed in writing (ii) Registered under the law for the time being in force for the registration of documents (iii) Is made on account of natural love and affection (iv) Between parties standing in a near relation to each other.000. I am sure you all must be familiar with the Lalman Shukla s case. On the same principle. a promise to pay less than what is due under a contract cannot be regarded as a consideration. Let us now study some some illustrations in this behalf (a) A promises. and as I promised to assist you at starting . and a third person promises to pay him a sum of money if he would go ahead with the performance. This is a void agrpement (b) A for natural love and affection.

Thus where a Hindu husband. rendered. was held to be valid and binding an the younger brother cause the elder brother in the event of his not carrying out the agreement (Venkatasamy vs Rangasami) It should. (Ahmedabad Jubilee Spinning Co. it was held that the agreement was void for want of consideration because it was not merely out of natural love. and B. then it is covered under past consideration [as per Sec. .25 (2)]. whereby an elder brother. (iii) The promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor. a person who has already voluntarily done something for the promisor. on account of natural love and affection. executed a registered document in favour of his wife. Thus where services were rendered by a promoter for a company not then in existence. This is a contract. agreeing to pay for separate residence and maintenance. Thus. In order to attract this exception. (Rajlakhi Devi vs Bhootnath) 2. B promises to give A Rs 50.A registered agreement. be noted that mere existence of a near relation between the parties does not necessarily import natural love and affection. (ii) The promisor must be in existance at the time the service was. promised to a the debts of his younger brother. vs Chhotalal). they being friends. however. and affection. Illustrations (a) A finds B s purse and gives it to him. the agreement between A and D is void for want. A promise made without consideration is also valid. (Note that B was legally bound to support his infant son). Agreement to compensate for past voluntary service (Sec. after referring to quarrels and disagreement between him and his wife. appreciating the service that had been rendered. (c) A rescued B from drowning in the river. where B treated A during his illness but refused to accept payment from A. There is a contract between A and B.000 to A. wholly or in part. This is a contract. B promises to pay A s expenses in so doing. (b) A supports B s infant son.000 to B s son D. 2(d) and not under this exception]. or done something which the promisor was legally compellable to do. promises to pay Rs 1. and A in gratitude promises to pay Rs 1. a subsequent promise by the company to pay for them could not be brought within the exception. if it is a promise to compensate. of consideration as it is not covered under the exception. If it is not voluntary but rendered at the desire of the promisor. the following points should be noted: (i) The service should have been rendered voluntarily for the promisor.

(iv) The intention of the promisor ought to be to compensate the promisee. A promise given for any motive other than the desire to compensate the promisee would not fall within the exception. (Abdulla Khan vs Parshottam) (v) The promisor to whom the service has been rendered needed competence to contract at the time the service was rendered.made after attaining majority to pay for goods supplied voluntarily to the promisor during his minority has been held valid and the promisee could enforce it . The court in LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 26 11. Thus a promise.555 .(Karam Chand vs Basant Kaur).

(iii) There must be an express promise to pay a time barred debt as distinguished from a mere acknowledgement of a liability in respect of a debt. hence the importance of the present exception. a promise to repay the loan) on the part of the borrower. 25(2) of the Contract Act. that at the time the thing was done the minor was unable to contract. (vi) The service rendered must also be legal.e. a debtor s letter to his creditor. to pay wholly or in part a debt barred by the law of limi-tation. 3. and (iv) The promise must be in writing and signed by the debtor or his agent. promise to pay a time-barred debt is unenforceable. In this connection it is important to note that this exception does not cover a promise by a person on attaining majority to repay the money borrowed during his minority because such a promise cannot be said to be a promise to compensate a person who has already voluntarily (without any promise of compensation) done something for the promisor. So a promissory note executed by a widow in her personal capacity in payment of time. Thus a promise made by a minor after attaining majority to repay money advanced during his minority has been held invalid and beyond the purview of Section 25(2) of the Contract Act (Indran Ramaswami vs Anthappa). . even at a time when the promisor was a minor. An oral.barred debt of her husband cannot be brought within the exception (Pestonji vs Maherbai28). But before the exception can apply. it is necessary that: (i) The debt must be such of which the creditor might have enforced payment but for the law for the limitation of suits. Thus. as well as by a minor. 25 (3)].000 on account of my timebarred promissory note is not a contract. Where there is an agreement. made in writing and signed by the debtor or by his au-thorised agent. In their opinion the provisions of Sec. who had already volun-tarily done something for the promisor. to pay for past services. There must be a distinct promise to pay. Thus past cohabitation will not make a promise to pay for it enforceable under this exception (Sabava vs Yamanappa). it for the minor must in law be taken to have done it voluntarily. 25(2) applied equally to a contract by a major. The reasoning of the court is. Advancing money as a loan necessarily implies a promise to compensate (i. the agreement is valid even though It is not supported by any consideration. I owe you Rs. A time barred debt cannot be recovered and therefore a promise to repay such a debt is without consideration.that case ob-served that they failed to see how an agreement made by a person of full age to compensate wholly or in part a promisee.. 1. Agreement to pay a time-barred debt (Sec. and therefore the person who did. (ii) The promisor himself must be liable for the debt. did not fall within the purview of Sec.

63). to Section 25]. Completed gift. Contribution to charities. present and future. 25). of performance of the promise (Sec.000. if on the faith of the promised subscrip-tion. A promise to contribute to charity. The remedy is revived by a new promise under the exception. Remission by the promisee. A owes B Rs 1. Consideration can be past. 6. In other words.63). giving reasons for your answers: . For every valid agreement there should be a consideration 2. The defendant was held liable. an agreement to extend time for performances of a contract need not be supported by consideration (Sec. the defendant promised to subscribe Rs 500 to a fund started for building. 5. In order to attract this excep-tion there need not be natural love and affection or nearness of relationship between the donor and done. A gift (which is not an agreement) does not require consideration in order to be valid As between the donor and the done any lift actually made will be valid I and binding even though without consideration [Explanation 1. a promised subscription is not legally recoverable. no consideration is necessary. Illustration. though gratuitous. But where the promisee had done nothing on the faith on the promise. the defendant had agreed to subscribe Rs 100 towards the construction of a Town Hall at Howrah. Similarly. The gift must. Section 185 of the Contract Act lays down that no consideration is necessary to create an agency. A signs a written promise to pay BRs 500 on account of the debt.The logic behind this exception is that by lapse of time the debt is not destroyed but only the remedy is lost. agreeing to accept less than what is due. For compromising a due debt. Comment on the following 1. The plaintiff (secretary of the Town Hall) on the faith of the promise entrusted the work to a contractor and undertook liability to pay him. a Mosque but steps had been take to carry out the repairs. In Kedar Nath vs Ghorie Mohammad. 4. the promisee takes definite steps in furtherance of the object and undertakes a liability. This is Ii contract (Appended to Sec. The defendant was held not liable and the suit was dismissed. not exceeding the promised amount of subscription. but the debt is barred by the Limitation Act.. i.e. a creditor can agree to give up a part of his claim and. Contract of agency. A stranger to a consideration can sue 3. Accordingly. there need be no consideration for such an agreement. 7. in Abdul Aziz vs Masum Ali. would be enforceable. to the extent of liability incurred. however. Practical Problems Attempt the following problems. be complete.

Is he entitled to recovery of the reward? [Hint. Yes. M offered a reward to anyone who would rescue his wife dead or alive from a burning building. In the instant case the fireman took an extra risk of endangering his life. which does not fall in his normal duties in LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.1. A fireman risking his life brought out the wife s dead body.555 27 .

.] 5. a promise to compensate for voluntary acts done in the past is valid even though without consideration. X. As the instant case is fully covered by the above Section. Advise B as to his legal rights. voluntarily treats A during his illness. A does not pay.] 4. promised Y a reward of Rs 1. Discuss whether he can succeed? [Hint. . so A s promise is not enforceable even under the exception. X sues A for the money. The general rule of law is that a stranger to a contract cannot sue.000 if he refrained from smoking for two years does so. at the risk of your own life. is unable to pay. This is a valid consideration in the form of an act of abstinencevide Section 2(d). A and B are friends. [Hint. you saved me from a serious motor accident. X. A writes to B.000. Y is entitled to the reward from X. Thus as per the exception the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor. In the instant case.000. In this case X s father. C cannot succeed. did nothing for A. B. As such the consideration s is not illusory and the fireman is entitled to reward. A makes a promise to B to render some service to C. C sues A on the promise. to whom the promise was made. For a valid consideration from B.connection with rescue opera-tions. I promise to pay you Rs 1. B is advised. In the instant case.] 3. a social reformer. whereas consideration to be valid must be given at the desire of the promisor-vide Section 2(d). There is no near relation between X and Y. As B s son.] 6. Is this gift valid? .000. C is not a party to the contract and therefore he cannot enforce the promise. to pay him Rs 1. Under Section 25 (2) of the Contract Act. Can X recover? [Hint.000 to Y his neighbor s wife by executing a registered gift deed without any consideration. The agreement between X and A is not a contract in the absence of consideration. Is he entitled to the reward? [Hint. X cannot recover the money from A. Apparently it is not a valid consideration because it is voluntary. to file a suit for recovery for Rs 1.] 2. No. X. B does not accept payment from A for the treatment and A promises B s son. Y at the desire of X refrained from smoking for two years. The question now 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 a person who has already voluntarily done something for the promisor. B treats A during A s illness. X gifted Rs 50. A being in poor circumstances.. Yes. A cannot avoid his liability later on.

000. Past consideration is no consideration in India. Is this promise valid? Solution: Section to which the given problem relates: Explana tion 1 to Section 25.000 to Y. his neighbors wife. (T) 7.000 to Y for Rs 10. X received an offer of Rs 20. 3. (True) 3. Is X liable to Y for damages? Solution: Section to which the given problem relates: Explanation 2 to Section 25. The inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.00. which a promisor is not already bound to do. Consideration must be adequate. there is only a promise to gift and not a completed gift. (T) 9.( T) 8. An act constituting consideration must be done by the promisee only. . and need not be a result of natural love and affection or near relation. (False) 2. Consideration must result in a benefit to both parties.Solution: Section to which the given problem relates: Explanation I to Section 25. Reason: This agreement is void for want of consideration and at the same time. X who was badly in need of money offered to sell his car worth Rs 1. 8.( F) 4. X promises to make a gift of Rs 50. Decision: X is liable to Y for damages. Consideration must be something. (F) 5. Consideration must result in a benefit to the promisor and detriments to promisee. 7. Reason: A completed gift needs no consideration. Before the car was delivered. Decision: A promise to gift is not valid. (F) 6. True or False 1. Reason: An agreement to which the consent of the party is freely given is not void merely because the consideration is inadequate.000 and refused to carry out the contract on the ground of inadequacy of consideration. An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate. Decision: The gift is valid. Consideration must result in a detriment to both parties.

and near relation. (F) 13. Completed gifts without consideration are valid only if they are out of natural love and affection. -(F) LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 28 11.(T) 14. A verbal promise to pay a time barred debt is valid. Natural love and affection by itself does not necessarily in nearness of relation. In case of trusts. (T) 11.A stranger to consideration can sue. Completed gifts need no consideration. Nearness of relation by itself does not necessarily import natural love and affection. A stranger to a contract cannot sue. (F) 12. (T) 10. An assignee cannot enforce the contract because he is a stranger to a contract. the beneficiary being a stranger to a contract cannot sue. (F) 16. (T) 15. (F) 17. (T) 18.555 . A promise made without consideration to compensate the person who has already done something voluntarily is valid if it is made in writing.

Delhi. Tata Mc.C. Business Law . Ltd. Business Law . Graw Hill Rohini Aggarwal(2003).C. (2003). Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.indialawinfo. Ltd. Sultan Chand and Sons. Elements of Mercantile Law.com/bareacts/soga.555 29 . A promise to gift to wife is valid. Ltd.19. http://www.(T) References Kapoor. New Delhi.D. Vikas Publishing House Pvt. Kucchal ( 2002).html M. (F) 20. Graw Hill Pvt. Tata Mc. No consideration is required to create an agency. Delhi. P. N. Delhi. Tulsian (2002). Student s Guide To Mercantile And Commercial Laws. Pvt.

Minor First of all let us understand who is a minor According to section 3 of the Indian majority Act 1875. who is under 18 years of age is a minor. I. If he is of unsound mind. by an amendment in 1999 in the Indian Majority Act1875. Thus minors.LESSON 7 CAPACITY OF PARTIES Learning Outcomes In today s lecture we shall study about capacity of a party to a contract. and who is of sound mind. attain majority at the age of 21 years. a person domiciled in India. and If he is disqualified from contracting by any law to which he is subject. In particular we shall do today Nature of minor s agreement Effects of minor agreement Persons of unsound mind Other persons incompetent to contract Intoduction Today we will discuss what exactly is meant by competence to enter into a contract According to section 10 an essential ingredient of a valid contract is that the contracting parties must be competent to contract .) . the age of majority is fixed as 18 years for every person (irrespective of the fact of appointment of a guardian. Accordingly every person who has completed the age of 18 years becomes a major. We shall now discuss them one by one in detail. Thus the section declares that a person is incompetent to contract under the following circumstances: If he is a minor according to the law to which he is subject. But minors of whose person or property or both a guardian is appointed by a court. and is not disqualified from contracting by any law to which he is subject. and minors of whose property superintendence has been assumed by a court of wards. However. Section 11 lays down that Every person is competent to contract who is of the age of majority according to the law to which he is subject. persons of unsound mind and persons disqualified by law are incompetent to contract.

the age of majority is to be determined by the law of the place where the contract is made. Minor s Agreements The law regarding minor s agreements may be summed up as under: An agreement by a minor is absolutely void and inoperative as against him. Accordingly. No restitution except in certain cases. because their mental faculties are not mature they don t possess the capacity to judge what is good and what is bad for them. and In the case of contracts relating to land. 1963 which states as follows: On adjudging the cancellation of an instrument. 20. because sections 64 and 65 of the contract Act. to restore. Law acts as the guardian of minors and protects their rights.Section 11 expressly provides that the age of majority of a person is to be determined according to the law to which he is subject. The mortgage filed a suit for the recovery of his mortgage money and for sale of the property in case of default. a minor executed a mortgage for Rs. endorsed certain negotiable instrument in Ceylon. however. he was held not to be liable as an endorser. But the later trend of law for determining the age of majority is: In the case of contracts relating to ordinary mercantile transactions.000 from the mortgage. the age of majority is to be determined by the law of the place where the land is situated. The court may. so far as may be. while ordering for the cancellation of an instrument. by the laws of which he was a minor. at the instance of a minor. apply only to contracts between competent parties and are not applicable to case where there is not and could not have been any contract at all. . where a minor is charged with obligations and the other contracting party seeks to enforce those obligations against minors. which deal with restitution. Thus. This is so as per section 33 of the Specific Relief Act. 8. The courts of law used to decide the age of majority (competency to contract) by the law of domicile and not by the law of the place where the contract is entered into (Kashiba Vs Shripat). A minor cannot be ordered to make compensation for a benefit obtained under a void agreement. domiciled in India. require the minor plaintiff to make compensation to the other party to the instrument. where a person aged 18 years. The Privy Council held that an agreement by a minor was absolutely void as against him and therefore the mortgagee could not recover the mortgage money nor could he have the minor s property sold under his mortgage. any benefit which he may have received from the other party and to make any compensation to him which justice may require. the court may require the party to whom such relief is granted.000 and received Rs. in certain cases. In the leading case of Mohiri Bibi Vs Dharmo Das Ghosh. the agreement is deemed as void ab-initio.

50. he may be directed by the court to refund the purchase money received by him before he can recover possession of the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. if a minor sells a house for Rs.555 31 .000 and later on files a suit to set aside the sale on the ground of minority. For example. the court will compel restitution by a minor when he is a plaintiff.Thus.

any agreement. While a contract of marriage could be . Accordingly. a minor is allowed to enforce a contract. a natural guardian is empowered to enter into a contract on behalf of the minor and the contract would be binding and enforceable if the contract is for the benefit of the minor. which is of some benefit to himand under which he is required to bear ni obligation. The decision in Mohiribi case as observed earlier. also provides to the same effect. 1963 is framed so as to afford relief only in a case where the minor himself as plaintiff seeks the assistance of court and the section is inapplicable if he happens to be merely a defendant in a suit by the person who dealt with him when he was a minor. (f) A contract for marriage of a minor is also prima facie for hos or her benefit. 1956. The decision in Mohiribibi case is confined to cases is confined to cases where a minor is charged with obligations and the other contracting party seeks to enforce those obligations agreements against him. which is of some benefit to the minor and under which he is required to bear no obligation. The contract is enforceable by him or by any other person on his behalf. who has paid the whole of the consideration money. when refused by vendor. Illustrations (a) A duly executed transfer by way of sale or mortgage in favor of a minor. This section is based on the well known principle that he who seeks equity must do equity Beneficial Contracts The meaning of the proposition that an infant is incompetent to contract or that his contract is void is that the law will not enforce any contractual obligation of an infant.property sold. (e) Where a minor had performed his part of the agreement and delivered the goods. Accordingly. Beneficial agreements are valid contracts. he was held entitled to maintain a suit for the recovery of their price. it was held that the minor could recover from his vendor the sum which he has paid as purchase money. a minor can be a beneficiary e. subsequent to his purchase. an endorsee or a promisee under a contract. the court protects the rights of minors. A minor will have the option of retiring from a beneficial contract on attaining majority. (c) A minor purchaser of immovable property was held entitled to recover possession of property purchased from his vendor. In other works. namely.g. dispossessed by a third party. The Hindu Minority and Guardianship Act. (b) Where a minor as a purchaser of immovable property was. Thus money advanced by a minor can be recovered by him by a suit because he can take benefit under a contract. It may be emphasized that section 33 of the Specific Relief Act. is valid. a payee. (d) A promissory note executed in favor of a minor is valid and can be enforced in a court.

No ratification on attaining the age of majority. by which. but no such exception is made in the case of contracts of service of course. for.g. they may gain a livelihood. the court held that a suit upon the second bond was not . provides that the minor must not be less than fourteen years of age and the contract must be entered into on behalf of the minor by his guardian.enforced against the other contracting party at the instance of the minor. (g) A lease to a minor is void. food. Nor can a void deed form a good consideration for a fresh contract made by the m inor on attaining m ajority. Ratification means the subsequent adoption and acceptance of an act or agreement. In that case the court said that the contract of apprenticeship entered into by the guardian is protected by the apprentices act provided the case falls within the terms of that act. A contract of apprenticeship is valid and binding upon a minor because such a contract is protected by the Apprentices Act. and after attaining majority executed a second bond in respect of the original loan. A minor s agreement being a nullity and void abinitio has no existence in the eye of law. Sim ilarly. Thus. The act was passed with a view to enabling children to learn trades. a promise to pay for such amount after he attains majority would not be enforceable. 1961 provided the case falls within the terms of that act. the consideration which passed under the earlier contract cannot be implied into the contract into which the minor enters on attaining majority . In Arumugam Chetti vs Duraisings Tevar. it can not be enforced against the minor. lodging. (h) A minor can also be supplied with necessaries suited to his conditions in life(e. It cannot be ratified by the minor on attaining the age of majority. education)and the supplier of such necessaries is entitled to be reimbursed from the property of the minor. A contract of apprenticeship stands on a different footing than an agreement of service by a minor. So far as an agreement of service by a minor is concerned it is void because a minor s promise to serve would supply no consideration for the promise of the defendant to pay him/her a salary. crafts and employments. if an advance is made to a minor during his minority. in Suraj Narain Vs Sukhu Ahir. The act inter alia. Contracts of apprenticeship and service by a minor. he is entitled to enforce the contract not by virtue of the contract but by reason of the relationship resembling those created by the contract under section 70 of the contract Act. it was held that there can be no ratification of a transaction which is void owing to the provisory possessing no contractual capacity at the time. where a minor has already served under a contract of service. when they come to full age. where a minor borrowed a sum of money by executing a promissory note. an agreement void ab initio cannot be made valid by subsequent ratification.

maintainable as that bond was without consideration. But if services are rendered or an advance is made to a minor during his minority and the services are continued or a further advance is made after he attains majority. a promise to pay for such services or amount as a whole would be valid and enforceable. Let us now discuss the liabilities of a minor under different circumstances LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 32 11. it is necessary for a valid ratification that the person who purports to ratify must be competent to contract at the time of the contract. Since ratification relates back to the date when the contract was originally made.555 .

act or omission. by his declaration. Thus if a minor obtains a loan by fraudulent representation and purchases a motorcar out of that. although the loan transaction is invalid. a minor is not stopped from pleading his infancy in order to avoid a contract.No Estoppel Against A Minor The rule of estoppel does not apply to a minor. the court. any property purchased out of. neither he nor his representatives shall be allowed. out of the proceeds of the contract made by fraudulently representing that he was of full age. although it is not a fact. even if he has entered into an agreement by falsely representing that he was of full age. The rule of estoppels does not apply to a minor i. the court may direct the minor to restore the motorcar to the lender. or any one whom he is legally bound to support. it may be noted that restoration is allowed only when a minor commits fraud by misrepresenting his age because section 65 expressly prohibits restoration in cases which are known to be void. a minor is not a fact. But once the identity of the property of money has been lost because it has been spent wastefully.Whenever the infant is still in possession of any property in specie which he has obtained by his fraud. it is no longer possible to invoke the aid of the equitable doctrine of restitution . on equitable considerations. the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. the infant will be made to restore to the person deceived.e. In the words of Lord Halsbury: Estoppel arises when you are precluded from denying the truth of anything. But if any thing is traceable in the hands of minor. But I think that it is incorrect to say that he can be made to repay money which he has spent. Section 115 of the Indian Evidence act explains Estoppel as follows: Where one person has. the infant is not estopped from setting up infancy. is supplied by another person with necessaries suited to his condition in life. may direct the minor to restore that thing to the other pary. merely because he received it under a contract induced by his fraud . The rule of estoppels Does not apply to a minor i. The case of necessaries supplied to minor is governed by section 68 of the contract act which provides that if a person incapable of entering into a contract. where an infant represents fraudulently or otherwise that he is of full age and thereby induces another to enter into a contract with him them in an action founded on the contract. or money received as a result of. Minor s Liability for Necessaries. for minors can have no privilege to cheat man . which you have represented as a fact.e. sale proceeds of the goods obtained by his fraud. Again. Similarly. In other words. . to deny the truth of that thing. he will be made to restore it to its former owner. in any suit or proceeding between himself and such person or his representative. intentionally caused or permitted another person to believe a thing to be true and to act upon such belief.

however a guardian has no power to bind the minor: (i) by a contract. is binding on the minor and can be specifically enforced by or against the minor. may be specifically enforced by either party to the contract. A is entitled to be reimbursed from B s property. Thus section 68 confers a quasi-contractual right on the supplier of necessaries to a person incapable of entering into a contract. contracts entered into by him for trading purposes are not for necessaries and are not binding on him. A is entitled to be reimbursed from B s property. This is to be determined with reference to the status and circumstances of the particular minor. Thus it was held in Gujoba Tulasiram vs Nilkanth. Loans taken by a minor to obtain necessaries also bind him. cost of defending a minor in civil and criminal proceedings. that a contract of sale of immovable property by the guardian of minor. Food and clothing may be taken as simple examples of necessaries. in Ramalingam vs Babanambal. Similarly. for the minor benefit. it is his property only which is liable. which though of real use. Specific performance means the actual carrying out of the contract as agreed. for the purchase of immovable property (Mir Sarwarjan vs Fakruddin) and (ii) By a Contract of service on his behalf ( . with necessaries suitable to their condition in life. Therefore. and (b) It is for the benefit of the minor. Objects of mere luxury are not necessaries. Specific Performance. or to any one whom he is legally bound to support. Now let us discuss as to what is a necessary article. provided: (a) The contract is within the authority of the guardian or managers. Even where a minor owns property. with necessaries suitable to his condition in life. If a minor owns no property. nor are objects. The necessaries would also includes the infant s lodging expense. the supplier will lose the price of necessaries. it was held that a Hindu minor is bound by a contract entered into by his mother as his guardian for sale of his property. the supplier will get a reasonable price and not the price agreed to by the minor.Illustrations (a) A supplies B. are excessively costly. a lunatic. Since an agreement by a minor is absolutely void the court will never direct specific performance of such an agreement by him. But a contract entered into on behalf of a minor. a lunatic. by his guardian or by the manager of his estate. (b) A supplies the wife and children of B. But a minor is not personally liable. But where a minor is engaged in trade. medical attendance.

but under section 30 of the Indian partnership act he can be admitted to the benefits of partnership with the consent of all the partners by an agreement executed LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Minor Partner. and therefore such contracts cannot be specifically enforced by or against the minor.Raj Rani vs Prem Adib).555 33 . A minor being incompetent to contract cannot be a partner in a partnership firm.

may become a shareholder of the company. He cannot be made personally liable for any obligations of the firm. does not arise at all . if a minor could legally hold property in his name. and held that if a minor could not default. The parents can be held liable only when the child is contracting as an agent for the parents. he is incapable of contracting debts. cannot be a shareholder of the company. Logically also. It follows from it that a minor. but he cannot be held personally liable for negligence or breach of duty. for. Where a minor and an adult jointly enter into an agreement with another person. in case of transfer or transmission of fully paid shares to him. The parents of a minor are not liable for agreements made by a minor. the liability of the guarantor being secondary. Similar decision has been given by Madras High Court in Edvavan Nambiar vs Moolaki Raman. although he may after attaining majority accept those obligations if he thinks fit to do so. being incompetent to contract. acting through his lawful guardian. A company can also refuse to register transfer or transmission of shares in favor of a minor unless the shares are fully paid. A minor. In fact in such a case there cannot be a contract of guarantee in true sense. he is not personally liable. the minor has no liability but the contracts as a whole can be enforced the contract against the major vendee. Minor Agent A minor can be an agent. Minor and Insolvency A minor cannot be adjudicated an insolvent. it would be wrong to debar him from holding fully . Such a minor will have a right to such share if the property or profits of the firm as may be agreed upon and he would have access to and inspect and copy any of the accounts of the firm. an adult stands surety for a minor the adult is liable under the contract. The Bombay high court considered the question in Manju Mahadeo vs Shivappa Manju. although the minor is not (as for three is a direct contract between the surety and the third party). whether the agreement is for the purchase of necessaries or not. He shall bind the principal by his acts done in the course of such an agency. Minor Shareholder. the principal runs a great risk. Even for necessaries supplied to him. The minor cannot participate in the management of the business and shall not share losses except when liability to third parties has arisen but then too up to his share in the partnership assets.through his lawful guardian with the other partners. Position of Minor s Parents. Thus in appointing a minor as an agent. Surety for a Minor When in a contract of guarantee. only is property is liable Contract by minor and adult jointly.

Thus where a minor hired a horse for riding and injured it by overriding. The court observed in that case. may contract during those intervals. is that in all cases there must be a free and full consent to bind the parties. the person entering into the contract must be a person who understands what he is doing and is able to form a rational judgment as to whether what he is about to so is to his interest or not. The section further states that: A person who is usually of unsound mind. whereby it was injured and ultimately died. According to this section. it is necessary that each party to it must have a sound mind. or from a rational judgment as to its effect on his interest. Thus. he is capable of understanding it and of forming a rational judgment as to its effects upon his interests.paid up shares in his own name. who is at intervals of sound mind. he was held liable when he lent the horse to one of his friends who jumped it. but occasionally of sound mind. What is a sound mind ? Section 12 of the contract act defines the term sound mind as follows: A person is said to be of sound mind for the purpose of making a contract. whereby it was held liable when he lent the horse to one of his friends who jumped it. Thus. consent is an act . where a minor hired a horse for riding under express instructions not to jump. he cannot be made liable in tort if he is not liable on the contract. for which the defendant was liable II. a sane man. unless the tort is in reality a breach of contract. The court observed. it was a bare trespass. Thus a patient in a lunatic asylum. therefore. as per section 11 of the contract Act for a valid contract. who is delirious from fever. A person who is usually of sound mind. if at the time when he makes it. he was not held liable. may not make a contract when he is of unsound mind. cannot contract whilst such delirium or drunkenness lasts. it is stated: The general theory of the law in regard to acts done. Persons of Unsound Mind As stated earlier. not within the object and purpose of the hiring. A minor is liable for his tort. But if the wrongful action is of a kind not contemplated by the contract. may make a contract when he is of sound mind. if an infant in the course of doing what he is entitled to do under the contract is guilty of negligence. but occasionally of unsound mind. the minor may be held liable for tort. First of all let me tell you what is a tort? A tort is a civil wrong (not having its genesis in contractual or equitable relationship) for which the ordinary remedy is damages. In Halsbury s Lawa of England. contracts made by parties affecting their rights and interests. or who is so drunk that he cannot understand the terms of a contract. Minor s Liability in Tort.

(b) Lunacy or Insanity it is a disease of the brain. A lunatic loses the use of his reason due to some metal strain or disease.of reason accompanied by deliberate consent that the conveyance and contracts of unsound mind are generally deemed to be invalid. there cannot be a contract by a person of unsound mind. The mental powers of an idiot are completely absent because of lack of development of the brain. or in other works. (subject to exceptions). with no intervals of saneness.555 . LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 34 11. Of course he may have lucid intervals of sanity. Unsoundness of mind may arise from: (a) Idiocy it is god given and permanent.

Foreign sovereigns and ambassadors. Who are disqualified Persons Alien enemies. The property of a person of unsound mind is however. Married women. Alien friend can contract but an alien enemy can t contract. they cannot be sued without obtaining the prior sanction of the central Government. On the expiry of the sentence. he is at liberty to institute a suit and the law of limitation is held in abeyance during the period of his sentence. A convict is one who is found guilty and is imprisoned. and that too subject to any restrictions imposed by the government in that respect. One has to be cautious while entering into contracts with foreign sovereigns and ambassadors. Contracts entered into before the declaration of the war stand suspended and cannot be performed during the course of war. as per section 11. they can be revived after the war is over provided they have not already become time. the burden of proof lies on the party who sets up such a disability. An agreement entered into by a person of unsound mind is treated on the same footing as that of minor s. (e) Mental decay on account of old age. the burden of providing a lucid interval is on him. Thus they are in a privileged position and are ordinarily considered incompetent to contract. etc. An alien (citizen of a foreign country) living in India can enter into contracts with citizens of India during peace time only. provided it is so excessive as to suspend the reason for a time and create impotence of mind. Effects of agreements made by persons of unsound mind. till the drunkard is under the effect of intoxication. always liable for necessaries supplied to him or to any one whom he is legally bound to support under section68 of the act. III . Convict. During the period of imprisonment. and (b) to sue on contracts made before conviction. who sets it up (Mohanlal vs Vinayak). On the declaration of a war between his country and India. Married women are competent to enter into . a convict is incompetent (a) to enter into contracts. till the person is under the impact of artificially induced sleep.(c) Drunkenness it produces temporary incapacity. and therefore an agreement by a person of unsound mind is absolutely void and inoperative as against him but he can derive benefit under it(Jugal Kishore vs Cheddu). he becomes an alien enemy and cannot enter into contracts. (d) Hypnotism it also produces temporary incapacity. Disqualified Persons The third type of incompetent persons.barred. because whereas they can sue others to enforce the contracts entered upon with them. of course. but if unsoundness of mind is once established. are those who are disqualified from contracting by any law to which they are subject. In case where the contract is sought to be avoided on any of the above grounds.

e. however. X. Again being an artificial person(and not a natural person) it cannot enter into contracts of a strictly personal nature e. as the case may be. Before discharge he also suffers from certain disqualifications e. 1000 against a promissory note executed in his favor. entered into a contract with Z for the purchase of a movable property for the benefit of the minor. on his attaining majority.g. Is the contract valid? Solution: Section to which the given problem relates: Section 10 . A. and obtained a loan of Rs. Is the second promissory note valid? 5. a guardian. has the money lender any right of action against the minor for the money lent. Can A be asked to repay the money? [Hint. A married woman can. purchase property or be an employee but he cannot sell his property which vests in the official receiver. A minor s agreement is void ab-initio as against him 2. can t be a magistrate or a director of company or a member of local body but he has the contractual capacity except with respect to his property. A company/ corporation is an artificial person created by law. A minor fraudulently represented to a money lender that he was of full age. he is just like an ordinary citizen. Joint-stock company and corporation incorporated under a special act. An adjudged insolvent (before an order of discharge ) is competent to enter into certain types of contracts i.contracts with respect to their separate properties provided they are major and are of sound mind. It cannot enter into contracts outside the power conferred upon it by its memorandum of association or by the provisions of its special act.g. After the order of discharge. on behalf of Y. No. or for damages for fraudulent misrepresentation? 4. borrows Rs 2000 form B and executes a promissory note for the amount in favor of B. Practical Problems Attempt the following problems. A. he can incur debts. the minor executes another promissory note in lieu of the first which is then cancelled. a minor. an infant. 500. giving reasons for your answers: 1. Insolvent. marriage. act as an agent of her husband and bind her husband s property for necessaries supplied to her. Is the borrower liable to repay the money? 3. They cannot enter into contracts with respect to their husbamds properties. an infant. A cannot be asked to repay the money. if he fails to provide her with these. a minor lends Rs. A. obtains a loan from B.

[Leading case: Subramanayan v. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Reason: This contract is for the benefit of minor.and Section 11. Decision: This contract is valid provided this contract is within the scope of the authority of guardian. a minor entered into contract with Y to supply food and clothes to his dependents. X. Y supplied the same but X refused to pay for the same. Subba Rao] 6.555 35 . Can Y recover anything? Solution: Section to which the given problem relates: Section 68. Decision: Y is entitled to be reimbursed from the property of such minor.

Reason: A person who has supplied the necessaries to a minor or those who are dependents on him is entitled to be reimbursed from the property of such minor. (2003). Student s Guide To Mercantile And Commercial Laws. Delhi. Tulsian (2002). a guardian. P. http://www. Business Law . N.C. Elements of Mercantile Law. Ltd. her minor daughter. [Leading case: Mohari Bibee v.indialawinfo. Reason: This contract was for the benefit of minor and a minor can be promisee.C. Delhi. Later on Z refused to marry.D. Vikas Publishing House Pvt. Can Y sue Z for damages? Solution: Sections to which the given problem relates: Sections 10 and 11. 7. Delhi. Pvt.html M. Business Law . Ltd. entered into a contract with Z whereby Z promised to marry her. Sultan Chand and Sons. Decision: Y can sue Z for damages. Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 36 11. X. Kucchal ( 2002). New Delhi. Tata Mc. Ltd.555 . on behalf of Y. Graw Hill Pvt. Dharmodas Ghosh] References Kapoor.com/bareacts/soga. Graw Hill Rohini Aggarwal(2003). Tata Mc.

Thus. according to Section 10 free consent of all the parties to an agreement is one of the essential elements of a valid contract. consent involves identity of minds or consensus ad-idem i. Undue influence .LESSON 8: FREE CONSENT Learning Outcomes After today s class you should be able to answer the following questions: The meaning of consent The various factors vitiating consent Introduction In today s lecture we shall study about another essential element of a contract that is free consent. subject to the provisions of Section. as defined in Section 15. or 4. Now we come to free consent Free Consent defined. It has already been pointed out in the earlier lecture that. Misrepresentation as defined in Section 18. 21 and 22.. But students do you know what is meant by consent? Consent Defined Section 13 of the Contract Act defines the term consent and lays down that Two or more persons are said to consent when they agree upon the same thing in the same sense. there is no real consent and hence no valid contract. for whatever reason. Henceforth the various factors which vitiate consent are Coercion. there is no consensus ad item among the contracting parties. 20.e. as defined in Section 17. or 5. Section 14 lays down that Consent is said to be free when it is not caused by 1. agreeing upon the same thing in the same sense. Coercion. or 2. Undue influence as defined in Section 16. Mistake. or 3. Fraud. If.

In such a case there is no consent at all. The Explanation to the Section further adds that it is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed. any act forbidden. there is no free consent and the contract is voidable at the option of the party whose consent was so caused (Sec. the agreement is void (Sec. The relatives of the deceased threatened the widow to adopt a boy otherwise they would not allow her to remove the dead body of her husband for cremation. the party. but for the vitiating circumstance the agreement would not have been entered into. undue influence.Misrepresentation Fraud Mistake Consent is said to be so caused when it would not have been given but for the existence of such coercion. with the intention of causing any person to enter into an agreement. fraud or mistake (Sec. the contract may turn out to be either voidable or void depending upon the nature of the flaw in consent to an agreement is caused by coercion. must show that. The various causes leading to flaw in consent discussed one by one in detail. Illustrations (i) A Madrasi gentleman died leaving a young widow. misrepresentation. in order to prove that his consent is not free . any property. But when consent is caused by bilateral mistake as to a matter of fact essential to the agreement. 14). 19 and 19A). undue influence. or had not been forced to agree. must prove that if he had known the truth. If was held that her consent was not free but induced by coercion. The widow adopted the boy and subsequently applied for cancellation of the adoption. Coercion Let us first define coersion Definition Section 15 of the Contract Act defines Coercion as follows: will now be Coercion is the committing or threatening to commit. the complainant must prove that if he had known the truth. In the absence of free consent . or had not been forced to agree. he would not have entered into the contract. This means that in order to bring a case within this Section. To put it differently. as any person who obstructed a . 20). misrepresentation or fraud. who alleges that his consent has been caused by any of the above elements which vitiate consent. to the prejudice of any person whatever.

unless the principal released him from all liabilities. if he does not let out his house to him .555 37 . paid the fine. The principal had to give a release deed as demanded. that the release deed was voidable at the instance of the Principal who was made to execute the release deed under coercion ( Muthia vs Karuppan).P. The consent of M has been induced by coercion. (iv) The Government gave a threat of attachment against the property of A. The adoption was set aside (Ranganayakamma vs Alwar Setti). A. would be guilty of an offence under Section 297 of the I.C. (ii) L threatens to shoot M.dead body from being removed for cremation. The payment of fine was LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. the son of A. Held. M agrees to let out his house to L. for the recovery of a fine due from B. (iii) An agent refused to hand over the account books of the business to the new agent sent in his place. Held.

may be directed at any person. if though his act not an offence by the law of England and although Section 506 of the Indian Penal Code was not in force. the above provision ( i.induced by coercion and therefore A was entitled to recover the money paid to remove wrongful attachment (Bansraj vs The Secy of State). afterwards sues B for breach of con-tract. threatens to shoot B if he does not let out his house to C. Illustration (Appended to Sec. A. 15) will apply. (Askari Mirza vs Bibi Jai Kishori) Threat to commit suicide. is not forbidden by the Penal code.P. In that case a person. . 15) A. Likewise it may proceed even from a stranger to the contract. causes B to enter into an-agreement by an act amounting to criminal intimidation under the Indian Penal Code. B s consent has been caused by coercion. a lunatic or a minor. Sec.C. it must be deemed to be forbidden by that Code as an attempt to commit suicide was punishable under section 09 of that Code.e. threatens to shoot B. has employed coercion. (b) A. Threat to file a suit. C agrees to do so. It was stated by the majority footings that though a threat to commit suicide was not punishable under the Indian Penal Code. it does not follow that the act . there arose a question as to whether a threat to commit suicide amounts to coercion. B agrees to let out his house to C. in favor of his brother in respect of certain properties which they claimed as their own. In Chikkam Ammiraju vs Chikkam Seshamma. The act constituting coercion. The transaction was set aside on the grounds of coercion. . For-example. and not necessarily at the other party to the agreement. 3. Illustrations (a) A. on board an English ship on the high seas. a friend of C if C does not let out his house to him. S iinp1y because a _an episcopes punishment. It does not matter whether the Indian Penal Code is or is not in force in the place where the coercion is employed . at the time or place where. To threaten a criminal or civil prosecution does not constitute coercion because it is not an act forbidden by the Indian Penal Code. If the suit is filed in India. 2. was done. the act. by a threat to commit suicide. Neither suicide nor threat to commit suicide is punishable under the Indian Penal Code: Only an attempt to commit suicide is punishable under it. induced his wife and son to execute a lease deed. The agreement has been brought about by coercion. But a threat to file a suit of a false charge constitutes coercion. A. for such an act is forbidden by the I. and the Lordships of the Madras High Court answered the question in the affirmative holding that this amounts to coercion. Their Leadership observed The term any act forbidden by the Indian Penal Code is wider than the term punishable by the Indian Penal Code. at Calcutta.

Effect of Coercion A contract brought about by coercion is voidable at the option. etc: or (c) Where he makes a contract with a person whose mental capacity of is temporarily or penitently affected by reason of age. thus: Under section 16(2) -A person is deemed to be in a position to dominate the will of another( a) Where he holds a real or apparent authority over the other. doctor and patient. he must restore any benefit received by him under the contract to the other party from whom received. guardian and ward. of the party whose consent was so caused (Sec. police officer and the accused. (i) the relations subsisting between the. for duress the act . solicitor and client. if the aggrieved party opts to rescind a voidable contract. In short. relation means a relation of mutual trust and confidence. The burden of proof that coercion was used lies on the party who wants to set aside the contract on the plea of coercion.g. old . parties are such that one of the parties is in a position to obtain an unfair advantage over the other. Duress. trustee and beneficiary. This does not show that their criminal acts are not forbidden by the Penal Code. The phrase in a position to dominate the will of the other is clarified by the same section under sub-section (2).or threat must be aimed at the life or liberty of the other patty to the contract or the members of his family: A threat to destroy or detain property will not amount to duress. This means that the aggrieved party shall either exercise the option to affirm the transaction and hold the other party bound by it. the relationship between master and the servant. Guru (spiritual adviser). Such a relationship is supposed to exist in the following cases. or repudiate the transaction by exercising a right of rescission. father and son.. or (b) Where he stands in a fiduciary relation to the other. 19). e. illness. or mental or bodily distress. because it includes threats over property also. Thus the scope of the term coercion. is wider. as defined in Section 15. As per Section 64.g. e. The term duress is used in English Law to denote illegal imprisonment or either actual or threatened violence over the person ( body) of another party of his wife or children with a view to obtain the consent of that party to the agreement. Fiduciary.May not be punished.and disciple. The second factor vitiating consent is Undue Influence Definition Section 16(1) defines the term Undue influence as follows: A contract is said to be induced by undue influence where..

solicitor and client. etc. (b) and (c). or where one of the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 38 11. (i) the other party was in a position to dominate. father and son. It is to be observed that for proving the use of undue-influence both the elements mentioned above. In other words. Presumption of Undue Influence Undue influence is presumed to exist under the circumstances men-tioned above in sub-clauses (a).. doctor and patient. for example. his will.555 . and (ii) the transaction was an unfair one. where the relationship between the contracting parties is that of master and servant. namely. must be established.illiterate persons.

Merely status of parties is enough to weave the existence of undue influence in these cases. to prove that the contract was not induced by undue influ-ence.on 1st Jan enfeebled by disease or age. there is no need of proving the use of undue influence by the party whose consent was so caused. B employs undue influence. by misuse of parental influence. (b) A. In cases where there is a presumption of undue influence the burden of proving that the person who was in a position to dominate the will of another. will lie upon the person who was in a position to dominate the will of the other [Sec. On a petition by A alleging undue influence. the burden of proof lies on A. the father. did not use his position to obtain an unfair advantage. Presumption of undue influence is also there. It will be for A to prove that he did not employ undue influence. He can rebut or oppose the presumption (i) That disclosure of facts was made. however. Burden of proof and rebutting the presumption. it lies on B. obtains. A employs undue influence. There is. is induced. (v) Creditor and debtor. a bond from B for a greater amount than the sum due in respect of the advance. by B s influence over him as his medical attendant. in case of a contract by or with a pardanashin woman. to agree to pay B an unreasonable sum for his professional services. no presumption of undue influence in the following cases: (i) Husband and wife (In case of persons engaged to marry. (iv) Landlord and tenant. (c) An old illiterate woman made a gift of almost the whole . having advanced money to his son B. the doctor. (iii) That the other party was in receipt of competent independent advice and his consent was free Let us study some illustrations in this repect Illustrations (a) A.parties to the contract is an old illiterate person. of a suit by B alleging undue influence. In these cases. (ii) That the price was adequate. undue influence shall have to be proved by the party alleging that undue influence existed. As undue influence is pre-sumed to exist if the relationship between contracting parties is that of father and son. the pre-sumption of undue influence will arise) (ii) Mother and daughter (iii) Grandson and grandfather.16(3)].

an agriculturist. misrepresentation or fraud. the Court has discretion to direct the aggrieved party for refunding the benefit whether in whole or in part or set aside the contract without any direction for refund of benefit. Effect of Undue Influence When consent to an agreement is caused by undue influence. 19-A). the onus has on the nephew to prove that the transaction is bona fide. and by undue influence. a money lender. the special feature of Section 19. induces B to execute a bond for Rs200 with interest at 6 percent per month. Persuasion and argument are also not in themselves undue influence. Undue influence implies mental and moral coercion so as to make the consent of one of the parties to the contract without freedom. who is not a party to the contract. (b) A. connection: (i) Lack of judgment. may make the contract voidable in other words. misrepresentation or fraud. It is sufficient If the third person m whom he is interested is benefited (Chirmamma vs Devenga Sangha). party whose consent was so caused. (Sec. advances Rsl00 to B. if a contract procured by undue influence is set aside. 19-A) Illustrations (Appended to Sec. who was managing her estate. just as section 19 so declares. if the party who was entitled to avoid it has received any benefit there under. lack of knowledge of facts or absence of foresight are generally not by themselves sufficient reasons for setting aside a contract on the ground of undue influence. under Section19A.of her property to her nephew. B. is that while in the case of rescission of a contract procured by coercion. On a petition by the old lady for setting aside the gift deed on the ground of undue Influence. Unconscionable Transactions . under threat of prosecuting A s son. it is not necessary that the person in a position to dominate the will of the other party use himself be benefited. it will be noticed that Section 19-A also declares a contract brought about by undue influence vojdable at the option of the aggrieved party. obtains a bond from A for the amount of the forged note. The Court may set the bond aside. well understood and free from undue influence. (ii) Undue influence by a person. any benefit received by the aggrieved party has to be restored under Section 64 of the Contract Act. the Court may set the bond aside. (a) A s son has forged B s name to a promissory note. Any such contract may be set aside either absolutely or. ordering B to repay the Rs100 with such interest as may seem just. If B sues on this bond. the agreement is a contract voidable at the option of the. because undue influence is presumed in such a case. In case of a contract brought about by coercion. upon such terms and conditions as the court may seem just. Thus. The following points must also be noted in this.

one is in a dominant position and makes an exorbitant profit of the others distress High rate of interest. That the moneylender was in a position to dominate the will of the borrower.e. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. These are such transactions where as between two con-tracting parties.555 39 .. Unconscionable bargains take place mostly in money lending transactions where moneylenders charge high rates of interest from needy borrower. The presumption of undue influence on the ground of high rate of interest is raised only when the following two things are proved: 1. rate of interest is excessive without any valid reason. and 2.Unfair or unreasonable bargains belong to the category of unconscionable transactions. That the bargain is unreasonable i.

It must be noted that both the above conditions must be proved for giving rise to a presumption of undue influence. It may be noted that the term pardanashin here refers to a woman who observes complete seclusion (parda) from contact with people outside her own family. The banker declines to make the loan except at an unusually high. This is a transaction in the ordinary course of business. the moneylender of his village. Pardanashin Woman As observed earlier. Baksha). (c) A. on equal footing (i. (b) A poor Hindu widow borrowed Rs 1. and was free to have independent advice in the matter. (ii) that she understood their implications. and one does not become pardanashin simply because she lives in some degree of seclusion Shaik Ismail vs Amir Bibi Further note that the protection ranted to ardent in woman is so extended to illiterate and ignorant ladies.S. It .i1uence Both.M. because of the custom of her community. who are equally exposed to the danger and risk of an unfair deal (Sonia Parshini vs . A. contract a fresh loan on terms which appear to be unconscionable. and (iii) that she freely consented to the contract.In such cases the law presumes that consent must have been obtained by undue influence and the burden of proving that there was no undue influence lies on the creditor.from a moneylender at 100 per cent per annum rate of interest for the purpose of enabling her to establish her right to maintenance. accepts the loan on these terms. the other party will have to satisfy the Court (i) that the terms of the contract were fully explained to her. For proving the absence of undue influence.e. will of the other party) or if there exists valid reason (like tight market conditions) for charging high rate of interest Illustrations (a) A being in debt .by her on the plea of undue influence and it is for the other party to prove that no undue influence was used.500 . There will be no presumption of undue influence and a transaction will not be set aside on ground of undue influence. It lies on the moneylender to prove that there was no undue influ-ence (Rannee Annapurni vs Swaminatha). coercion and undue influence. there is a presumption of undue influence in case of a contract by or with a pardanashin woman . Distinction between Coercion and Undue 1n. applied to a banker for a loan at the time when there is stringency in the money market.to B. She can avoid any contract entered . vitiate consent and make . merely because the rate of interest is high if both the parties are. rate of interest.lies on B to prove that the contract was not induced by undue influence [Illustration (c) to Section 16]. and the contract is not induced by undue influence [Illustration (d) to Section 16]. none of the parties is in a position to dominate the.

the. Coercion is mainly of a physical character involving mostly use of physical or violent force. Definition According to Section 18 Misrepresentation means and . either innocently or indecently . Whereas undue influence is of moral character involving use of moral force or mental pressure. misrepresent.may be either innocent or intentional or deliberate with an intent to deceive the other party.the consent of one of the parties to the contract unfree. Misrepresentation A representation means statement of fact made by one party to the other. for the former kind.. The burden of proof that coercion was used lies on the party whose consent was so caused. with an intention to induce the other party to enter into the contract. In law. Court has discretion to direct the aggrieved party for restoring the benefit whether in whole or in part or set aside the contract with any direction for refund of benefit. the consent of the aggrieved party is obtained by committing or threatening to commit an act forbidden by Indian Penal Code or detaining or threatening to detain some property unlawfully. however. any benefit received by the aggrieved party has to be restored under Section 64. there is presumption as to the same in the case of certain relationships. But the 2. the consent of the aggrieved party is affected from the domination of the will of one person over another. There is no criminal liability case of undueinfluence. the term misrepresen-tation and for the latter the term fraud is used. by any half statement of truth). In these cases there is no need of proving the use of undue-influence by the party whose consent was so caused. 3. There is no presumption of coercion by law under any circumstance. It may be expressed by words spoken or written or implied from the acts or conducts of the parties (e.g. In coercion. besides an action on contract. A representation when wrongly made. While in undue influence. 4. essential to the formation of the contract. in the case of rescission of a contract procured by I undue influence. is termed as a mi-representation. To put in differently. of the Contract Act. as per Section 19-A. either before or at the time of contract. relating to some matter. following are the points of distinction between the two: 1. In the case of undue-influence. 5. The party exercising coercion exposes himself to criminal liability under the Indian Penal Code. While in the case of rescission of a contract procured by coercion.

by misleading another to the prejudice or to the prejudice of any one claiming under him. a party to an agreement. or (c) Causing. however innocently. gains an advantage to the person committing it.555 . LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 40 11. in a manner not warranted by the information of the person making it. or (b) Any breach of duty which. of that which is not true. or anyone Claiming under-him. without an intent to deceive. to make a mistake as to the substance of the thing which is the subject of the agreement.includes: (a) The positive assertion. though he believes it to be true.

5. believes the statement to be true. per are. there is misrepresentation. Illustration. . This is a misrepresentation. for instance. unintentionally keeps quite. Sulphur. 50. A. If a person makes an explicit statement of fact not warranted by his information (i. there is misrepresentation. Note. that a partial non-disclosure may also constitute a misrepresen-tation. however. Illustration. under an honest belief as to its truth though it is not true. Otherwise he will be guilty of misrepresentation. A says to B who intends to purchase his land. he was held guilty of misrepresen-tation (Dimmock vs Hallett). . (c) Causing mistake about subject-matter innocently If one of the parties induces the other. In such a case.000. when the contract of sale was signed. correctly states that the monthly sales are Rs.Thus. Negotiations lasted for five months. The buyer would not have purchased the wheat but for the representation. had been used in 5 out of 200 acres of land. It was held that there was misrepresentation and B was entitled to rescind the contract ( With vs O Flanagan). without any reasonable ground). A. Illustration A before signing a contract with B for the sale of business.e. cannot be held to amount to a positive assertion. where a vendor of land told a purchaser that all the farms on the land were fully let. it transpires! that the land produces only 7 quintals of wheat.000 a month. as per Section 18. but inadvertently omitted to inform him that the tenants had given notice to quit. (b) Breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice. in a contract of sale of 500 bags of wheat . During this period the sales dwindled to Rs. though innocently. the person making the statement comes under an obligation to disclose the change in circumstances to the other party. the seller made a representation that no sulphur has been used in the cultivation of wheat. There is a misrepresentation. there is misrepresentation in the following three cases: (a) Positive assertion of unwarranted statements of material facts believing them to be true. My land produces 10 quintals of wheat per acre. It may be noted that a mere expression of opinion or words of commen-dation for example in a sale of land a mere general statement that the land is fertile. although he did not have sufficient grounds for the belief later on. it became false to the knowledge of the person making it.. This clause comes those cases where a statement when made was true but subsequently before it was acted upon. to commit a mistake as to the quality or nature of the thing bargained.

may either avoid the contract or may insist on its being carried out. A. which show that only 400 maunds of indigo have been made. by a misrepresentation. Fraud The term fraud includes all acts committed by a person with an intention to deceive another person. B examines the accounts of the factory. Exception. if the represen-tation made had been true (Sec. It follows that for alleging misrepresentation. either expressly or impliedly. the aggrieved party has two alternative courses open to him (i) He can rescind the contract. Misrepresentation does not entitle the aggrieved party to claim damages by way of interest or otherwise for expenses occurred. Effects of Misrepresentation In case of misrepresentation. or must have become untrue (iv) The representation must have been instrumental in inducing the other party to enter into a contract (As per the Explanation to Section 19). set. set is made in Japan. 19). B may either ask for replacing the set by a Japanese make set or may keep the Indian make set and claim the difference in price between that set and a Japanese make set. the following four things are nec-essary (i) There should be a representation. The above remedy is lost. treating the contract as voidable. . From the foregoing discussion.V. made innocently. is guilty of misrepresentation. B.Let us now understand the essentials of misrepresentation Essentials of misrepresentation. leads B erroneously to believe that 500 maunds of indigo are made annually at A s factory. The contract is not voidable on account ofA s misrepresen-tation (Illustration ( b) to Section 19]. B. Illustration A. thereupon buys the T. or (ii) He may affirm the contract and insist that he shall be put in the position in which he would have been. innocently in good faith tells B that his T.V. However. (ii) The representation must relate to facts material to the contract and not to mere opinion or hearsay (iii) The representation must be. it comes out to be an Indian make. with an honest belief as to its truth and without any desire to deceive the other party. After this B buys the factory. had the means of discovering the truth with ordinary diligence. if the party whose consent was caused by misrepresentation. In the latter case. Illustration A.

If a representor honestly believes his statement to be true. or by his agent. In order to be called fraudulent representation the false statement must be made intentionally. Thus a false statement intentionally made is fraud. to enter into the contract: 1. or even negligent he may have been. stupid. An absence of honest belief in the truth of the statement made is essential to constitute fraud. The suggestion that an act is true when it is not true by one who does not believe it to be true. he cannot be liable in deceit no matter how ill-advised.555 41 . Lord Herschell gave the definition of fraud in LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. or with his connivance.. with intent to deceive or to induce another party thereto or his agent.Definition According to Section 17. fraud means and includes any of the following acts committed by a party to a contract.

A knows that the mare has a cracked hoof which he fills up in such a way as to defy detection or on enquiry from B. Any other act fitted to deceive. It is a clear case of fraud from X s side. Caveat Emptor or Buyer Beware is the principle in all contracts of sale of goods. if not impossible. There is fraud on the part of A and the agreement can be avoided by B as his consent has been obtained by. the fertility of man s invention in devising new schemes of fraud is so great that it would be difficult. the general rule of law being let the buyer beware [Illustration (a) to Section 17]. Note that mere failure to pay. Taylor). The active concealment of a fact by a person who has knowledge or belief of the act. 2. 3. Any such act or omission as the law specially declares to be fraudulent. Active concealment of a material fact is taken as much and as if the existence of such fact was expressly denied or the reverse of it expressly stated. where there is no duty to disclose. (b) Where a man and a woman went throug a ceremony of marriage without any intention on the part of the husband to regard it as a real marriage. A says nothing to B about the horse s unsoundness. A affirms that the mare is sound. Illustrations (a) A. Illustrations (a) X purchases certain goods from Y on credit without any intention of paying for them as he was in insolvent circumstances. This sub-section refers to the provisions in certain Acts which make it obligatory to disclose relevant facts. a horse dealer sells a mare to B. it was held that the consent of the wife was obtained by fraud and that the marriage was mere pretence. The defect is subsequently dis-covered by B. This is not fraud because A is under no duty to disclose the fact to B. or recklessly careless whether it be true or false. 4.Derry vs Peep as. All surprise. trick. (b) A. cunning. A promise made without any intention of performing it. If a man while entering into a contract has no intention to person his promise. dissembling and other unfair way that is used to cheat anyone is considered fraud and sub-section (4) is obviously intended to cover all those cases of fraud which cannot appropriately be covered by the other subsections. for instance under Section 55 of the Transfer of Property Act. a false statement made knowingly or without belief in its truth. the seller of immovable property is . 5. to confine fraud within the limits of any exhaustive definition. there is fraud on his part. to B a horse. where there was no original dishonest intention. fraud. Mere nondisclosure is not fraud. is not fraud. Thus. As a rule the seller is not bound to disclose to the buyer the faults in the goods he is selling. (Shireenl vs John J J. sells by auction. which he knows to be unsound.

solicitor and client. silence is fraudulent in contract of utmost good faith i. unless (i) The circumstances of the case are such that. equivalent to speech. of material facts within his knowledge. When the parties stand in a fiduciary rela-tion to each other.. in order to allege fraud. A is not bound to inform B [Illustration (d) to Section 17]. The-explanation declares that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.g. the act complained of must be brought within the scope of the acts enumerated above. being traders. the roof has a crack) or in the seller s title (e. A has private information of a change in prices which would affect B s willingness to proceed with the contract. Thus. sold his own shares to the client. and trustee and beneficiary. 2. Illustration A and B. the property is mortgaged). In other words. Such statements do not ordinarily amount to fraud.g. The following contract come within the class of unberrimae fides contracts. An omission to make such a disclosure amounts to fraud. or (ii) Silence is. Examples of a fiduciary relationship include those of principal and agent.bound to disclose to the buyer all material defects in the property (e. (a) Fiduciary relationship. Can Silence be Fraudulent? The Explanation to Section 17 deals with cases as to when silence is fraudulent or what is sometimes called constructive fraud. due to peculiar relationship of the parties or due to the fact that one of the parties has peculiar means of knowledge which are not accessible to the other. The land is very fertile is simply a statement of opinion or fur products are the best in the market is merely a commendatory expression. It therefore follows that 1.e contracts unberrimae fides . enter upon a contract. A mere expression of opinion or commendatory express is not fraud. Silence is fraudulent. if the circumstances of the case are such that it is the duty of the person keeping silence to speak . guardian and ward.. These are contracts in which the law imposes a duty of abundant disclosure on one of the parties thereto. regard being had to them. in itself. without disclosing . the person in whom confidence is reposed is under a duty to act with utmost good faith and to make a full disclosure of all material facts concerning the transaction known to him. As a rule mere silence is not fraud because there is no duty cast by law on a party to a contract to make a disclosure to the other party. it is the duty of the person keeping silence to speak. Illustrations (i) Where a broker who was employed to buy shares for the client.

this fact to him and without obtaining his consent therefore. (ii) Where solicitor purchased certain property from his client nominally for his brother. but really for himself. (b) Contract of insurance-In contracts of marine. fire and life insurance. it was held that the sale can be avoided by the client (Regier vs Campbell-Stuart).555 . it was held that the sale can be avoided by the client. the insurer contracts on the basis that all material facts have been communicated to him. even if the transaction was perfectly proper one (Macpherson vs Watt). and it is an implied LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 42 11.

if the party suffers injury because of unsound horse. where a man was fraudulently induced to buy a house. (e) Share allotment contract: Promoters and directors.condition of the contract that full disclosure shall be made. for example. He can rescind the contract i. if the representation made had been true (Sec. equivalent to speech.). mortgage debt of deemed.. (d) Contracts of family settlements. If the horse is unsound A s silence is fraudulent [Illustration © to Section 17]. A concealment or misstatement of a material fact will render the contract void (Ratan Lal vs Metropolitan Co. [Illustration (c)to Section 19]. (c) Contract of marriage engagement . Such a contract is not binding if either party has been misled by the concealment of material facts. The aggrieved party can also sue for demand if any. which was not disclosed despite enquiry. The assured. of the contract) . in case of life insurance. The estate is subject to a mortgage. or may insist on its being carried out and the. B may either avoid the contract. Similarly. 3. disease etc. Where. disclose all information regarding the company with strict and scrupulous accuracy. B says to A. compensation can be demanded. A says nothing. Every material fact must be disclosed by to parties to a contract of marriage otherwise the other party is justified in breaking off the engagement (Haji Ahmed vs Abdul Ganj). fraudulently informs B that A s estate is free from en-cumbrance. Effect of Fraud A party who has been induced to enter into a contract by fraud. Silence is fraudulent where the circumstances are such that silence is. 19). who issue the prospectus of a company to invite the public to subscribe for shares and debentures. contract being voidable at his option (Sec. Fraud is a civil wrong hence compensation is payable. has the following remedies open to him: 1. and that if there has been non: disclosure he shall be entitled to avoid the contract. possess information which is not available to general public and as such they are required to. . For instance..g. he was allowed to recover the expense involved in moving into the house as damages (in addition to rescission.or 2. Hence A s silence is equivalent to speech. 19). in itself. I shall assume hat the horse is sound.If you do not deny it. therefore must disclose to the insurer all material facts concerning the risk to be undertaken e. He can ask for restitution and insist that the contract shall be per-formed. B thereupon buys the estate. Illustration A. Contracts of family settlements and arrangements also require full disclosure of all material facts within the knowledge of the parties to such contracts. and that he shall be put in the position in which he would have been.e he can avoid the performance of the contract.

For giving rise to an action for deceit. But his right of rescission is lost in the following cases: 1. Loss of Right of Rescission We have observed earlier that a contract brought about by coercion. the contract is voidable even if the fraud could be discovered with ordinary diligence. without any intention to deceive. misrepresentation or fraud is voidable at the option of the party whose consent was so caused. undue influence. In cases. Fraud implies an intention to deceive. Affirmation. gives only the right to avoid the contract and there can be no suit for damages 3. of fraudulent silence. be recalled that coercion as undue influence by a stranger to a contract affect the contract. (iv) The plaintiff must be thereby idemnified. the contract is not voidable. this is no defence i. truth with ordinary diligence will prevent the party from avoiding the contract. no action will lie. He has the option either to rescind the contract or to affirm it. whereas misrepresentation is innocent. If after becoming aware of his right to rescind. Misrepresentation. the aggrieved party affirms the transaction either by . 19 given in the Act). the following points deserve special attention: (i) Fraud by a stranger to the contract does not affect contract.e. In case of misrepresentation. but for this. Fraud is a civil wrong which entitles a party to.[Doyle vs Olby (Ironmongers) Ltd ]. A deceit which does not deceive gives no ground for action. the aggrieved party would not have entered into the contract. 2. It is a common saying that there is no fraud without damages.. the contract is voidable even though the party defrauded had the means of discovering the truth with ordinary diligence.. if the party whose consent was so caused had the means of discovering the truth with ordinary diligence ( Exception to Sec. the fact that the aggrieved party had the means to discover the. Special points. (iii) The plaintiff must have been actually deceived by fraudulent state-ment.e. Distinction Between Fraud and Misrepresentation The following are the points of distinction between the two: 1. (ii) Fraudulent representation must have been instrumental in inducing the other party to enter into the contract i. it is deliberate or wilful. claim damages in addition to the right of rescinding the contract. Unless the plaintiff has sustained a damage or injury. But In case of fraud: excepting fraud by silence. Note that in other cases of fraud. It may.

if a person.555 43 . 2. attempting to sell the good are some other examples of implied affirmation. where the subject-matter LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. So. who has purchased shares on the faith of a misleading prospectus. he will not be permitted to avoid the contract.. Resestitution not possible. Paying for the goods purchased (if not paid so far). but accepts dividends paid to him. for example. e.g.express words or by an act which shows an intention to affirm it. subsequently becomes aware of its falsity. If the party seeking rescission is not in a positiol 1 to restore the benefits he may have obtained under the contract. the right of rescission is lost.

Mistake of law. and the right to rescind will no longer be available. the contract is valid). Rights of third parties. disposes them off to a bona fide party. if one of the parties makes a mistake of law through the inducement. if before the contract is rescinded third parties. Every one is deemed to be conversant with the law of his country. Mistake of law. As such the right of rescission may also be lost be too long-a-delay 4. (b) Mistake of foreign law. whether innocent or otherwise. Accordingly. 3. acquire rights in the subject matter of the contract. 2. Here the agreement is void in case of bilateral mistake only. the right to rescind the contract cannot be exercised. Section 21 declares that a contract is not voidable because it was caused by a mistake as to . However. Mistake of fact.e. before the seller rescinds the contract. Mistake of Law Mistake of law may be of two types: (a) Mistake of law of the country. (a) Mistake of law of the country or Mistake of law. bona fide for value. A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation: the contract is not voidable (i.of the contract has been consumed or destroyed. of the other party. those rights are valid against the party misled. Since the. therefore. as explained under the subsequent heading. Illustration (To Sec. no relief can be granted on the ground of mistake of law of the country. is no excuse and It does not give right to the parties to avoid the contract Stating the effect of mistake as to law. and hence the maxim ignorance of law is-no excuse. being a voidable contract. Mistake of Fact Mistake of fact may be of two types: . Mistake Mistake may be defined as an erroneous belief concerning something. 21). Lapse of time. contract is valid until rescinded.34 Thus where a person obtains goods by fraud and. Mistake of foreign law stands on the same footing as the mistake of fact . It may be of two kinds: 1.. the contract may be avoided (b) Mistake of foreign law.any law in force in India. It may be treated as evidence of affirmation where the party misled fails to exercise his rights promptly on discovering the representation to be untrue of on becoming aware of the fraud of coercion. the seller cannot then rescind (Phillips vs Brooks Ltd 35).

there being entire absence of consent. In fact in such cases.such which goes to the very root to the agreement. or ii. the fact must be. and pays Rs. having two houses A and B.000. Unilateral mistake. On the basis of judicial decisions. (ii) A stake must relate to some fact and not to judgement or opinion etc. This has been termed by Salmond as error in consensus as distinguished from error in causa (i. the ship conveying . the contract remains good. A has to blame himself for his ignorance of the true value of the motorcar and he cannot avoid the contract on the ground of mistake. In case . or if it has never been in existence. Bilateral mistake. If at the time of the agreement and unknown to parties.000. (ii) The fact must be essential to the agreement -i. when it is only worth Rs 40. then the agreement is void (Bell vs Lever Bros. 80. there is no agreement at all. it turns out that. misrepresentation or fraud).e. Here there is no real consent and the agreement is void. Section 20 provides that where both the parties. Both the parties should misunderstand each other so as to nullify consent. the agreement is void Thus for declaring an agreement void ab-inito under this Section.e.of bilateral mistake of essen-tial fact. the subject-matter of the agreement has ceased to exist. thinking that it is worth Rs 80.. the following three conditions must be fulfilled (i) Both the parties must be under a mistake i. thinks of house B and agrees to buy it. there is a bilateral mistake.000 for it. Where the parties to an agreement misunderstood each other and are at cross purposes. undue influence.i.e. where consent is not free and is caused by coercion.). the agreement is void ab-initio. An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact (Explanation to Section 20) Illustration (i) If A buys a motorcar. Bilaterial mistake. to an agreement are under a mistake as to a matter of fact essential to the agreement. Here there is no real correspondence of offer acceptance. Illustrations (a) A agrees to sell to B a specific cargo of goods supposed to be on is way from England to Bombay. the mistake must be mutual. before the day of the bargain. offers to sell house A. and N not knowing that M has two houses. Illustration M.. each party obviously understanding the contract in a different way. the mistakes which may be covered under this condition may broadly be put into the following heads (a) Mistake as to the existence of the subject-matter of the agreement.

Where both parties are working under mistake as to the-identity of the .the cargo had been cast away. The agreement is void. Neither party was aware of these facts. agrees to buy from B a certain horse. party had one thing in mind and the other party had another.. the agreement is void for want of consensus-ad-idem LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 44 11. and the goods lost.555 . e. It turns out that the horse was dead at the time of-the bargain. one. though neither party was aware of the fact. (b) Mistake as to the identity of the subject-matter. (b) A.subject-matter i. The agreement is void.

H sent 50 rifles. (e) Mistake as to the quality of the subject matter.Illustration. only in a very special circumstance. Illustration. P telegraphed Send three rifles. Normally a mistake as to title of the seller does not affect the validity of the contract because Section 14 of the Sale of Goods Act. That being so. Accordingly. H filed a suit for damages for non-acceptance of 47 rifles. if the subject-matter is something essentially different. there was no consensus-adidem and therefore no binding contract. unless otherwise agreed. The Court observed: the defendant meant one peerless and the Plaintiff another. imposes an implied condition s to the title of the seller in a contract of sale. The telegraph clerk transcribed the message as Send the rifles.seller is taken to warrant his title to the property sold and he may be made liable in damages for breach of the condition. and there were two ships of that name sailing. though contrary to the belief of both parties at the time A was tenant for life by inheritance of the fishery and B had no title at all. even though both the parties contract under a mistaken belief as to the title of the seller. (a) A agreed to take a lease of fishery from B. If both the parties are working under a mistake as to the quantity of the subject-matter. fact the linen was Georgian and there was a mutual mistake of both description . It is. (d) Mistake as to the quantity of the Subject Matter. where a person agrees to purchase property or goods which unknown to himself and the seller. a . In. the agreement is void. is his own already. (Reffles vs Wichelaus) (c) Mistake as to the title of the subject-matter. held here was no contract. that the agreement is void ab-initio and none of the parties can be made liable in damages.lieved it to be. Of course P must pay the price of three rifles accepted by him (Henkel vs Pope). Where there was a contract of the sale of ascertain quantity of cotton arriving per ex ship Peerless. Illustration P enquired about the price of rifles from H stating that he may buy as many as 50. from what the parties be. and the parties had in mind different ships at the time of entering into the contract.e. H quoted the price.. It was held that the lease agreement was void (Copper vs Phibbs). It was held that there was no contract as there was no consent and it made no difference even if the mistake was caused by the negligence of a third party. Illustrations (a) A set of table-linen was sold at an auction by a with the crest of Charles I and the authentic property of that monarch. If there is a mutual mistake of both the parties as to the quality of the subject-matter I. 1930. P accepted only three and returned 47. the agreement is void.

Accord-ingly. Held . e.he must . . Where only cine of the contracting parties is mistaken as to a matter of fact. . Thus. The agreement Strictly speaking it is the mistake as to substance of the subject-matter going to the very root of the agreement and affecting . For. A sold certain seeds to B.blame himself and cannot avoid the contract. in the absence of any misrepresentation or guarantee by the seller. (Galloway vs Galloway). Both parties honestly believed that the seeds were two years old. the mistake is a unilateral mistake. Contract valid.allowed as a defence in avoiding. misrepresentation.. which is believed by both the parties to be a race horse. Thus as rule.parties as to the quality of subject-matter. an unilateral mistake is. whether caused by fraud.on the validity of a contract. Actually the seeds proved to be only one year eleven months old. the agreement was held void as the parties entered into the contract under a false and fundamental assumption that they were lawfully married. But later on it time out to be a cart horse.. or otherwise. not . (b) A. Unilateral mistake. n t e basis of judicial deci-sions. Regard-ing the effect of unilateral mistake . it has no effect on the contract and the contract remains valid. in which case the contract is voidable at t e option of aggrieved art. The contract cannot be avoided as the mistake does not affect the substance of the transaction. Section 22 provides that a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. contracts to sell B a particular horse. however. With a view to elucidating the above mentioned various possibilities regarding the validity of a contract under unilateral mistake. 2. If a man due to his own negligence or lack of reasonable care does not ascertain what he is contracting about. (f) Mistaken assumption going to the root of agreement. Vs Smith Marriott). etc. may make an agreement void ab-intio. in certain exceptional cases even an unilateral mistake.the whole consideration which makes it void and not the mistake as to quality . the agreement was void ( Nicholson & I enn. The contract i. we shall now discuss them in some detail. the principle of caveat emptor (let the buyer beware) clearly states that there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale and the buyer must be held to have taken the risk that the goods sold might prove defective or might in some way be different item that which the parties believed it to be. in case unilateral mistake a contract remains valid unless the mistake is caused by misrepresentation or fraud. where a man and woman entered into an agreement for separation on the erroneous assumption that their marriage was valid. Illustration.

when in fact it was for one year only.555 45 . he could not avoid the contract because it was his unilateral mistake caused by his own negligence.Illustrations (a) Where the government sold by auction the right of fishery and the plaintiff offered the highest bid thinking that the right was sold for three years. He ought LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.

etc. since he had a set-off which he wished to enforce against him. The rice -is. with whom the defendant. It is important to note that in case of mistake as to identity of person contracted with. whenever the identity of the person with whom one intends to contract is important element of the contract. and despite the mistake the contract remains valid. changed hands. Contract voidable. on the part of the other party. Illustration. new. In the following two cases. however. has a horse with a hole in the hoof. is guilty of fraud and as such on discovery of the defect B can avoid the contract because his unilateral mistake has been caused by A s fraud Agreement void ab-initio. The rule of law is that a contract apparently made between A and C is a complete nullity. there can be no real formation of an agreement by proposal and acceptance unless a proposal is accepted by the person to whom it is made. purchases the horse under the impression that the horse is sound. Singh vs Unon of India). Jones sent an order for goods to. Boulton. where such identity is important. If the unilateral mistake is caused by fraud or misrepresentation. it was the intention of A to contract only with B. The rule of caveat emptor (let the buyer beware) of the Sale of Goods Act is generally applicable in such cases of unilateral mistake as to quality of subjectmatter of a contract. party. Jones consumed the goods of the belief that thy had been supplied by Brocklehurst. alleging that he had intended to contract with Brocklehurst personally.. sue3d Jones for the . Thus. taken over the business of one Brocklehurst. so fills it up that the defect cannot be discovered on a reasonable examination. X cannot avoid the contract. no contract will arise even though there is a unilateral mistake only: 1. When Boulton demanded. the contract is void-able and can be avoided by the injured. a mistake with regard to the person contracted with destroys his consent and consequently annuls the contract. therefore. (a) In Boulton vs Jones Boulton had. Illustrations. B. Jones. for. if the inference from the faces is that to the knowledge of C. A. Brocklehurst. the payment the of the goods supplied. by sample under the impression that the rice is old. (b) X buys rice from Y. Identity of person contracted with is important either when there is a credit deal or when one party has a set-off agilest the other party. had been accustomed to deal. which Boulton supplied without informing hi131 that the business has . Mistake as to the identity _contracted with. A.to have ascertained the tenure of fishery before bidding at the auction (A. the contract is not merely voidable but is absolutely void. and against whom he had a set-of. even if the mistake is committed because of fraud or misrepresentation of another party. Here A.A. where the con-sent is given by a party under a mistake which is so fundamental as goes to the root of the agreement and has the effect of nullifying consent. Jones refused to pay.

Said. Cundy & Co. On coming to know the true facts. mistook his order for that of Blenkiron & Co. the rogue. Hence the specialty of a mistake as to the identity of person contracted with becomes clear. B cannot give himself any right under it. therefore. cannot negative the consent. it must return them or pay their price to Lindsay & Co. in the same town. Pollock C. The Court of Appeal held that owing to mistake as to identity of contracting party caused by Blenkarn. Lindsay & Co. (b) In Said vs Butt Butt.. knowing this. for them. With this ticket Said went to the theatre but was refused admission. and dispatched the goods. for example. It was held that Jones was not liable to pay for the goods. to the prejudice of third parties who later deal in good faith with the fraudulent person. introduces himself as Y and purchases some goods for cash. Thus ifX enters a shop. the contract is absolutely void. taking advan-tage of the similarity of his name with that of a big company named Blenkiron & Co.. would have been merely voidable for fraud. asked a friend to buy a ticket for him. Thus where X enters into a contract with Y. one can pass a good title to a bonafide purchaser for value. It can only Vitiate consent. falsely representing himself to be a richman. for recovery of goods.price.. mistakes to the identity of a party is to be distinguished from mistake as to the attributes of the other party. the contract is . Further. Notice that in the above case if the contract between Blenkarn and Lindsay & Co. the contract is only voidable at the option of Y. Lindsay & Co.. placed an order with Lindsey & Co. Mistake as to attributes.. for supply of certain goods on credit and signed the order in such a way as to look like that of Blenkiron & Co. and hence the agreement was void ab-initio and Blenkarn got no title to the goods which he could pass to Cundy & Co. there was no consensus of mind which could lead to any agreement whatever between Blenkarn and Lindsay & Co. mistake as to identity will not avoid a contract. filed a suit on Cundy & Co. a bona fide purchaser for value. As Cundy & Co. Again where the identity of the party contracted with is. would have been entitled to retain the goods as it had taken them in good faith for value. even if the mistake is committed because of misrepresentation or fraud of another party. because in case of a voidable contract before it is repudiated. and did not pay Lindsay & _o. It. Said filed a suit for damages for breach of contract.. obtained no title to the goods.. Held that there was no contract because the theatrical company never intended to contract with Said.. immaterial... as to the solvency or social status of that person. observed. it is a rule of law that if a person intends to contract with A. makes the contract merely voidable for fraud.) (c) In Cundy vs Lindsay A fraudulent person named Blenkarn. the managing director of a theatrical company... that in such a case. who was a very bad critic of all the plays of _11e company. Blenkarn took delivery of the goods and sold them to Cundy & Co. (Notice that in the given circumstances the identity of the plaintiff was a material element in the formation of the contract..B. gave instructions that no ticket was to be sold to Said.

Mistake as to the nature and character of a written document.555 . The second circumstances which even an unilateral mistake may make a con-tract absolutely void is LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 46 11. 2.valid.

who is trying to sell an unsound horse. sound and pins it on the stable door. (b) A blind man signed what he thought was a compromise petition. (c) M. as her mind did not go with her signature (Bala Devi vs Santi Mazllmda). and there had already been without his knowledge. Will he succeed? . a bill of exchange . In this case made a very interesting observation was made: It was as if he had written his name in a lady s album. Practical Problems Attempt the following problems. A. on the other side of the paper. sells a horse to B knowing fully well that the horse is vicious.. he never did sign the contract to which his name is appended and the agreement is void abinitio.where the consent is given by a party under a mistake as to the nature and character of a written document.000 thinking it was a guarantee. even if one party s consent is induced by misrepresentation of another. an old man with feeble sight. The rule of law is that where the mind of the signer did not accompany the signature. The document was held to be void. e. He buys the horse and finds later on the horse to be unsound. the document was held to be void (Hem Singh vs Bhaar). Yes. B comes to examine the horse but the certificate goes unnoticed by him. the sale is valid. forges a veterinary surgeon s certificate. It was held that M was not liable (Foster vs Mackin-non). Is the sale valid? [Hint. or in the fly-leaf of a book. stating that the horse is.. It should be borne in mind that in the aforesaid type of mistake. Illustrations (a) An old illiterate woman executed a deed under the impression that she was executing a power of attorney authorising her nephew to manage her estate. i.. he did not intend to sign. but was in fact a release. A does not disclose the nature of the horse to B. ] 2. giving reasons for your answers: 1. the con-tract is not merely voidable but is entirely void and the third party would acquire no rights (Ningawwa vs Byrappa). because A is under no duty to disclose the fault to B. the general rule of law being let the buyer beware. The evidence showed that the woman never intended to execute such a deed of gift nor was the deed read or explained to her. A. while in fact it was a deed of gift in favour of her nephew. on the fraudulent representation of another. . signed a bill of exchange for £ 3. He wants to avoid the agreement under the plea that he has been defra6ded. in contemplation of law. or on an order for admission to the Temple Church.

X offers to sell Y a painting which X knows is a copy of a well known masterpiece.000. Y signs the necessary document for the sale of house and receives the pay-ment. B has not therefore been deceived by the Certificate actually and a deceit which does not deceive is not fraud-. Later on. as it has been obtained by committing an act.Sections 15 and 72. Later on. Reason: Y s consent is not free. there is a contract. Later on. Will he succeed? Solution: Sections to which the given problem relates: . The contract is absolutely void as there is a mutual mistake of both the parties as to the substance or quality of the subject-matter going to the very root of the contract. Y wants to avoid the contract. Reason: Y s consent is not free as it has been obtained by giving a threat to commit an act which is forbidden by the Indian Penal Code.] . 5. Does this result in ac6ntract? [Hint.000 which he has received from X. Y assigns the necessary documents for the sale of house and receives the pay-ment.] 4. 6. Will he succeed? Solution: Sections to which the given problem relates: Sections 15 and 72.] 3. X threatens to kill Y s son if Y does not sell his house to Z for Rs 1. X threatens to kill Y s son if Y does not sell his house to X for Rs 1.[Hint. thinking that the painting is an original one and that X must be unaware of this. 7.00. Y. Y wants to avoid the contract. Y signs the necessary documents for the sale of house and receives the pay-ment.00.00.00. as per Section 20. Decision: Y can avoid the contract on the ground of coercion but he will have to return Rs 1. X buys from Y a painting which both believe to be the work of an old master and for which X pays a high price. In case of bilateral mistake of essential fact. the agreement is void ab-initio. and despite the mistake the contract remains valid.00. which is forbidden by the Indian Penal Code.000. B will not succeed because he bought the horse after his examination and not on the basis of the Certificate. Yes. The rule ofCaveat Emptor applies in case of unilateral mistake as to quality of subject matter of a contract. Discuss the validity of the contract? [Hint. The painting turns out to be only a modern copy. Will he succeed? Solution: Sections to which the given problem relates: Sections .000 which he has received from X. immediately accepts X s offer.000. Y wants to avoid the contract. Decision: Y can avoid the contract on the ground of coercion but he will have to return Rs 1. X threatens to kill Y if he does not sell his house to X for Rs 1.

Decision: Y can avoid the contract on the ground of coercion but he will have to return Rs 1. his wife. by a threat to commit suicide induced Y.000 which he has received from X. 8. to execute a release deed in favor of his brother in respect of certain property.15 and 72. Reason: Y s consent is not free as it has been obtained by committing an act which is forbidden by the Indian Penal Code. Are Y and Z bound by such release deed? Solution: Section to which the given problem relates: Section 15. Decision: Y and Z are not bound by such release deed. X. his son. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. and Z.00.555 47 .

http://www. physically infirm and mentally in distress. Student s Guide To Mercantile And Commercial Laws. Notes: LEGAL ASPECTS OF BUSINESS . Delhi. Vikas Publishing House Pvt. New Delhi. [Leading case: Ranee Annapurni v. Kucchal ( 2002). Sultan Chand and Sons. a poor Hindu widow. Elements of Mercantile Law. Delhi. [Leading case: Ammiraju v. executed a gift deed of his properties in favour of Y his nearest relative who was looking after his daily needs and managing his cultivation. Prithi Singh] 10. an illiterate old man of about 90 years.Reason: The consent of Y and Z is not free as it has been obtained by threatening to commit an act which is deemed to be forbidden by the Indian Penal Code. Swaminatha] References Kapoor.C. Pvt.Is X bound by this gift deed? Solution: Section to which the given problem relates: Section 16(2). Tata Mc. Seshamma] 9. X. Tulsian (2002).C. Ltd. Ltd. X is not bound by this gift deed. Decision: This transaction appears to be an unconscionable. Reason: Not only the rate of interest is too high but also the lender has used the circumstances of poor Hindu widow to obtain an unfair advantage.com/bareacts/soga. was in great need of money to establish her right to maintenance. Graw Hill Pvt. Business Law . Reason: Y s consent is not free as it has been obtained by exercising undue influence because Y was in position to dominate the will of X [Leading case: Sher Singh v.html M.a.indialawinfo. Delhi. Business Law . Ltd. Decision: No. P. X. She took a loan of Rs 1.D. (2003). Graw Hill Rohini Aggarwal(2003). Is this transaction an unconscionable? Solution: Section to which the given problem relates: Section 16(3).500 bearing a rate of interest of 100% p. Tata Mc. N.

© Copy Right: Rai University 48 11.555 .

every agreement of which the object or con-sideration is unlawful is void. If the consideration or object for a promise is such as is . If it is forbidden by law. What Considerations and Objects are Unlawful? According to Section 23. They have committed no offence. The court observed that although the consideration of the contract was lawful but the object was unlawful because the purpose of the parties was to defeat the provisions of the Insolvency Law. and the consideration or the object of an agreement is unlawful in the following cases: 1. The word object here means purpose or design. If the object or consideration is unlawful for one or the other of the reasons mentioned in Section 23. where a person. it was held that the agreement was void and the transfer was inoperative (Jajlar Meher Ali vs Budge Budge Jute Mills Co. unless it is expressly punishable by law or amounts to a criminal conspiracy are not liable to punishment. The use of the word illegal is somewhat a misnomer here. ). transferred his property to one of his creditors with the object of defrauding his other creditors. It usually connotes a punishable offence. but the parties to a so called illegal agreement.LESSON 9: LEGALITY OF OBJECT AND CONSIDERATION Learning Outcomes After todays class you should be able to answer the following questions: The legality of object and consideration The consequence of the unlawful object or consideration The effect of illegal agreement on collateral transaction Introduction In today s lecture we shall study about another essential element of a contract that is legality of object and consideration The object of consideration of an agreement must be lawful. Section 10 lays down that all agreements are contracts if made for lawful consideration and with a lawful object. Thus. 23). The words object and consideration used in Section 23 are not synonymous. Section 23 declares what kinds of considerations and objects are not lawful. the agreement is illegal and therefore void (Sec. This clause refers to agreements which arc declared illegal by law. in order to make the agreement a valid contract. while in insolvent circumstances. for. They have merely concluded a transaction that will be spurned by the courts.

B agrees. (c) An agreement between husband and wife to live separately is invalid as being opposed to Hindu Law (A.g Commodity s Act. for the money was lent to enable the guardian to celebrate the marriage contrary to the provisions of the said Act. Such an agree-ment.. celebrate the minor s marriage in contravention of the Child Marriage Restraint Act was held illegal and could not be recovered back (Chandra Shrinivisa Rao vs Korrapati Raja Rama Mohana Rao). Hindu and Mohammedan Laws).forbidden by law. This clause refers to cases where the objector consideration to an agreement is of such a nature that. the agreement is void.It will be seen that the purpose of borrowing in this case is of such a nature that if permitted it would defeat the provisions of Child Marriage Restraint Act of 1929. (b) An agreement by the debtor not to raise the plea of limitation.g. Illustrations. promises to pay Rs 200 to B. is void as tending to limit the provisions of the Limitation Act (Rama Murthy vs Gopayya). 1955) with regard to a controlled article are illegal and hence void (Sua Ram vs Kunj LaI). An act or an undertaking is forbidden by law: a. When it is punishable by the criminal law of the country. Thimma/ Naidu vs Rajamma). If it is fraudulent. If it is of such a nature that. (b) An agreement to pay consideration to a tenant to induce him to vacatepremises governed by the Rent Restriction Act is illegal and cannot be enforced because such an act is forbidden by the said Act (Mohanchana vs Manindta). or b. it would defeat the provision of any law. should a suit have to be filed. it would indirectly lend to a violation of law. (a) A. is also void. is unlawful and hence void. When it is prohibited by special legislation or regulations made by a competent authority under powers derived from the legislature. E. 2. Illustrations (a) Agreements for sale or purchase above the standard price fixed by the relevant law (e. 3. Illustrations (a) A loan granted under a promissory note to the guard-ian of a minor to enable him to. if permitted. though not directly forbidden by law. B s agreeing to defraud is unlawful . An agreement whose object or consideration is to defraud others. whether enacted or otherwise (e. if B would commit fraud on C.

to be acquired. agrees for money. [Illustration (e) to Section 23] ( c) A. to obtain a lease LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. The agreement is void. being agent for a landed proprietor. B and Center into an agreement for the division among them of gains acquired.consideration for A s promise to pay. by them by fraud. without the. as its object is unlawful.555 49 . knowl-edge of his principal. Hence the agreement is illegal and void. (b) A.

being an lawful agreement. which comprised the consideration. who borrowed Rs 100. is illegal and therefore void.. The agreement is void. Illustrations (a) A. as it involved injury to the person of the debtor (Ram Sarup vs Bansi Mandar) 5. If. If it involves or implies in fury to the person or property of an-other. It may be noted that an agreement to pay for past or future illicit cohabitation is also void. (b) An agreement to put certain property to fire is unlawful and void under this clause. (c) An agreement involving the publication of a libel (defamatory article against someone) has been held unlawful and void (Clay vs Yates). An agreement whose object orconsideration. a promise to pay for the purpose of future cohabitation. The scope of the word immoral here extends to the following: (i) Sexual immorality e. because it is immoral. illicit cohabitation or concubinage or pros-titution. agrees to let her daughter to hire to B for concubi-nage. it is void. Similarly. so long as the debt was not repaid in full has been held to be void. the court regards it as immoral. is immoral. If the object or consideration of an agreement is injury to the person or property of another. though the letting may not be punishable under the Indian Penal Code.g. .[Illustration (k) to Section 23] (b) A gift deed executed in consideration of illicit intercourse has been held void as its object was immoral (Ghumma vs Ram Chandra ). (d) An agreement by which a debtor. Let us now do some illustrations in this respect Illustrations (a) An agreement to commit an assault or to beat a man has been held unlawful and void (Allen vs Raucously).consideration for past cohabitation is unlawful as being immoral (Hussenali vs Dinbai). Illutration (a) A prostitute was sued for the hire money of a carriage in .of land belonging to his principal . 4. [Illustration (g) to Section 23]. promised to do manual labour without pay for the creditor. as being immoral. was held illegal and void (Lakshminarayana vs Subhadri). The agreement between A and B is void as it implies a fraud by concealment by A upon his principal. Consideration which is immoral at the time when it passes cannot become innocent by passage of time and therefore the . (ii) Furtherance of sexual immorality.

It has been described as an un-trustworthy guide unruly horse etc. (iii) An agreement for future separation between a husband and wife is void ab--initio. because it is immoral. thus. Public policy is a principle of law which holds the no citizen can lawfully do that which is injurious to the public or is against the interests of the society or the state. however.. it being immoral in the eye or law. The agreement is void. On the basis of decided cases. after the death of first wife is against good morals and hence would be void (Wilson vs Comleyl) (b) A who is B s mukhtar. Illustrations (a) Money advanced to a married woman to enable her to procure a divorce and to marry the plaintiff could not be recovered back as the object of the agreement was held immoral (Bai Vij/i vs Nansa Nagar).000 to A. the doctrine of public policy is generally governed by precedents. (b) A man who knowingly lets out his house for prostitution cannot recover the rent. it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days. both are very much similar in nature because what is immoral must be opposed to public policy and reverse is also true in most cases. Illustrations (a) An agreement for future marriage. The courts. An agreement is unlawful if the court regards it as opposed to public policy. [Illustration to Section 23] 6. Broadly speaking. and therefore. Public policy is an illusive concept. it being an act for furtherance of sexual immorality ( Choga Lal vs Piyasi). The suit was dismissed on the ground that the plaintiff contributed towards the performance of an immoral and illegal act and hence he was liable to suffer ( Pearce vs Brooks). on the subject the following . . (iv) Such acts which are against good public morals. as such with B in favour of C and C promises to pay Rs 1. In Gherulal vs Mahadeodas the Supreme court served. If the court regards it as opposed to public policy. promises to exercise his influence. It is not possible to give a precise or exact definition of the term public policy. are generally disinclined to invent new heads of public policy. It is rather an elastic term and its connotation may vary with the social structure of a state. The landlord may.which she used to go every evening in order to make a display of her beauty and thus to attract customers. recover if he did not know the purpose. It is interesting to note that opposed to public policy and immoral. an agreement which tends to promote corruption or injustice or immorality is said to be opposed to public policy. though the heads (of public policy) are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world.

It is to be noted that LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 50 11. It is now fully established that trading with an alien enemy ( i.agreements have been held to be against -public polity: (i) Trading with an alien enemy.e. unless made with the special permission of Government. Such agreements are therefore illegal.555 . a citizen of the other country at war with the state ) is against public polity in so far as It tends to aid the economy of the enemy country.

Thus. e. assault) which can be compromised and agreements for the compromise of such offences are valid (Ramachandra vs Bhauwari Bai). It is well settled law that if a-person has committed a crime..g. in both cases financial or professional assistance is provided with a view to assisting another person in litigation but in case of champerty the party helping in litigation also shares in the gains of the litigation in addition to interest on money advanced or fees for professional services. The rules applied in India are as follows: - . Champerty is an agreement whereby a person agrees to assist another in litigation in exchange promise to hand over a portion of the proceeds of the action. it was observed: No court of law can countenance or give effect to an agreement which attempts to take the administration of law out of the hands of the judges and put it in the hands of private individuals. there fore. does not make them absolutely void because of the peculiar position of Indian litigants many of whom are too poor to afford expensive litigation. however. (ii) Agreements interfering with the course of justice. the compromise of a public offence is illegal . The Indian Law. A promises B to drop a prosecution which he has instituted against B for robbery. is obviously opposed to public policy and is void. he must be punished. Where. It is obvious that if such a course is allowed to be adopted and agreements made between the parties based solely on the consideration of stifling criminal prosecutions are sustained. But an agreement to refer present or future disputes to arbitration is a valid agreement. the agreement is void.g. as its object is unlawful. and B promises to restore the value of the thing taken. (iii) Agreements for stifling criminal prosecution:. the basic pur-pose of Criminal Law would be defeated. An agreement the object of which is to interfere with the course of justice. Hence any agreement which seeks to prevent the prosecution of a guilty party is opposed to public policy and is void In Sudhindra Kumar vs Ganesh Chand. However. and if the financier must need risk losing his money he may well be allowed some chances of exceptional advantage (Ram Sarup vs Court of Wards).. Under the English Law such agreements are absolutely void. an agreement not to disclose misconduct to the other interested party or an agreement to influence a judge to induce him to decide the case in a party s favour. (iv) Maintenance and Champertv: Maintenance may be defined as an agreement whereby a stranger promises to help another person by money or otherwise in litigation in which that -third person has himself no legal interest. Similarly. The uncertainties of litigation are proverbial.an agreement to promote hostile action in a friendly state is also illegal and void as being opposed to public policy. under the Indian Criminal Procedure Code there are certain compoundable offences (e.

I. i. and not with the -bona fide object of assisting a claim believed to be just (Bhagwat Dayal -Singh vs Debi D I Sahu ). Such agreements. and B promises to pay Rs. it is void (Ko/hi Jairam vs Vishvanat). An agreement for providing professional services is valid if it is made by way of maintenance and with a bona fide object of assisting a claim believed to be-just and obtaining a reasonable recompense therefore. the ground that it is opposed to public policy. being opposed to public policy. or (b) It is made by a malicious motive like that of gambling in litigation or oppressing other party by encouraging unrighteous suits. if enforced. making the remuneration dependent to any extent whatsoever upon the result of the suit. (b) So also a promise to pay money to a public servant to induce him to retire and make way for the appointment of the promisor is void ( Saminatha vs Muthusami). The agreement is void as the consideration for it is unlawful [Illustration (f) to Section 23]. Illustrations. (a) A. It was held that the agreement was unreasonable and hence void. out of the prop recovered. would lead to inefficiency and corruption in public life. But if it is made by way of Champerty .. Agreements for sale or transfer of public offices or for appointments to public offices in consideration of money are -illegal. the plaintiff (financier) was awarded the expenses legitimately incurred by him with interest (Nuthaki Venkataswami vs Katta Nagi Reddy). (vi) Agreements creating an interest opposed to duty. II. 1. it being against the professional code of conduct (Kothi Jairam vs Vishvanath). (v) Traffic in public offices. (c) An agreement by a client to pay his lawyer according to the result of the case was held opposed to public policy and void. promises to obtain for B an employment in the public service. (a) A. An agreement for supplying funds by way of maintenance for Champerty is valid unless: (a) it is unreasonable so as to be unjust to the other party.000 to A. agrees to pay B. Illustrations. .e. An agreement which tends to create a conflict between interest and duty is illegal and. However. void on. the lieutenant colonel in the army. Illustrations (a) Where 75 paise in a rupee was agreed as the share of the financier.

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. (b) An agreement by an agent with a third party whereby he would be enabled to make secret profits is illegal and void as it tends to create a conflict between interest and duty.000 if he will assist her brother to desert the army.555 51 .Rs10.hence the agreement is void and illegal. The object of the agreement is opposed to public policy and . (vii) Agreements unduly restraining personal liberty: Agreements which unduly restrict personal freedom have been held to be void and illegal as being against public policy.

without the written consent of B.would not. leave his job. Of course the money can be recovered when the marriage is not performed (Dharnidhar vs. the agreement was held. therefore. in addition to salary. For monetary consideration. . But such an agreement is illegal in respect of payment only. A. borrowed money from B. was held illegal because the provision as to expenses was contrary to public policy being merely a device to defraud the income-tax authorities (Napeier vs National Business . For example. an agreement by which an employee was to get. and if not paid. It was held that the agreement was illegal as it unduly restricted the liberty of A ( Harwood vs Miller s Timber and Trading Co ). in accordance with good public morals. Thus. The following agreements have also been held to be against public policy: (a) Agreements tending to create monopolies are illegal and void (Kameshwar Singh vs Yasin Khan).Illustration. an expense allowance grossly in excess of the expenses actually incurred by him. is the legal guardian of his/her minor child. Illustration. Jagjiwan). A agrees to place his daughter at the disposal of B to be married as B likes. If.. clothes and ornaments or their value can be recovered if the marriage does not take place (Girdhari Singh vs Neelandhar Singh ). money if actually paid cannot be recovered back. Further. because the agreement to pay is illegal. borrow money. which is . a moneylender. the validity of marriage is not affected.payment of money in consideration of procuring for another in marriage a husband or a wife.e. Such agreement its are illegal and void as being contrary to public policy. (x) Miscellaneous cases. The au-thority of a guardian is to be exercised in the best interest of the child. So. the right of guardianship is bartered away by any agreement. when a profit was promised Rs 200 in consideration of procuring a wife for the defendant. A father. The agreement is illegal and void as B it would interfere with A s parental duty to select a husband in the best interests of the girl (Alma Ram vs Banku Mal) (ix) Marriage brokerage agreements. and agreed that he . (viii)Agreements interfering with parental duties. invalid and the money could} recovered (Pitamber vs. and in his absence the mother. once the marriage is solemnized. to give money or property to the parents of the bride or the bridegroom in connection of their agreeing to the contract of marriage is also illegal and cannot be enforced. . (b) Agreements to the fraud revenue authorities are void and illegal.inconsistent with the duties arising out of such custody such an agreement shall be void on the ground of public policy. a suit therefore would not lie. These are agreements for the. Kanhji Sahay). Similarly. dispose of his property or change his residence. an agreement of dowry i.

24). 1961 had defined dowry as property given directly or indirectly by one party to another. the following rules will apply: 1.. (c) A agrees to serve B as his housekeeper and also to live in adultery with him at a fixed salary. The Dowry Prohibition (Amendment) Act. i. Object or Consideration Unlawful in Part Section 23 (already discussed) deals with cases in which object or/and consideration are unlawful. (c) Agreements whereby money is given to induce persons to give evidences in a civil court are void because every one is expected to perform his legal duty ( Adhiraja Shatty vs Vittil Bhatta). the legal part is a contract and the . In this case consideration is wholly illegal. Where there is reciprocal promise to do things legal and also other things illegal and the legal part can be separated from the illegal part (i. The Amendment Act however clarifies that presents given to the bride or the bridegroom at the time of marriage voluntarily. on behalf of B.. The whole agreement is unlawful and void. there is a separate consideration for different promises).Agency Ltd). without a demand being made.000 a year. But these presents will have to be carefully listed in accordance with the rules of the Amendment Act. William Clarke).e. e. 10. by parents of one party to either party at or before or after the marriage or in consideration of marriage.. a legal manufacturer of indigo and an illegal traffic in other articles. 57 and 58 of and 58 of the Contract Act provide for such cases.e. When an agreement contains several distinct promises to do things legal and also other things illegal. Now we come to those cases where object/consideration are unlawful in part The Dowry Prohibition Act. The agreement is void and unlawful. both 1egal and illegal terms. But what is the position if the same agree-ment contains. Illustrations (a) A promises to superintend. and the legal part cannot be separated from the illegal part (i. it is partly legal and partly illegal? Sections 24. Here a part of the object is legal and a part is illegal which are not severable because the consideration for both promises is a single sum (illustration to Section 24). the whole agreement is illegal and void (Sec. A cannot sue even for service rendered as housekeeper because it cannot be ascertained as to what was due on account of adulterous intercourse and what was due for housekeeping (Alice Hill vs. the consideration for different promises is a single sum of money). The new Act has defined dowry as property given in connection (not consideration) with marriage. Accordingly. 1984 has changed the definition of dowry slightly. 2. B promises to pay to A a salary of Rs. if the object or consideration is partially unlawful. will not be treated as dowry.

000 for it is a contract. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 52 11. to sell the house and to pay Rs10. namely. A and B agree that A shall sell B a house for Rs 10. if B uses it is as a gambling house he shall pay A Rs50.illegal part is a void agreement (Sec. The second set is for an unlawful.000. and is a void and illegal agreement. object. that B may use the house as a gambling house. (Illustration to Section 57).000 for it. Here it is to be noted that the two promises are distinct and severable with a separate consideration for each such promise. 57). The first set of reciprocal promises. The promises are thus inde-pendent of each other except that they form part of the same contract.555 . Illustration. namely. but that.

is immaterial.3. whether he knew the purpose of loan or not. Parties to an illegal agreement cannot get all help from a court of law. Illustration. C can always recover the money lent. giving reasons for your answers: 1. Practical Problems Attempt the following problems. are not enforceable. because his loan agreement was a collateral transaction to an illegal agreement. because his loan agreement was collateral of a void (wagering) agreement only. he can recover even though A had used the money for an illegal object.a horse race with B and borrows Rs 500 from C for this purpose.000 for which B shall afterwards deliver to. C cannot recover the money lent . Effect of Illegal Agreements on Collateral Transactions While discussing different kinds of contracts in Chapter Lesson 3 we have already seen that an illegal agreement like the void agreement is unen-forceable as between the immediate parties. ( c) A bets on . X cannot recover the amount back. If X has already paid the amount and Y fails in murdering Z.000 from C for giving an advance to B. Of course if C. provided the parties to the collateral transaction had the knowledge of the illegal or immoral design of the main or primary agreement ( a void agreement does not invalidate collateral transaction). 58).if he knew the illegal purpose.000 if he murders Z. So. If Y commits the murder. the illegal branch alone can be enforced (Sec. nothing can be recovered under an illegal agreement and if something has been paid it cannot be recovered back. did not know the purpose of the loan. Illustrations (a) A enters into a smuggling of goods agreement with B and borrows Rs 1. he cannot recover the amount from X. A and B agree that A shall pay B Rs1. In the case of an alternative promise. for. whether the illegal object has been carried out or has not been carried out. no polluted hand shall touch the pure fountain of justice. one branch of which is legal and the other. This is a valid contract to deliver rice and a void and unlawful agreement as to opium (Illustration to Section 58). illegal. the position of the defendant is better than that of the plaintiff. Illustration X promises Y to pay Rs 10. The rule of law is that no action is allowed on a illegal agreement and in case of equal guilt. . But an illegal agreement has this further effect that other transactions whether incidental or collateral to it are also tainted with illegality and. No restitution is allowed. therefore. A either rice or smuggled opium.

the agreement is contrary to public policy and hence void [Bhagwan Datt Shastri vs Raja Ram. C agrees to provide funds to A in consideration of sharing one-fourth of the money recovered from B. In a suit by A against B for the recovery of Rs 5. promised to marry C in the event of B s death. becomes the purchaser and agrees to convey the estate to X for the price. in consideration of B s absenting hit P self-at-the trial. (1929) Mad.I. which Y has paid. on the mind of the court. while his wife B was alive. 812. entered into an agreement with B and engaged B for the purpose of informing puja (prayer) for A s success in a suit which he had before the court and promised to pay Rs 2. Thus accordingly the agreement between A and B is valid and B must succeed. unauthorized by law. A. Will B succeed? [Hint. It is a champertous agreement which is valid provided its terms are fair and reasonable and is made with a bona fide object of.] 6.B. Y. The agreement between C and A is valid. C will not succeed because an agreement for future marriage. 729)] 5. Decide. B absents I but fails to get the money. after the death of first wife is against good public morals and hence illegal and void (Wilson vs Carnley. [Hint. It has been held that where the object of an agreement is to exercise some extraneous influence.A promises to pay a certain slim of money to B. in Balasundara Mudaliar vs Mahomed Usman. However.R. A. 1 K. (1927) All.f is 8l1' intended witness in a suit against A. 406]. a promise of reward by a Muslim litigant to a Hindu devotee in consideration of offering prayers for the success of his suit has been held not against public policy. assisting a just claim. upon the understanding with X. B cannot recover the money because an agreement. C sues A for damages for breach of promise. between interest and duty is illegal and void being opposed to public 2. 1908. Decision: The agreement is void. [Hint. Reason: This agreement results in an indirect purchase by the . A. B will not succeed as the object of the agreement is to interfere with the course of justice. by which a defaulter is prohibited from purchasing the estate. Subsequently B died but A refused to marry. Decide the validity of the agreement between C and A. X s estate is sold for arrears of revenue under the provisions of an Act of the Legislature. Can he recover? (Hint. A succeeded in the suit. A is in need of money.000 in the event of success. No. making the agreement illegal and void. Is this agreement valid? Solution: Section to which the given problem relates: Section 23.] 3. B sued A for the amount agreed upon. wHs.000. which tends to create a conflict.

7. X executed a bond promising to work for Y without pay for 2 years and in LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Y and Z enter into an agreement for the division among them of gains acquired or to be acquired by them by fraud. Decision: This agreement is void. Is this agreement valid? Solution: Section to which the given problem relates: Section 23. 8.000 from Y. X. Reason: The object of this agreement is unlawful as it is fraudulent.555 53 .defaulter and hence it defeats the object of the law by which a defaulter is prohibited from purchasing the estate. X borrowed Rs 1.

P. (2003). Reason: This agreement is opposed to public policy as it is for stifling prosecution.indialawinfo. Is this agreement valid? Solution: Section to which the given problem relates: Section 23. Elements of Mercantile Law.html M. Ltd.D. http://www. Delhi. [Leading case: Ram Saroop v. a prostitute. Decision: This agreement is void. Delhi. Vikas Publishing House Pvt. Graw Hill Pvt.com/bareacts/soga. Business Law . Decision: The agreement is void.000 if Y secures him an employment in the public service. N. Student s Guide To Mercantile And Commercial Laws. 11. Tata Mc. Brooks] 10. knowing that it would be used for immoral purposes. Is this agreement void? Solution: Section to which the given problem relates: Section 23. Decision: The agreement is void.000 in consideration of not exposing Y. Ltd. X promises to pay Y Rs 1. Decision: The agreement is void. Graw Hill Rohini Aggarwal(2003). Tulsian (2002). Is tip s agreement valid? Solution: Section to which the given problem relates: Section 23. Kucchal ( 2002). Reason: The object of this agreement is unlawful as it involves an injury to another person. References Kapoor. Ltd. Sultan Chand and Sons. Pvt. Reason: The agreement is opposed to public policy as it is for the sale of public office. Business Law . Reason: The object of this agreement is immoral. X knowing that Y has committed a murder. New Delhi. X let a flat on hire to y. Delhi. Tata Mc.C. Is this agreement valid? Solution: Section to which the given problem relates: Section 23.C. Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University .00. Bansi Mandar] 9.00.case of default agreed to pay interest at 10% per month and the principal amount at once. -[Leading case: Pearce v. obtains a promise from Y to pay him (X) Rs 5.

555 .54 11.

Agreements of which the consideration or object is unlawful in part and the illegal part cannot be separated from the legal part (Sec. and will not therefore discuss them here again: The preceding chapters. 25). 4.2(g)]. Agreements by a minor or a person of unsound mind (Sec. Agreements in restraint of marriage (Sec. and will not therefore discuss them here again: 1. Thus. as to what are expressly declared void agreements? The following agreements have been expressly declared . to be void by the Indian Contract Act: 1. 11). Agreements made without consideration (Sec. 26). Agreements of which the consideration or object is unlawful (Sec. We have already dealt with the following types of void agreements in the preceding chapters. Expressly Declared Void Agreements The last essential of a valid contract as declared by Section 10 is that it must not be one which is expressly declared to be void by the Act. The agreements expressly declared to be void The uncertain agreements The wagering agreements Introduction In today s lecture we shall study about void agreements and their different classes You all must be aware by now that An agreement not enforceable by law is said to be void [Sec. 24). 23).LESSON 10: VOID AGREEMENTS Learning Outcomes After today s class you should be able to answer the following questions. Agreements made under a bilateral mistake of fact material to the agreements(Sec. . there arises a question. 3. 2. Thus a void agreement does not give rise to any legal consequences and is void ab-initio. In the eye of law such an agreement is no agreement at all from its very inception. 5. 20). 2.

It is interesting to note that a promise to marry a particular person does not imply any restraint of marriage. Agreements in Restraint of Marriage Every individual enjoys the freedom to marry and so according to Section 26 of the Contract Act every agreement in restraint of the marriage of any person.agreements in restraint of trade (Sec. an agreement restraining the marriage of a minor is valid under the Section. trade or business of any kind. The restraint may be general or partial but the agreement is void. At the very outset. However. (b) A agrees with B that she will marry him only. Thus no person is at liberty to deprive himself of the fruit of his labour. Agreements contingent on impossible events (Sec. 6. and is. Illustrations (a) Agrees with B for good consideration that he will not marry C. It is a valid contract of marriage. or a certain person. or for a fixed period. Illustration. skill or talent. if it is in the nature of restraint of trade. a valid contract. is void. 30). An agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to . 7. Agreements to do impossible acts (Sec. It is a void agreement. it may be borne in mind that the law declares these agreements void ab-initio and not illegal. 56). by any contracts that he enters into. 2. 3. 36). and therefore transactions collateral to such agreements are not made void. is void. It is to be noted that whether restraint is reasonable or not. an agreement agreeing not to marry at all. other than a minor. It may be recalled that in the case of illegal agreements. is to that extent void. or a class of persons. the agreement is void always. Agreements in Restraint of Trade The Constitution of India guarantees the freedom of trade and commerce to every citizen and therefore Section27 declares every agreement by which any one is restrained from exercising a lawful profession. Illegal agreements are also unlawful agreements as they are expressly declared void by the Contract Act. 29) 5. and therefore. 28). 27). 4. transactions collateral to them are also tainted with illegality and hence void. In fact it is for this reason that these agreements have not been discussed in the preceding chapter. Agreements the meaning of which is uncertain (Sec. therefore. subject to certain exceptions provided for statutorily. Agreements by way of wager (Sec. Agreements in restraint of legal proceedings (Sec. 1.

is void. and the amount is not recoverable. being an agreement in restraint of trade. with a stipulation that the purchaser was bound to accept the whole quantity. for the law does not intend to take away the right of a trader to regulate his business according to his own discretion and choice. if the other party fails to pay the promised sum of money ( Madhub Chander vs Raj Kumar) But agreements merely restraining freedom of action necessary for the carrying on of business are not void.pay a certain sum of money.555 55 . was held valid because it aimed to promote business LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Illustration An agreement to sell all produce to a certain party.

upon or in anticipation of the dissolution of the term. were held void as the restraint was unreasonable in point of space and the nature of business (Goldsoll vs Goldma). provided the restrictions imposed are reasonable (Section 54 of the Partnership Act). As the restraint is unreasonable the agreement is void. (ii) Partners agreements. (b) in real jewellery in England. The other two promises. within specified local limits. on retiring from the partnership he will not carry on any business similar to that of the firm within a specified period or within specified local limits. or any person deriving title to the goodwill from him. and (c) in real or imitation jewellery in certain foreign countries. 27). namely (b) and (c). (d) An agreement between any partner and the buyer of the firms that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits. Exceptions An agreement in restraint of trade is valid in the following cases (i) Sale of goodwill. (b) C a seller of imitation jewellery in London sells his business to D and promises that for a period of two years he would not deal: (a) in imitation jewellery in England. The seller of the goodwill of a business can be restrained from carrying on a similar business. was not bound to accept the whole quantity tendered) it was held that the agreement was void as being in restraint of trade (Sheikh Kalu vs Ram Saran). But where in a similar agreement the purchaser was free to reject the goods (i. (b) An agreement by a partner with his other partners that. (c) An agreement among the partners. An agreement in restraint of trade among the partners or between any partner and the buyer of firm s goodwill is valid if the restraint comes within any of the following cases: (a) An agreement among the partners that a partner shall not carry on any business other than that of the firm while he is a partner . carries on a like business therein.. The first promise alone was held lawful. provided the restrictions imposed are reasonable [Section 36(2) of the Partnership Act}.and did not restrain it (Mackenzie vs Striramiah). so long as the buyer. provided the restrictions .e. Illustrations (a) A after selling the goodwill of his business to B promises not to carry on similar business anywhere in the world. provided the restraint is reasonable in point of time and space (Exception to Sec. that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits.

it would be void (Kameshwar Singh vs Yasin Khan).. where S. declares the following three kinds of agreements void: (a) An agreement by which a party is restricted absolutely nom taking usual legal proceedings. Thus a chartered accountant employed in a company may be debarred from private practice or from serving elsewhere during the con-tinuance of service (Maganlal vs Ambica Mills Ltd. Agreements tending to create monopolies are now also governed by the provisions of the Monopolies and Restrictive Trade Practices Act. 1969. is valid.] (iii) Trade combinations. 8) But an agreement of service which seeks to restrict the freedom of occupation for some period. to pool profits or output and to divide the same in an agreed proportion. for a period of five years from the date of the termination of his service. agreement plus enforceability at law is a contract. without regard to the time allowed by the Limitation Act. Thus. Restriction on Legal proceedings. not to sell their goods below a certain price. it was held that the agreement is in restraint of lawful profession and hence void (Brahamputra Tea Co. v Bombay Ice Company5). This is in furtherance of what we studied under the definition of a contract . particular locality with the object of keeping the trade in their own hands is not void merely because it hurts a rival in trade (Bhola Nath vs Lachmi Narain).g. which forbids certain types of trade agreements. is void. does not amount to a restart of trade and IS perfectly valid (Fraser & Co. But if an agreement attempts to create a monopoly. in respect of any rights arising Item a contract. As pointed out earlier. (iv) Negative stipulations in service agreements. after the termination of service. (c) An agreement which provides for forfeiture of any rights arising from a contract. Agreements in Restraint of Legal Proceedings Section 28. Act. 1996. vs Scarth). who was an employ-ee of Brahmputra Tea Co. namely. agreed not to employ himself or to change himself in any similar business within 40 miles from Assam. if suit is not brought within a specified period. an agreement. Thus. not to take service with anyone else. an agreement in the nature of a business combination between traders or manufacturers e. an agreement amongst the traders of a.imposed are reasonable [Section 55(3) of the Partnership . An agreement of service by which a person binds himself during the term of the agreement. Similarly. the Ii primary object of which is to regulate business and not to restrain it. Thus if an agreement inter-alia provides that no party . Assam. without regard to the time allowed by the Limitation Act. 3. is not in restraint of lawful profession and is valid. as amended by the Indian Contract (Amendment) Act. (b) An agreement which limits the time within which one may enforce his contract rights. As stated above Section 28 renders every agreement in restraint of legal proceedings void.

in case of breach.shall -go to a court of law.555 . there is no contract and the agreement is void ab-initio. It does not apply to cases1o of civil or criminal wrongs or torts. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 56 11. In this connection the following points must also be borne in mind: (a) The Section applies only to rights arising from a contract.

the High Court of Judicature at Calcutta. Curtailing the period of limitation. Section 28 applies only to absolute restriction on taking the legal proceedings. The defendants filed a suit in Agra whereas the plaintiff brought a suit in Calcutta.. 1996. not under this Section but under Section 23. Milton & Co. as the object will be to defeat the provisions of the law (Rama Murthy vs Gopayya). this Section does not prevent the parties to a contract from selecting one of the two courts which are equally competent to try the suit. Thus in A. period of limitation prescribed by the Limitation Act.g. Any agreement curtailing the period of limitation prescribed by the Limitation Act is also void under . the clause is void and despite the clause the parties have a right to sue in case of breach Such cases come under Agreements Stifling Prosecutions which have been discussed in the preceding chapter. Thus where it was agreed that neither party shall appeal against the trial court s decision. It is relevant to state that agreements extend tile period of limitation prescribed by the Limitation Act are also void. It was held that the agreement was binding between the parties and it was not open to the defendants to proceed with their suit in Agra. if the parties agree to refer to arbitration any dispute which may arise between them under the contract. Clause (c) refers to an agreement which does not affect the remedy for breach but which extinguishes the right itself after the specified time and such a stipulation has also been declared void. The background behind the passing of the Indian Contract . whereas here the restriction is only partial as the parties can go to a court of law alright and the only restriction is that the losing party cannot file an appeal (Kedar Nath vs Ramlal).. e. the agreement was held valid. Forfeiture of contract rights. such a contract is valid (Exceptions 1 and 2 to Section 28). the agreement limits the time within which one is to have any contract tights to enforce. vs qjha Automobile Engineering Company s Casel2. Under Clause (b). the agreement limits the time within which one may enforce his contract rights thereby curtailing the. (d) Lastly. The distinction between Clause (b) and Clause (c) of Section 28 (stated above) may be noted. if suit is not brought within a specified time (say 3 months) is also void. (c) The Section does not affect an agreement whereby parties agree not to file an appeal in a higher court. there was an agreement which inter-alia provided Any litigation arising out of this agreement shall be settled in. within three years from the date of breach. Under Clause (c) of Section 28 (stated above) an agreement which provides for forfeiture of any rights arising from a contract.by either party within the time allowed by the Limitation Act i.(b) This Section does not affect the law relating to arbitration e. whereas under Clause (c). and in no other court whatsoever.section 28. Thus. if a clause in an agreement between A and B provides that either party can sue for breach within a year of breach only. This Clause was inserted by the Indian Contract (Amendment) Act. for. Thus.

an agreement to engage a servant some time next year. Such a provision was held valid and binding on the ground that it is outside the scope of Section 28 (Baroda Spinning Co. the Supreme Court in the Food Corporation of India vs New India insurance Co. an agreement of to enter into an agreement in future is void certainty unless all the terms of the proposed agreement are agreed sly or implicitly. 14). (c) A agrees to sell to B one thousand mounds of rice at a price to be fixed As the price is capable of being made certain.Case held that insurance contracts restraining the time period within which one is to have any con-tract rights to enforce were violative of the Limitation Act. (b) A. There is nothing to show which of the two prices was. words used by the parties are vague or indefinite. However. the meaning of which is not certain. (1994) . the law cannot enforce the agreement. or capable of being made certain. Accordingly henceforth general insurance companies cannot insist that suits for claims be brought within a period of time smal1er than the period provided under the Limitation Act. The learned judge observed: what the plaintiff was forbidden to do was to limit the time within which he was to enforce his rights. Ltd. The agreement is void. who is a dealer in coconut oil only. vs Satya-narayan Marine & Fire Insurance Co. Illustrations (to Sec. 29). agrees to sell to B one hundred tons. are void (Sec. to be given. Prior to this Amendment Act. Thus. all benefits under the policy shall be forfeited. Further. Ltd.: something to be lost or won on the result of a doubtful issue . what he has done is to limit the time within which he is to have any rights to enforce. 29). (a) A agrees to sell to B . a hundred tons of lories nothing whatever to show what kind of oil was intended. the insurance policy documents issued by general insurance companies invariably provided that if a claim is rejected and a suit is not tiled within three months after such rejection. Through Section 29 the law aims to ensure that the parties to a contract should be aware of the precise nature and scope of their mutual rights and obligations under the contract: Thus. Uncertain Agreements Agreements. 1996 may be briefly stated as follows. there is no uncertainty here the agreement void. and that appears to me to be a very different thing . The Parliament has therefore amended Section 28 by inserting a new clause. 5. Wagering Agreements What is a wager? Literally the word wager means a a bet. Ltd. otherwise all benefits under the policy shall be forfeited. (d) A agrees to sell to B his white horse for rupees five hundred or rupees one oil. The agree void for uncertainty. at a salary to be mutually agreed upon is a void agreement.(Amend-ment) Act. The nature of A s trade affords an indication of the meaning of the words. last entered into a contract for the sale of one hundred tons of coconut oil.

therefore.and.555 57 . wagering agreements are nothing but ordinary betting agreements. Thus A and B mutually agree that if it rains today A will pay B Rs 100 it does not rain B will pay A Rs 100 or where C and D enter into agreement that on tossing up a LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.

a sum of money or other neither of the contracting parties having any other interest ill that contract than the sum of stake he will so win or lose. entered into the contract of insurance. I it turns out the other way he will win. if the event turns out one way A will lose. Essential features of a wager. there is. Secondly. An agreement is not a wager if one party. A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event mutually agree independent upon the determination of that event. or may lose but cannot win. whether he will win or lose being dependent on the issue of the event. and. If either of the parties may win but cannot lose. It is essential to a wagering contract that each party may under it either win or lose.that is to say. Hawkins. a wagering agreement A wager can be described as. it is not a wagering contract. one shall win from the and the other shall pay or hand over to him. follows: The agreement of gaming and wagering is that one party is to win and the other e upon a future every which at the time C the contract is of an a in nature .coin.c Smoke Ball Co. If one of the parties has the event in his own hands. next month in Calcutta.. An event may be uncertain.may . remaining uncertain until that issue is known. therefore. (d) Each party must stand to win or lose under the terms of agreement. It is here that wagering agreements differ from insurance contracts which are valid because parties have an interest to protect the life or property. in Carlill vs Carboli. there being no other real consideration for the making of such contract by either of the parties. Thus a wager may be made upon the result of the cricket match which is to take place . In me first place._ (b) The promise must be conditional on an event s happening or not happening (c) The event must be an uncertain one. but because it is not yet known to the parties. Certain aspects of the above definition require to be emphasised.. the parties to a wager must have no interest in the event s hap-pening or non-happening except the winning or losing of the bet laid be-tween them. if the parties do not know the result. for that very reason. not only because it is a future event. and have. or upon the result of an election which is over. Possibly the most expressive and all-encompassing definition of a was agreement was given by. wager is a game of chance in which the contingency of either gain or loss is wholly dependent on an uncertain event. if it falls head upwards C will pay O and if it falls tail upwards D will pay C Rs 50. the transaction is not a wager. The essentials of a wagering agreement may thus be summarised as follows: (a) There must bean promise to pay money or money s worth.

(e) No party should have a proprietary interest in the event. or entrusted to any person to abide the result of any game or other uncertain event on which any wager if made. made or entered into for or toward any plate. Agreements for sale and purchase of any commodity or share market transactions. not only void but also illegal. instructing him to. Further. or if he may lose but cannot win. the stake-holder. for recovering his Rs 100. had paid the sum to the winner. In order to constitute a . An agreement by way of a wager . Of course the loser can recover back. if I. bet amount from Z. no suit can be brought by the winner for recovering the. 100. the stake-holder. or if he can neither win nor lose. of the value or amount of five hundred rupees or upwards. where such an agreement is void and illegal. where C and D enter into a wagering agreement and each deposits Rs 100 with Z. in which there is a genuine inten-tion to do legitimate business i. Special cases. pay or give the total sum to the winner. The Section makes an exception in favour of certain prizes for horse racing by providing further that This Section shall not be deemed to render unlawful a subscription. the loser cannot bring a suit. a bet on a horse race carrying a prize of Rs 500 or more to the winners has been made valid under the exception. to be awarded to the winner or winners of any horse race. where A and B enter into an agreement which provides that if England s cricket team wins the test match. We now turn to certain special cases in order to examine as to whether they are wagers: Commercial transactions. But even such a deposit cannot be recovered by a loser. by a local statute. Thus. e. It is important to note that in the States of Maharashtra and Gujarat wagering agreements are. even if Z had paid after the loser s definite instructions not to pay. his deposit if he makes the demand before the stake-holder had paid it ovation the winner (Ratnakalli vs Vochalapu). If there is no such genuine intention and parties only want to gamble on the rise or fall of the market by paying or receiving the differences in prices only.. void. in the States of Maharashtra and Gujarat. or agreement to subscribe or con-tribute. or contribution. and no suit shall be brought or recovering anything alleged to be won on any wager. But with a view to protecting the poor persons from gambling. are not wagering agreements. to give and take delivery of goods or shares. The stake must be the only interest which the parties have in the agreement.. 100 to A. the transaction would be a wagering agreement and therefore void. prize or sum of money. and if it loses B will pay Rs. As a result in these states the collateral transactions to wagering agreements become tainted with illegality and hence are void. nothing can be recovered by the winning party under the agreement. A will pay B Rs. Thus. either against the winner or against Z. it being a wager. a bet on a horse race carrying a prize of less than Rs 500 remains a wager. Section 30 lays down that agreements by way of wager are void. Similarly.only win and cannot lose.

Such a transaction is not only void but also illegal because 294-A of the Indian Penal Code declares conducting of lottery a punishable offence. neither party should intend to perform the contract itself..555 . the only effect of such permission is that the persons conducting the lottery (i. the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 58 11. Hence the lottery business is a wagering transaction. A lottery is a game of chance.wagering contract. e. If a lottery is authorized by the Government. but only to pay the differences Lotteries.

picture puzzles.on the happening of a future uncertain event. Insurance contracts. in which prizes depend upon correspondence of the competitor s solution with a previously prepared solution. but the lottery remains a wager alright (Dorabji Tata vs Lance).000 (as a loan) if B will marry A s daughter. whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. whereas wagering agreements do not serve any useful purpose.000 (as a loan) if two straight lines should enclose a space. Thus prize competitions which are games of skill and in which an effort is made to select the best competitor e. 7. Agreements to do Impossible Acts An agreement to do an act impossible in itself is void. (b) Contracts of insurance are based on scientific and actuarial calculation whereas wagering agreements are a gamble without any scientific calculation of risks. The agreement is void. be guilty of a criminal offence. it is a valid transaction. But if prizes depend upon skill and intelligence. Agreements Contingent on Impossible Events Contingent agreement to do or not to do anything. 36) Illustrations (to Sec. literary competitions and athletic competitions are not wagers.. Thus a crossword puzzle.. (Sec. C was dead at the time of the agreement.g. Such contracts differ from wagering agreements mainly in three respects: (a) The holder of an insurance policy must have an insurable interest in the event upon which the insurance money becomes payable. Even in such competitions . Crossword puzzles. otherwise they shall be wagers as per the provisions of the Prize Competition Act. Where prizes depend upon a chance. it is a lottery and therefore a wagering transaction. 6. (a) A agrees to pay B Rs 1. 36).the amount of prize should not exceed Rs 1.000. (b) A agrees to pay B Rs. (c) Contracts of insurance are regarded as beneficial to the public. are void. The agreement is void. thus con-tracts of insurance are entered into to protect an interest. (See. if an impossible event happens. In a wagering agreement there is no interest to protect and the parties bet exclusively because they can thereby make some easy money. is a wager. . 1955. 56 Para 1 Illustrations . 1. . C. Insurance contracts are valid contracts even though they provide for payment of money by the insurer .persons running the lottery and the buyer of lottery ticket) will not.

10 as agreed. no restitution . B will succeed because the agreement between him and A is valid as it aims to promote business and does not restrain it. The performance of a contingent contract depends upon . The cow fails.] True or False Questions State whether the following statements are true or false: 1. through ostensibly a sale.of the benefit received is allowed in the case of expressly declared void agreements. They enter into a wagering agreement with a third party. Can A recover the money lent by him? [ Hint: A can recover. A refuses. A agrees to sell his cow to B for Rs 500 if the cow gives 6 kg milk every day. A and B are partners in a business. Can A claim from B the amount paid on his behalf? [Hint. Will B succeed? {Hint: Yes. is in reality a wager ( Brogden vs Marriott) 3. The agreement is void. Will B succeed? [Hint: No. No Restitution The term restitution means return or restoration of the benefit received from the plaintiff under the agreement. A agrees to sell all the goods manufactured by him in the ensuring season to B.(a) A agrees with B to discover treasure by magic. A lends money to B to enable him to pay off the loss which he has sustained in a wagering transaction with C. because an agreement collateral to a wagering agreement remains valid except in Maharashtra and Gujarat States where wagering agreements are illegal. Thereupon B sued A for breach of contract. Bbrings a suit against him. but for Rs 10 only if it fails to do so. As per Section 65 . (b) A agrees with B to run with a speed of -100 Kilometers per hour. B will not succeed as the transaction. Practical Problem Attempt the following problems. A can claim the amount from B because a wagering agreement is only void and not illegal and therefore a collateral contract can be enforced. The agreement is void [Illustration (a) to Section 56]. In breach of the said agreement A sold some goods manufactured during the said season to C. Yes.} 2. On losing the bet A satisfies his own and also B s liability under the agreement.] 4. giving reasons for your answers: 1. whereupon B demands the cow for Rs.

6. 7. Contracts contingent upon the happening of an uncertain future event be. The performance of a contingent contract must not depend upon mere will of the promisor. The event in.comes avoidable at the option of promisee if that event becomes impossible. The performance of a contingent contract depends upon the non-happening of some future event. 8.555 59 . The event in a contingent contract may be certain. 5.the happening of some future event. Contracts contingent upon the non-happening of a certain future event cannot be enforced if the happening of that event becomes impossible. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Contracts contingent upon the happening of an uncertain specified event within a fixed time can become void only after the expiry of the fixed time. a contingent contract must be essential to the contract. 4. or uncertain. 2. 3.

. Delhi Notes © Copy Right: Rai University 60 11.indialawinfo.html M. Student s Guide To Mercantile And Commercial Laws. Answers LEGAL ASPECTS OF BUSINESS 1. Kucchal ( 2002). False 10. Tata Mc. False 2. Agreements contingent upon impossible events are void only if the parties to the agreements at the time when these are made know the impossi-bility of the event. Ltd. False 3.com/bareacts/soga.9. http://www. False 8. Delhi.D. P. Business Law . False 9. True 6. Pvt. Vikas Publishing House Pvt. Elements of Mercantile Law. False5. Graw Hill Rohini Aggarwal(2003). Ltd. (2003). False 4. False References Kapoor. Business Law . Delhi. Tulsian (2002). Contracts contingent upon the non-happening of an uncertain specified event within a fixed time can be enforced only after the expiry of the fixed time.C. Tata Mc. 10.555 . Ltd. Graw Hill Pvt. New Delhi.C. False 7. N. Sultan Chand and Sons.

The term quasi-contract has been used because such a contract resembles with a contract so far as result or effect is concerned but it has little or no affinity with a contract in respect of mode of creation. It may be noted that a suit for damages for the breach of the contract can be filed in the case of a quasi-contract in the same way as in the case of a completed contract (Sec. The Contract Act deals with quasi-contractual obligations under Sections 68 to 72. Claim for necessaries supplied to a person incapable of contract-ing or on his account (Sec. 68). and not a promise or agreement. from the conduct and relationship of the parties. A quasi-contract rests upon the equitable doctrine of unjust enrich-ment which declares that a person shall not be allowed to enrich himself unjustly at the expense of another. implies a promise imposing obligation on the one party and conferring a right in favour of the other.LESSON 11: QUASI CONTRACTS AND CONTINGENT CONTRACTS Learning Outcomes After today s class you should be able to answer the following questions: The meaning of quasi contract The different types of quasi contract The meaning of contingent contract The nature and effect of contingent contract The differences between wagering and contingent contracts. If a person. The first of all we will start with the Quasi Contracts Quasi Contracts Introduction We have seen that a contract is the result of an agreement enforceable by law. In other words under certain special circumstances obligations resembling those created by a contract are imposed by law although the parties have never entered into a contract. which are discussed below: I. is the basis of such contracts. no acceptance. no consensus ad idem and in fact no intention on the part of parties to enter into a contract and still the law. Duty. But in some cases there is no offer. . Such obligations imposed by law are referred to as Quasi-Contracts or Constructive Con-tracts under the English law. 73). and certain relations resembling those cre-ated by contracts under the Indian law.

A is entitled to be reimbursed from B s property. With a view to recapitu-late it may be stated here that although agreements by minors. (iv) Incompetent person s property is liable to pay only reasonable price for the goods or services supplied and not the price which the incompetent person might have agreed to pay(legally speaking an incompetent person cannot agree to anything). (ii) The things supplied must come within the category of necessaries .incapable of entering into a contract.. 69). The following points need to be emphasized: (i) The Section does not create any personal liability but only the estates are liable. pays to the government the sum due from A. are void ab-initio. but Section 68 makes an exception to this rule by providing that their estates are liable to reimburse the supplier who supplies them or to some one whom they are legally bound to support with necessaries of life. is entitled to be reimbursed by the other. Illustration (to Sec. This provision has already been considered in connection with minor s agreements in the chapter of Capacity of Parties. the. 69). the person. A is bound to make good to B the amount so . food and clothes. idiots. a lunatic. a radio. a lunatic. is supplied by another person with necessaries suited to his condition in life.g. luna-tics. with necessaries suitable to his condition in life. etc. or anyone whom he is legally bound to support. The revenue payable by A to the Government being in arrear. Reimbursement of person paying money due by another. (b) A supplies the wife and children of B. and who therefore pays it. Under the revenue law... Illustrations (to See 68) (a) A supplies B. conse-quence of such sale will be the annulment of B s lease. e. his land is advertised for sale by the Government. a bicycle may be included therein. having regard to his status in society. a watch. The word necessaries here covers not only bare necessities of existence. B. 2. A person who is interested in the payment of money which another is bound by law to pay.g. e. but all things which are reasonably necessary to the incompetent person. (iii) Necessaries should be supplied only to such incompetent person or to some one whom he is legally bound to support such as his wife and children. in pay-ment of which he is interested (Sec. who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. on a lease granted by the zamindar. A is entitled to be reimbursed from B s property. with necessaries suitable to their condition in life. to prevent the sale and the consequent annulment of his own lease. B holds land in Bengal.

In order to make Section 69 applicable.paid. the following conditions must be satisfied: (i) The plaintiff should be interested in making the payment in order to protect his own interest and the payment LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 61 .

70). the following three conditions must be fulfilled: (i) . realise the arrears of Government revenue due by B. yet A cannot recover as he himself was bound to make the payment. In other words. He should only be interested in making the payment. being jointly liable with B and was not simply inter-ested in making the payment. Thus. Notice that although B was bound by law to pay and A has paid B s share in good faith.should not be voluntary one. (iii) The payment must not be such as the plaintiff himself was bound to pay. just to avoid a struggle between B and his landlord. Obligation of person enjoying benefit of non-gratuitous act (Sec. (a) A sub-tenant pays the arrears of rent due by the tenant the landlord. Moreover. Illustrations. pays the arrears of rent of his neighbour B. the thing so done or delivered. or delivers anything to him. A cannot recover from B as he acted voluntarily and had no interest of his own in the payment. A cannot later claim contribution from B under Section 69. a suit under this section is maintainable only for reimbursement and not for contribution.] (ii) The payment must be such as the other party was bound by law to pay. [A can. (b) A. claim contribution form B under action 43. the payment must have been done in good faith and not to manufacture evidence of title to land or any other thing. however. the latter is bound to make compensation to the former in respect of. A pays the dues to save the goods from being sold.] Illustration A and B have been fined jointly Rs500 for selling adulter-ated ghee. He is entitled to recover the amount from B (Abid Hussain vs Ganga Sahai). Where a person lawfully does anything for another person. For giving rise to a right of action under this Section. or to restore. Illustration a s goods were wrongfully attached to. This is the third type of quasi-contract provided in the Contract Act. no suit for contribution from the other would be maintainable under this Section (Ramkrishna vs Radhakrishana). not intending to do so gratui-tously. Section 70 lays down thus. although there is no contract between the two. A alone pays the amount of fine in good faith. and such other person enjoys the benefit thereof. [But if B should agree to reimburse A. the amount paid by him to the landlord. [A suit for contribution from the other joint promisor would be maintainable under Section 43. in order to save the tenancy from forfeiture. this would be a good contract under Section 25(2). where there is a joint liability on joint wrong doers and only one of them discharges the liability. The sub-tenant is entitled to recover from the tenant.] 3.

is subject to the same responsibility as a bailee.. . take of his own goods of the same bulk.e. The rights of a finder of goods have been discussed in Sections 168-. he must restore the goods to him on demand. (ii) The thing must have been done by a person not intending to act gratuitous i. he will be guilty of criminal misappropriation of the property under Section 403 of Indian Penal Code. 71). under similar circumstances. till the goods are in possession of the finder. If the real owner is traced. Section 71 lays down another circumstance in which also a quasicontractual obligation is to be presumed. Further. he can retain possession of the goods against everybody in the world. who finds goods belonging to another and takes them into his custody. Duties of finder of goods. [Illustration to Section 70] (c) Where a coolie takes the luggage at the railway station without being asked by the passenger or a shoe-shiner starts shining shoes of the passenger without being asked to do so. quality and value (Sec. compensation from B if the -circumstances show that he intended to act gratuitously. 4..e. Thus law between the owner and finder of the goods also implies an agreement and the latter is deemed to be a bailee. He must try to find out the real . he can refuse to redeem the goods to the true owner until these moneys are paid. and if the passenger does not object to that. B treats the goods as his own. This means that the act done must be in pursuance of the implied wishes (because there should not be any request in the case of a quasi-contract) and in the presence of the other party. (b) A saves B s property from fire. If he does not take these measures.The thing must have been done lawfully in good faith. 151). A is not entitled to. it must have been done with the intention of being paid for. Illustrations (a) A. He is not entitled to file a suit for the recovery . all expenses incurred by him for preserving the goods or finding the true owner. He is entitled to receive from the true owner. a tradesman. Till the true owner is found out. then he is bound to pay reasonably for the same as the work was not intended to be gratuitous. leaves goods at B s house by mistake. Responsibility of finder of goods (Sec. He is bound to pay A for them.. owner of the goods and must not appropriate the property to his own use. It says: A person. giving him the full choice to reject the thing or service. [Illustration to Section 70]. . he must take as much care of the goods as a man of ordinary prudence would. He has a lien on the goods for the money so spent i. (iii) The person for whom the act is done must have enjoyed the benefit of the act.169 which provide as follows: Rights of finder of goods.

The finder of goods is entitled to sell the goods if the owner cannot be found out or if he refuses to pay the lawful charges of the finder. provided he came to know of the offer of reward before actually finding out the goods. which was offered by the owner for the return of the goods.of such sums.555 . in the following two situations only: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 62 11. But he can file a suit against the owner to recover any reward.

Accordingly. Held. (c) A pays some money to B by mistake. (d) A fruit parcel is delivered under a mistake to R who consumes the fruits thinking them as birthday present. If anybody deprives him of the possession of the goods. and 13. Liability of person to whom money is paid. C is bound to repay the amount to B [illustration to Section 72]. This is the fifth and the last kind of quasi-contract mentioned in the Act. He is entitled to recover so much of the charge as was illegally excessive (illustration to Section 72). if one party under a mistake pays to another party money. The true owner is entitled to get the balance of sale proceeds. he can file a suit for damages for trespass. that money must be repaid. Illustration (a) A and B jointly owe Rs 100 to C. A alone pays the amount to C. must repay or return it. pays Rs 100 over again to C. however. 5. 72). or thing delivered by mistake or under coercion (Sec. (b) A railway company refuses to deliver up certain goods to the consignee. R . cannot recover the amount from B in the absence of privities of contract between B and C. by mistake or under coercion. After the lapse of some weeks. H). if there is surplus after meeting the lawful charges.e.(a) When the thing is in danger of perishing or of losing the greater part of its value. C. F refused to do so. Here coercion means under pressure . H picked up a diamond on the floor of F s shop and handed it over to F to keep it till the owner appeared. The term mistake has been used in the Section without any qualifi-cation or limitation whatever and comprises within its scope a mistake of law as well as a mistake of fact (Sales Tax Officer vs Kanhaiyalal Mukund). or anything delivered. Section 72 declares thus. In spite of best efforts the true owner could not be searched. or (b) When the lawful charges of the finder amount to twothirds of the value of the goods found. except upon the payment of an illegal charge for carriage. It is really due to C. The term coercion has been used in its ordinary sense and not as defined in Section 157 (Pep/ad Bulakhidas Mills vs Union of India). The consignee pays the sum charged in order to obtain the goods. Illustration. which is not due by contract or otherwise. not knowing this fact. F must return the diamond to H as he was entitled to retain the goods as against everybody except the true owner (Hollinsvs FowlerS). B must refund the money to A. H tendered to F the lawful expenses incurred by him for finding the true owner and an indemnity bond and requested him to return the diamond to him (i. A person to whom money has been paid.. It is to be noted that no one except the real owner can claim possession of goods from the finder.

Similarly the Section does not apply when there is a deliberate disregard of law e. 000 to B if a certain ship does not return. (It is a contract of insurance. whereas in fact it may be simply an ordinary absolute contract where the promisor undertakes to perform the contract in all events. But in certain cases a contract may look like a conditional contract. For example. This is a contingent contract. of course after charging usual premium. For example. Contingent Contracts First let us define a contingent contract Definition Section 31 of the Contract Act defines a contingent contract as follows: A contingent contract is a contract to do or not to do something. the following are contingent contracts: (a) A contracts to sell B 10 bales of cotton for Rs20. he cannot recover it. M will do so. (It is a contract of guarantee. collateral to such contract. 000 to B. if B s factory is burnt. if he is elected the president of a particular association. 000. contingent contracts are also known as conditional contracts.000 annual premium. the happening or non-happening of an uncertain event. collateral to such contract does or does not happen. where moneys are paid voluntarily knowing fully well that the contract has become void.) (d) C advances a loan of Rs10. if its performance is made dependent upon the happening or non-happening of an uncertain event. As the performance of a contract is made dependent upon a contingency. the performance of which is dependent upon. Illustration A contract to indemnify B upto Rs20.. It is to be noted.) Contracts of insurance and contracts of indemnity and guarantee are popular instances of contingent contracts. if some event. (b) A promises to give a loan of Rs1. base Where money has been paid in payment of a natural obligation. 000 to D and M promises to C that if D does not repay the loan. (c) A promises to pay Rs50. if the ship by which they are coming returns safely.must return the parcel or pay for the fruits. yet he is bound to pay as the law regards it a quasi-contract. it cannot be recovered under the Section (Ananth Bandhu vs Union of India). in consideration of B paying Rs1. where A promises to pay . Thus it is a contract. that this Section does not cover a. Thus where one has paid up a time-barred debt. Although there is no agreem ent between R and the true owner.g. Any ordinary contract can be changed into a contingent contract.000. collateral to such contract.

a collateral event. means an event which is neither a performance directly promised as part of the contract.500 to B.555 63 .500 per months. it is not a contingent contract. It is an ordinary absolute contract because the uncertain event (namely. Collateral event. though on the face of it. According to Pollock and Mulla. managing to get an accommodation) itself forms the consideration of the contract and is not a collateral event. Hence it must be clearly understood that in the case of contingent contracts the uncertain events must be collateral to such contracts. if B manages to get a two rooms accommodation for him at a rental of Rs2. it appears like a conditional contract.Rs. nor the whole of the considerLEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. a property broker.

e. Essentials of Contingent Contract From the foregoing discussion the following two essentials of a contingent contract become evident: 1. Contingent contracts to do or not to do anything if an uncertain future event happens. approval by an architect. 2.000 to B. (b) A makes a contract with B to sell a horse to B at a specified price. The performance of such a contract depends upon the happening or non-happening of some future uncertain event. it is not collateral to the contract. A contracts to pay Rs50.. and is independent of it. to whom the horse has been offered. The contract cannot be enforced by law unless and until C. If the event becomes impossible. such contracts become void (Sec.ation for a promise. 32). where C contracts to pay Rs100 to D for white-washing his house on the terms that no payment shall be made till the completion of the work. Illustrations (a) A makes a contract with B to buy B s horse if A survives C. The future uncertain event is collateral i. a contractor. as contained in Sections 32 to 36 of the Contract Act. and is thus an integral part of the contract. a contract for the sale of goods wherein the seller agrees to give delivery of goods after a week provided the purchaser makes the payment within two days. Rules Regarding the Performances of Contingent Contracts The rules regarding the performance of contingent contracts.000. refuses to buy it. incidental to the contract. but is itself a reciprocal promise or is the very thing contracted for. In simple words. are given below: 1. the collateral event is one. Thus. is the construction of the building. if C. The contract cannot be enforced by law unless and . For example. which is independent of the consideration. is an absolute contract and not a contingent contract because the event (making payment by the buyer) is an integral part of the contract ( a condition precedent ) and not collateral to the contract. is a collateral event. it cannot be enforced by law unless and until that event has happened. which does not form part of consideration of the contract. and the event. provided the construction is approved by an architect. It is a contingent contract because the consideration of the promise to pay Rs50. Similarly. namely. dies in A s lifetime. for constructing a building. and it is on the happening of this collateral event that the contract shall be enforced.

2. Contingent contracts to do or not to do anything if an uncertain future event does not happen. C marries D. such event becomes impossible [Sec. 35). The contract becomes void. Contingent contracts to do or not to do anything. 35). If a contract is contingent upon how a person will act at an unspecified time. or. it can be enforced when the happening of that event becomes impossible. The marriage of B to C must now be considered impossible. Illustration ( to Sec. it will not revive the old obligation of A to pay the sum. or otherwise than under further contingencies (Sec. or is burnt within the year. 5. 6. because that came to an end when C married D]. Contingent agreements to do or not to do anything. 1. Illustration ( to Sec. are void. 33). becomes void. C dies without being married to B. if it becomes certain that such event will not happen [Sec. Illustrations (to Sec. A agrees to pay B a sum of money (as insurance claim) if a certain ship does not return (of course after charging premium). before the time fixed. (a) A agrees to pay B Rs. The contract can be enforced when the ship sinks. if a specified uncertain event happens within a fixed time. Illustration (To Sec. 36). 35 (2)]. such event has not happened. 4.until C refuses to buy the horse. Contingent contracts to do or not to do anything. 34). or if. [If later B actually marries C (the D s widow). before the time fixed has expired. The contract may be enforced if the ship returns within the year. and not before (Sec. 35 (1)]. A promises to pay B a sum of money (as loan) if a certain ship returns within a year. may be enforced by law when the time fixed has expired and such event has not happened. 3. Illustration ( to Sec. and becomes void if the ship is burnt within the year or if the ship does not return within the year. if an impossible event happens. 34). if. The contract may be enforced if the ship does not return within the year. A agrees to pay B a sum of money (as loan) if B marries C. the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time. whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made (Sec.000 (as a . 36). A promises to pay B a sum of money ( as insurance claim) if a certain ship does not return within a year. if a specified uncertain event does not happen within a fixed time. although it is possible that D may die and that C may afterwards marry B. 33). The ship is sunk. at the expiration of the time fixed. (c) A contracts to pay B a sum of money (as loan when B marries C.

2.000 (as a loan).loan). The agreement is void. In a contingent contract the parties have real interest is the occurrence or non-occurrence of the event e. if B will marry A s daughter C. Difference between a Contingent Contract and a Wagering Agreement The main points of distinction between the two are as under: 1. (a) A agrees to pay B Rs. 1.g. A contingent contract is a valid contract but a wagering agreement is absolutely void. but in a wager the parties LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 64 11. insurable interest in the property insured..555 . if two straight lines should enclose a space. C was dead at the time of the agreement. The agreement is void.

The delivery is to be made after two months and the payment is to be made one month before delivery. 3. of course . 325). Cal. Yet B can recover the loan out of A s property. If any. A s completing the work ) is not collateral to the contract but is the very thing contracted for. 1955. Can B recover the loan and the interest? [Hint. Vs Ajundhia pd. On the expiry of two months. 626). it also cannot be recovered because Sec. As regards the refund of purchase price. B sues A for breach of the contract and for refund of the purchase price. will not be allowed. A agrees to sell land to B at a price to be fixed by C. Interest. because marriage expenses of one s sister are included within the scope of necessaries. this is not a contingent contract because the uncertain event ( i.are not interested in the occurrence of the event except for the winning or losing the best amount.J.] 5. being dissatisfied with . the contract enforceable? [Hint. when no potatoes are delivered to B. A. and is thus an integral part of the contract.R.] 2. on the terms that no payment shall be made till the completion of the work. a Hindu minor.e. Attempt the following problems. No. No. 72 does not apply when there is a deliberate disregard of law (Ananth Bandhu vs Dom. 1910.000. A. The contract in question stands discharged by subsequent destruction of subject-matter and hence there arises no question of its breach. (Nanadan Pd. giving reasons for your answers: Practical Problems 1. In a contingent contract the future uncertain event is merely collateral whereas in a wagering agreement the uncertain event is the sole determining factor of the agreement. C refuses to fix the price. the contract is not enforceable because by C s refusal to fix the price the agreement becomes void for uncertainty in terms. Soon after the crop is destroyed by a pest to the knowledge of both the parties but still makes the payment as agreed. Later.000 for the marriage of his sister from B at 8 per cent interest.] 4. 3. B will not succeed. A promises to pay B for his services whatever A himself will think right or reasonable.. takes a loan of Rs 5. of India. 2 lakhs. Although the minor cannot be estopped from setting up his minority. 32 All. A contracts to sell a part of a specific crop of potatoes to be grown on his farms to B for Rs1. fraudulently representing himself as major. No. Is this a contingent contract? [Hint. A agreed to construct a building for B for Rs. Will B succeed ? [Hint.

Pvt. Elements of Mercantile Law.the payment made.] References Kapoor.D. Business Law . Graw Hill Pvt. Business Law .555 65 .indialawinfo. Kucchal ( 2002). New Delhi. Ltd. are void (Sec. http://www. N.com/bareacts/soga. Delhi.C. (2003). certain.C. Tulsian (2002).html M. Sultan Chand and Sons. Ltd. Tata Mc. Graw Hill Rohini Aggarwal(2003). Decide. or capable of being made certain. B s suit will not be admitted by the Court because if the performance of a promise is contingent upon the mere will and pleasure of the promisor. P. [Hint. 29). Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Delhi. B sues A. Delhi. Vikas Publishing House Pvt. Student s Guide To Mercantile And Commercial Laws. Tata Mc. Ltd.

i. (b) A promises to paint a picture for B by a certain day. The performance can be actual performance or attempted performance .000. that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and . unless such performance is dispensed with or excused under the provisions of this Act. or offer to perform.e. the promisor is not responsible for non-performance.000 to A s representatives. and B is bound to pay Rs. A dies before that day. offer to perform . Every such offer must fulfill the following conditions: (1) It must be unconditional.LESSON 12: PERFORMANCE AND DISCHARGE OF A CONTRACT Learning Outcomes After todays class you should be able to answer the following questions: The performance of a contract The time and place of performance The performance of reciprocal promises The appropriation of payment The contracts which need not be performed The modes of discharge of a contract Introduction Let us first learn about the performance of a contract Section 37 lays down that the parties to a contract must either perform. 1. Promises bind the representatives of the promisors in case of death of such promisors before performance. and the offer has not been accepted. at a certain price. The contract cannot be enforced either by A s representative or by B [section 37]. or of any other law. Illustrations (a) A promises to deliver goods to B on a certain day on payment of Rs. (2) It must be made at a proper time and place. A s representatives are bound to deliver the goods to B. A dies before the day. unless a contrary intention appears from the contract. nor does he thereby lose his rights under the contract. and under such circumstances. Section 38 specifies that where a promisor has made an offer of performance to the promisee. 1. their respective promises.

his promise in its entirety.If any one of two or more joint promisors makes default in such contribution. Effect of accepting performance from third person (Section 41).When two or more persons have made a joint promise.Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise.When a promisee accepts performance of the promise from a third person. during their joint lives. Any one of joint promisors may be compelled to perform ( Section 43) When two or more persons make a joint promise. must fulfill the promise. Now a question arises who are the persons who should perform the contract By Whom Contracts Must be Performed Section 40 specifies that if it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself. In other cases. compel any [one or more] of such joint promisors to perform the whole of the promise. unless a contrary intention appears from the contract. by words or conduct. after the death of any of them.. Nothing in this section shall prevent a surety from recovering from his principal. the promisee may put an end to the contract. Devolution of joint liabilities (Section 42). Explanation. or entitle the principal to recover anything from the surety on . his representative jointly with the survivor or survivors. the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver.. (3) If the offer is an offer to deliver anything to the promisee. his acquiescence in its continuance. or disabled himself from performing. and. An offer to one of several joint promisees has the same legal consequences as an offer to all of them. the promisor or his representatives may employ a competent person to perform it. unless a contrary intention appears by the contract all such persons. then. in the absence of express agreement to the contrary. the remaining joint promisors must bear the loss arising from such default in equal shares. such promise must be performed by the promisor. and. payments made by the surety on behalf of the principal. the promisee may. unless he has signified.then to do the whole of what he is bound by his promise to do. Each promisor may compel contribution. Effect of refusal of party to perform promise wholly (Section 39) When a party to a contract has refused to perform. Sharing of loss by default in contribution. after the death of the last survivor. the representatives of all jointly. he cannot afterwards enforce it against the promisor.

there is not any illegality in the decree granted by the lower Court as against D1. 43 of the Contract Act. a release of one of LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 66 11.555 . Therefore. As the liability is joint and several under Sec. Effect of release of one joint promisor (Section 44) Where two or more persons have made a joint promise. D1 cannot escape from his liability merely because the claim as against D2 stood abated.account of payments made by the principal.

as between him and them. unless a contrary intention appears from. then. Explanation. in each particular case. Devolution of joint rights (Section 45).The question what is a proper time and place is. the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. Application for performance on a certain day to be at proper time and place. a question of fact. with them during their joint lives. (Section 48) When a promise is to be performed on a certain day. a promisor is to perform his promise without application by the promisee. The time and place of performance is very important in the context of a valid performance of a contract Time and Place For Performance Time for performance of promise. by the contract. and. after the death of the last survivor. where no application to be made and no place fixed for performance. where no application is to be made and no time is specified (Section 46) Where. and no place is fixed for the performance of it. Time and place for performance of promise.. and the promisor has undertaken to perform it without application by the promisee. and the promisor has not undertaken to perform it without application by the promisee. in each particular case. it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business. it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise. and no time for performance is specified the engagement must be performed within a reasonable time.such joint promisors by the promisee does not discharge the other joint promisor or joint promisors. the right to claim performance rests. neither does it free the joint promisors so released from responsibility to the other joint promisor or joint promisors. Explanation The question what is a reasonable time is.When a promise is to be performed without application by the promisee. with the representatives of all jointly. and to perform it at such place. a question of fact.. the contract. with the representative of such deceased person jointly with the survivor or survivors and.When a person has made a promise to two or more persons jointly. (Section 50) Performance in manner or at time prescribed or sanctioned by promisee. where time is specified and no application to be made (Section 47) When a promise is to be performed on a certain day.The performance of any promise may . (Section 49) Place for performance of promise. after the death of any of them.

such promisor cannot claim the performance of the reciprocal promise. such that one of them cannot be performed. in contract in which time is essential. or that its performance cannot be claimed till the other has been performed. Section 52 states that where the order in which reciprocal promises are to be performed is expressly fixed by the contract. the contract. and where the order is not expressly fixed by the contract.If it was not the intention of the parties that time should be of the essence of the contract. they shall be performed in that order which the nature of the transaction requires. . and one party to the contract prevents the other from performing his promise. or so much of it as has not beer performed becomes voidable at the option of the promisee. the contract does not become voidable by the failure to do such thing at or before the specified time. or certain things at or before specified times.. the contract becomes voidable at the option of the party so prevented. the promisee accepts performance of such promise at any time other than that agreed. and the promisor of the promise last mentioned fails to perform it. in case of a contract voidable on account of the promisor s failure to perform his promise at the time agreed. Section 53 states that when a contract contains reciprocal promises. in contract consisting of reciprocal promises (Section 54) When a contract consists of reciprocal promises. Let us learn about the performance of reciprocal promises Performance of Reciprocal Promises Promisor not bound to perform. .. and fails to do any such thing at or before the specified times. they shall be performed in that order.be made in any manner.If. and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract. if the intention of the parties was that time should be of the essence of the contract.(Section 55) When a party to contract promises to do a certain thing at or before a specified time.(Section 51) When a contract consists of reciprocal promises to be simultaneously per formed. Effect of failure to perform at fixed time. and he is entitled to compensation1 from the other party for any loss which he may sustain in consequence of the non-performance of the contract. no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. Effect of acceptance of performance at time other than that agreed upon. or at any time which the promisee prescribes or sanctions. unless reciprocal promisee ready and willing to perform. promisee cannot claim . Effect of default as to that promise which should be first performed.. Effect of such failure when time is not essential. but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.

or. might have known. Where one person has promised to do something which he knew. to be impossible or unlawful. becomes impossible. he gives notice to the promisor of his intention to do so.compensation for any loss occasioned by the non-performance of the promise at the time agreed. becomes void when the act becomes impossible or unlawful. with reasonable diligence. or. A contract to do an act which. unlawful. by reason of some event which the promisor could not prevent. unless. such promisor must make compensation to such promisee for any loss which such LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 67 . after the contract is made. Section 56 states that an agreement to do impossible act in itself is void. at the time of such acceptance. and which the promisee did not know.

if accepted. firstly to do certain things which are legal. wholly or in part. or to rescind or alter it. Section 58-Alternative promise.In the case of an alternative promise. Consequences of rescission of voidable contract (Section 64) When a person at whose option a contract is voidable rescinds it. and also other things illegal. the payment. but the second is a void agreement. whether they are or are not barred by the law in force for the time being as to the limitation of suits. the original contract need not be performed. Section 61 states that where neither party makes any appropriation. Promisee may dispense with or remit performance of promise (Section 63) Every promisee may dispense with or remit. must be applied accordingly. If the debts are of equal standing. whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits. one branch being illegal. the legal branch alone can be enforced. the first set of promises is a contract.Where a debtor. which need not be performed? Contracts. Which Need Not be Performed Section 62 states the Effect of novation. You may be thinking that is it necessary that every contract need to be performed What are the contracts. makes a payment to him. and... or under circumstances implying. the payment shall be applied in discharge of each proportionately. the other party thereto need not perform any promise therein . that the payment is to be applied to the discharge of some particular debt.promisee sustains through the non-performance of the promise.. or may extend the time for such performance. to do certain other things which are illegal. Section 60 states about an application of payment where debt to be discharged is not indicated.Where persons reciprocally promise. secondly.. one branch of which is legal and the other illegal. Let us now learn about the appropriation of payments Appropriation Of Payments Section 59 specifies that an application of payment where debt to be discharged is indicated. 3 or may accept instead of it any satisfaction which he thinks fit. and there are no other circumstances indicating to which debt the payment is to be applied.Where the debtor has omitted to intimate.. Section 57 . the payment shall be applied in discharge of the debts in order of time.Reciprocal promise to do things legal. under specified circumstances. owing several distinct debts to one person. the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor. rescission and alteration of contract.If the parties to a contract agree to substitute a new contract for it. the performance of the promise made to him. either with express intimation.

Modes of discharge of contract A contract may be discharged in various modes as discussed below: Discharge by Performance A contract can be discharged by performance in any of the following ways: (a) By Actual Performance A contract is said to be discharged by actual per-formance when the parties to the contract perform their promises in accordance with the terms of the contract. A contract is said to and obligations of the parties end. Discharge by Mutual Agreement Since a contract is created by mutual agreement. so far as may be. Discharge of a Contract Discharge of a contract means relations between the parties be discharged when the rights under the contract come to an termination of the contractual to a contract. (b) By Attempted Performance or Tender A contract is said to be discharged by attempted performance when the promisor has made an offer of performance to the promisee but it has not been accepted by the promisee. Let us now learn about the modes of a discharge of a contract. and subject to the same rules. The party rescinding a voidable contract shall. or when a contract becomes void. restore such benefit. Effect of neglect of promisee to afford promisor reasonable facilities for performance (Section 66) If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise.contained in which he is promisor. Mode of communicating or revoking rescission of a voidable contract (Section 66) The rescission of a voidable contract may be communicated or revoked in the same manner. the promisor is excused by such neglect or refusal as to any non-performance caused thereby. as apply to the communication or revocation of a proposal. Obligation of person who has received advantage under void agreement or contract that becomes void (Section 65) When an agreement is discovered to be void. any person who has received any advantage under such agreement or contract is bound to restore it. if he has received any benefit thereunder from another party to such contract. A contract can be discharged by mutual agreement in any of the following ways: . to the person from whom it was received. or to make compensation for it. it can also be discharged by mutual agreement. to the person from whom he received it. This was all-important about the performance of a contract.

555 . Example i) A owes money to B under a contract. The consideration for the new contract is the discharge of the original contract. and gives B a mortgage of his (A s) estate for Rs 5.000 in place of the debt of Rs 10. Band C that B shall henceforth accept C as his debtor. It is agreed between A. The old debt of A to B no longer exists and a new debt from C to B has been contracted. A enters into an agreement with B. instead of A. Such a new contract may be either between the same parties or between different parties. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 68 11.000. ii) A owes B Rs 10. This is a new contract and extinguishes the old.a) Novation [Section 62] Novation means the substitution of a new contract for the original contract.000.

and is also indebted to other creditors.000 paid at the time and place at which Rs 5. Rs 2.000. However. under a contract a sum of money.000 were payable. or may extend the time for such performance. in satisfaction thereof. wholly or in part. Example X promises Y to sell and deliver 100 Bales of cotton on 1st Oct. parties to the new contract must not change. without ascertaining the amount. According to Section 63. to pay them a composition of 50 paise in a rupee upon . X and Y mutually decide that the goods shall be delivered in five equal installments at Z s godown. Afterwards. ii) A owes B Rs 5. The whole debt is discharged. including B. and B. or may accept instead of it any satisfaction which he thinks fit. (d) Alteration [Section 62] Alteration means a change in the terms of a contract with mutual consent of the parties. and B accepts. in satisfaction of the whole debt. and Y promises to pay for goods on 1st Nov. accepts the sum of Rs 2. at his god own and Y promises to pay for goods on 1st Nov. (e) Remission [Section 63] Remission means acceptance by the promisee of a lesser fulfillment of the promise made. Y may rescind the contract. Every promisee may dispense with or remit. the amount of which has not been ascertained.000. Example i) A promises to paint a picture for B. Example X promises to sell and deliver 100 bales of cotton on 1st Oct. A makes an arrangement with his creditors. iv) A owes B Rs 2. X does not supply the goods. A is no longer bound to perform the promise. the performance of the promise made to him. original contract has been discharged and a new contract has come into effect. A pays to B.(c) Rescission [Section 62] Rescission means cancellation of the contract by any party or all the parties to a contract. gives to B.000. Alteration discharges the original contract and creates a new contract. iii) A owes B. This is a discharge of the whole debt. Here. A. B afterwards forbids him to do so. whatever may be its amount.

Where the promisor alone knows about the initial impossibility relinquishment of a right under the con-tract. (d) By the Identity of Promisor and Promisee When the promisor becomes the promisee. Thus. Discharge by Operation of Law A contract may be discharged by operation of law in the following cases: (a) By Death of the Promisor A contract involving the personal skill or ability of the promisor is discharged on the death of the promisor. This amounts to the right of performance on the part of Y. the contract comes to an end. Discharge by Impossibility of Performance The effects of impossibility of the performance of a contract may be discussed under the following two heads: (a) Effects of Initial Impossibility (b) Effects of Supervening Impossibility (a) . (b) By Insolvency When a person is declared insolvent.000 is a discharge of B s demand. he is discharged from his liability up to the date of his insolvency. Example X draws a bill receivable on Y who accepts the same. A promises to supply goods to Y. Subsequently.respective demands. (c) By Unauthorised Material Alteration If any party makes any material alteration in the terms of the contract without the approval of the other party. X endorses the bill in favour of Z who in turn endorses in favour of Y. Y X from carrying out the promise. the other parties are discharged. Here. (f) Waiver Waiver means intentional Case I Where both the promisor and promisee know about the initial impossibility II. it amounts to releasing a person of certain legal obligation under a Example exempts waiving contract. Payment to B of Rs 1. Y is both promisor and promisee and hence the other parties are discharged. Where both the promisor and promisee do not know about the initial impossibility III.

This agreement is void. and being forbidden by the law to which he is subject to practise polygamy. the horse was dead at the time of making the agreement. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Example X agrees to sell his horse to Y. Example A contracts to marry B. This agreement is void. being already married to C.Effects of Initial Impossibility [Section 56] Initial impossibility means the impossibility existing at the time of making the contract. The effects of initial impossibility are as under Effect Such agreement is void ab initio. Such promisor must compensate for any loss which such promisee sustains through the nonperformance of the promise. Unknown to both the parties. A must make compensation to B for the loss caused to her by the non-performance of his promise. Such agreement is void on the ground of mutual mistake. Example X undertakes to put life into the dead wife of Y.555 69 .

The contract was discharged.(b) Effects of Supervening Impossibility [Section 56] the land. Where an act becomes impossible after the contract is made II. The contract was discharged. (d) Change of Law The contract is discharged if the performance of the contract becomes impossible or unlawful due to change in law after the formation of the . The hall caught fire before the date of first concert. The entire crop was destroyed by fire though no fault of the party. It was held. The contract becomes void when the war is declared. X fell seriously ill and could not perform on the day. The Things Necessary for Performance The contract is effects of supervening impossibility are as under Case Effect 1. [Shyam Sunder v. Supervening impossibility means impossibility which does Durga] not exist at the time of making the contract but which (e) Non-existence or Non-occurrence of a Particular State of arises subsequently after the formation of the contract. Where an act becomes unlawful by reason of some event beyond the control of promisor III. Where an agreement is discovered to be void or where a contract becomes void Let us discuss some of the cases when a Contract is discharged on the ground of Supervening Impossibility A contract is discharged by supervening impossibility in the following cases: (a) Destruction of Subject Matter: The contract is discharged if the subject matter of the contract is destroyed after the formation of the contract without any fault of either party. Example A music hall was rented out for a series of concerts on certain days. (c) Declaration of War The pending contracts at the time of declaration of war are either suspended or declared as void. the contract has become void on ground of supervening impossibility. The contract was discharged. (b) Death or personal incapacity: The contract is discharged on the death or incapacity or illness of a person if the performance of a contract depends on his personal skill or ability. Example X agreed to sing on a specified day. Example X contracts to take in cargo for Y at a foreign port. Example X agreed to sell his crop of wheat. Where the promisor alone knows about the impossibility IV. X s government afterwards declares war against the country in which the port is situated.

[Section 56. to the person from whom he received it. room rent because the procession. Example a) X and Y contract to marry each other. The procession was cancelled because of King s illness. Henry) Cases when the Contract is not Discharged on the Ground of Supervening Impossibility Impossibility of performance is. X must refund Rs 1. Para 2] Such promisor must compensate the promisee for any loss which such promisee might have suffered on account of non-performance of the promise. The contract becomes void. Example X agreed to sell his land to Y. as a rule. ceases to exist or occur. After the formation of the contract. It means that when a person has promised to do something. b) X hired a room from Y for viewing the coronation process of King Edward VII. the Government issued a notification and acquired discharged if that particular state of thing which forms the basis of a contract. he must perform his promise unless the performance becomes absolutely impossible. [Section 65] Example X contracts to sing for Y at a concert for Rs 1. (Krell v.000 to Y. which is paid in advance. It was held that X was not liable to pay the The contract to do such an act becomes void when the act becomes impossible. did not occur. [Section 56 Para 2] The contract to do such an act becomes void when the act becomes unlawful. not an excuse from performance.contract. which formed the basis of the contract. [Section 56 Para 3] Any person who has received any benefit under such agreement or contract is bound to restore it or to make compensation for it. Before the time fixed for the marriage X goes mad.000. X is too ill to sing. A contract is not discharged by the supervening impossibility in the following cases: (a) .

Afterwards.Difficulty of Performance A contract is not discharged simply on the ground that its performance has become more difficult. when the contract becomes commercially unviable or unprofitable. Example X. Example X agreed to supply coal within a specified time. Since.555 . Example X entered into a contract with Y for the sale of goods to be manufactured by Z. Here X will not be discharged because the coal was available in the open market from where X could have obtained it. there was a sharp increase in the rates of the timber and rates of wages.e. Z LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 70 11. (c) Default of a Third Party A contract is not discharged if it could not be performed because of the default of a third party on whose work the promisor relied. i. it was no longer profitable to supply at the agreed rate. a manufacturer of those goods. (b) Commercial Impossibility A contract is not discharged simply on the ground of commercial impossibility. a furniture manufacturer agreed to supply certain furniture to Y at an agreed rate. X will not be discharged on the ground of commercial impossibility. more expensive or less profitable than that agreed at the time of its formation. X did not supply. He failed to supply in time because of government s restriction on the transport of coal from collieries.

2004 (3 years from the expiry of the credit period) Discharge by Breach of Contract A contract is said to be discharged by breach of contract if any party to the contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. It was held that this was no excuse for nonperformance of-the contract. of king and (Ii) to cruise round the fleet. Solution Case (a) The contract is discharged by lapse of time (i. period of limitation for exercising right to recover a debt is 3 years. Due to the illness of the king. 2001 X sold goods to Y for Rs 1. 1963 has prescribed the different periods for different contracts. Credit Lyonnais] (e) Partial Impossibility A contract is not discharged simply on the ground of impossibility of some of the objects of the contract. e. Example X agreed to supply to Y certain goods to be imported from Algeria.B. 2004. The contractual parties cannot exercise their rights after the expiry of period of limitation. the naval review was cancelled but the fleet was assembled and the boat could have been used to cruise round the fleet. The goods could not be imported due to riots in that country. Case (b) The contract is not discharged by lapse of time because the period of limitation is yet to expire on 31st Aug. called period of limitation. 2004 if no credit period was allowed (b) if 2 months credit period was allowed. X will not be discharged and will be liable to Y for damages. It was held that the contract was not discharged.did not manufacture those goods. 3 years) from 1st July 2001 because the debt has become time barred and hence X cannot exercise his right to recover this debt. and to recover an immovable property is 12 years. Example On 1st July. [Jacobs v.g. lockouts and civil disturbances unless otherwise agreed by the parties to the contract. Example X agreed to let a boat to H (i) to view the naval review at the coronation. State the legal position as on 1st Aug. Lockouts and Civil Disturbances A contract is not discharged on the grounds of strikes. Hutton] Discharge by Lapse of Time A contract is discharged if it is not performed or enforced within a specified period. v. [H. A breach of contract may occur in the following two ways: (a) Anticipatory Breach of Contract Anticipatory breach of contract occurs when party declares his intention of not .e. The Limitation Act. (d) Strikes.000 and Y has made no payment till Aug.00. Steamboat Co.

Case (c) If the goods were destroyed by fire after the formation of agreement. is bound to restore it [Section 65] 2.100 per bale because of unexpected increase in the cost of material and labour. (a) The person who received any advantage under a void agreement.000. Case (d) If war is declared between India and Pakistan.000 in advance. Is Y s claim valid? Solution: Section to which the given problem relates: [Section 56 (Para 1).e. unknown to both the parties. the party not at fault) is discharged from his obligation and gets rights to proceed against the party at fault. Case if) If these goods were to be manufactured by Z who . the goods were destroyed by fire at the time of agreement Case (b) If X knew that goods were destroyed by fire at the time of agreement. Solve the following problems for a better understanding: Practical Problems 1. The various remedies available to an aggrieved party will be discussed with you in detail in the next class. X failed to supply these goods. State the legal position in each of the following alternative cases: Case (a) If. X undertakes to put life into the dead wife of Y and takes his fees Rs 5. and Section 65]. X of Delhi agreed to sell 100 bales of cotton @ Rs 1. Consequences of Breach of Contract The aggrieved party (i.000 per bale and to deliver within a fortnight at buyer s godown at Lahore. (b) Actual Breach of Contract Actual breach of contract occurs in the follow-ing two ways: (i) On Due Date of Performance: If any party to a contract refuses or fails to perform his part of the contract at the time fixed for performance. Decision: Y s claim is void. During the Course of Performance: If any party has performed a part of the contract and then refuses or fails to perform the remaining part of the contract. X fails to do so. Case (e) If these goods were to be manufactured by Z who is ready to supply @ Rs 1. Y claims Rs 5. Reason: (a) The agreement is void ab-initio [Section 56 (Para 2)].performing the contract before the performance is due. it is called an actual breach of contract on due date of performance. it is called an actual breach of contract during the course of performance.

did not manufacture those goods. Decision and Reason Case(a) The contract is void on the ground of mutual mistake. lock-out or civil disturbance 4. Mr X a Hindu contracts to marry Y a Muslim. Case (c) & (d) The contract has become void on the ground of supervening possibility Case (e) The contract is not discharged because of commercial impossibility. the promisor. Case (g) If these goods could not be delivered because of strike of transport operators. must compensate the buyer for the promisee for any loss which such promisee sustains through the non-perfor-mance of the promise. Case (g) The contract is not discharged because of non-performance due to strikes. State the legal position in each of the following alternative cases: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Case (b) The contract is void but X. Solution: Section to which the given problem relates: Section 56.555 71 . Case (j) The contract is not discharged because of default of third party.

com/bareacts/soga. References Kapoor. Decision and Reason: Case (a) Y can rescind the contract and can claim the damages for the breach of contract [Section 39]. X. (c) & (d) X is discharged on the sixth night because of her incapability to sing and Y cannot claim the compensation for the damages sustained by him through Y s failure to sing on the sixth night. Case (b) On the sixth night if X willfully absents herself from the theatre and Y allows X to sing on seventh night. Case (b) Y cannot rescind the contract but can claim the compensation for the damages sustained by him through X s failure to sing on the sixth night [Section 39]. New Delhi. Case (d) On sixth night.D. Business Law . Case (a) The contract becomes void because of change in the state of things which formed the basis of the contract. 56. 5. Elements of Mercantile Law.html M. X dies before she sings Solution: Section to which the given problem relates: Sections 39. Solution: Section to which the given problem relates: Section 56 Decision and Reason: Case (a) The contract is void ab-initio because such contract is forbidden by law. Kucchal ( 2002). State the legal position in each of the following alternative cases: Case (a) On sixth night if X willfully absents herself from the theatre and wants to sing on the seventh night but Y does not allow her to sing on the seventh night. Case (c) If Mr X dies before the date fixed for marriage.Case (a) If Mr X is already married to Z who lives with X. http://www. N. Vikas Publishing . X is too ill to sing. the manager of a theatre. Case (c) On sixth night.indialawinfo. a singer enters into a contract with Y. X must compensate Y for the loss caused to her by the non-performance of the promise. Case (b) If Mr X goes mad before the date fixed for marriage. Case (c) The contract is discharged on the death of X.C. to sing at his theatre two nights every week during the next two months and Y engages to pay her at the rate of Rs 100 for each night on completion of the contract. Sultan Chand and Sons. (2003).

Ltd. Ltd. Delhi. Tata Mc. Delhi. Pvt. Ltd. Student s Guide To Mercantile And Commercial Laws. P.C. Tulsian (2002). Graw Hill Pvt. Delhi. Business Law . Notes: © Copy Right: Rai University 72 11.LEGAL ASPECTS OF BUSINESS House Pvt. Tata Mc. Graw Hill Rohini Aggarwal(2003).555 .

B may also file Thus. 75). contract as rescinded and may sit quietly at a suit for rescission and claim damages. .000 to B on 15 April. you would be able to: Identify the remedies for breach of the Contract Rescission of the contract Suit for damages Suit upon quantum meruit Suit for specific performance of the contract Suit for an injunction Introduction There are the following remedies available to the aggrieved party for the breach of the Contract Let us first start with the Rescission of the Contract Rescission of the Contract When there is a breach of contract by one party. When the court grants rescission. if the pledger does not pay as per agreement. in order to free himself from his obligation to return the . B need not pay the price. and becomes entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract (Sec. applying to the court for rescission of the contract is necessary for claiming damages for breach or for availing any other remedy. the aggrieved party is freed from all his obligations under the contract. the other party may rescind the contract and need not perform his part of the obligations under the contract and may sit quietly at home if he decides not to take any legal action against the guilty party.. tea leaves for Rs the tea leaves on B may treat the home. If A does not supply the appointed day.LESSON 13 : REMEDIES FOR BREACH OF CONTRACT Learning Outcomes At the end of this chapter. In prac-tice a suit for rescission is accompanied by a suit for damages. he has to file a suit for rescission of the contract. Illustration A contracts to supply 100 kg of 8. say gold ornaments. 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 claimed. for example. etc. the pledgee may file a suit for rescission of the contract (of course within the period of limitation which is 30 years in this case). But in case the aggrieved party intends to sue the guilty party for damages for breach of contract. in case of pledge of movable goods. in the same plaint.

By awarding damages the court aims to put the injured party into the position in which he would have been had there been performance and not breach. We will now consider the extent to which a plaintiff is entitled to demand damages for breach of contract. Punitive or Vindictive damages. always recover from the guilty party ordinary or general damages. Nominal damages.) With a view to making the study of the quantum of damages easily comprehensible. and not to punish the defaulter party.. the means which existed of remedying the inconvenience caused by the breach must also be taken into account (Explanation to Sec. as a rule. the above rules. Ordinary or General or Compensatory damages (i.73). the injured party can. 2. compensation must be commensurate with the injury or loss sustained. as likely to result from the breach (Special Damages). damages in contemplation of the parties at the time of contract). (b) Such damages which the parties knew. damages arising naturally from the breach).e. Special damages (i. as enunciated in Section 73 may now be considered in some more details under appropriate heads.e. Exemplary. No compensation is to be given generally for any remote or indirect loss sustained by reason of the breach (Ordinary Damages). As a general rule. The rules in this regard have been laid down by Section 73. 1. The fundamental principle underlying damages is not punishment but compensation. when they entered into the contract. (Duty to mitigate damage suffered. an injured party is entitled to receive from the defaulter party: (a) Such damages which naturally arose in the usual course of things from such breach. 4. Suit for Damages Damages are monetary compensation allowed to the injured party for the loss suffered by him as a result of the breach of contract. We shall now see these kinds one by one. (c) In estimating the loss or damage caused to a party by breach. Different kinds of damages. Damages may be of four kinds: 1. arising naturally from the breach. Ordinary Damages When a contract has been broken. 3. no damages will be awarded.ornaments on payment and to become entitled to sell the ornaments in order to realise his debt. Accordingly.. These are such damages as may fairly and reasonably be considered as arising natu-rally and directly in the usual course of . Assessment of damages. If actual loss is not proved.

which are not the natural and probable consequence of the breach of contract. In other words.555 73 . ordinary damages are restricted to the direct or proximate consequences of the breach of contract and remote or indirect losses. are generally not regarded. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.things from the breach of contract itself.

A does not pay the money on that day. A is not responsible to B for the loss caused to B by the closing of the mill [Illustration (p) to Section 73].) (c) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. It was not made known to B that delay would result in loss of profits.Illustrations (a) The leading case of Hadley vs Baxendale. and only nominal damages were awarded. B. In that case: H s mill was stopped by a breakage of the crankshaft. is unable to pay his debts. He cannot claim the loss of profits callused by the closing of the mill because it cannot be considered to have been in contemplation of both the parties when they made the contract and thus is a remote consequence of the breach. the market price is to be ascertained by adding to the price at the place of purchase. is obliged to close his mill. is an authority on the point. 73 is almost based on the rules laid down in this case). (If a suit has been filed then A will have also to pay cost of the suit to B. and is totally ruined. The only information given to B was that the article to be carried was the broken shaft of the mill. a common carrier. (B. together with interest upto the date of payment [Illustration (n) to Section 73]. If there is no market price for the subject matter of the contract. the plaintiffs might have had another shaft. The Court pointed out that B. however. If there is no nearest substitute. Accord-ingly it was not a direct consequence of the breach and hence not recoverable. or there might have been some other defect in the machinery to cause the stoppage. A breaks his promise.) In the case of a contract for sale and purchase the general rule as regards measure of damages is that the damages would be assessed on the difference between the contract price and the market price at the date of breach and any subsequent increase or decrease in the market price would not be taken note of. In consequence the mill remained idle for a longer period than should have been necessary. (b) A contracts to pay a sum of money to B on a specified day. By some neglect on the part of B the delivery of the shaft was delayed beyond a reasonable time. to take it to the manufacturers at Greenwich as a pattern for a new one. A is not liable to make good to B anything except the principal sum he contracted to pay. the conveyance charges to the place of delivery plus the usual profit of the importer (Hajee Ismail & Sons vs Wilson & Co). H brought an action against B claiming damages for loss of profits. in consequence of not receiving the money on that day. A knows nothing of B s mode of conducting his business. having no cotton. H delivered the shaft to B. Held that B was not liable for loss of profits caused by the delay because it was a remote consequence. If the . the defendant. was never told that the delay in the delivery of the shaft would entail loss of profits of the mill. which is said to be the foundation of modern law of damages in England and India (as Sec. and B. or for any other reason there might have been loss actually. which would have been made during the period of delay. the rule is to take the market price of the nearest substitute. can claim damages for the breach of contract.

Notice that if Rs 250 are paid to B by way of damages. Subsequent . It is important that such damages must be in contemplation of the parties at the time when the contract is entered into. by way of compensation. as ordinary damages arising directly from the breach. B is entitled to receive from A. then the due date of each instalment is taken as the date of breach and the measure of damages is the sum of the difference of the market value at the several dates of delivery. In other words. the seller is liable to pay all damages which the purchaser has to pay to the person to whom the goods are sold by him. B is entitled to be reimbursed this sum by A.000. Unlike ordinary damages. warrant-ing it to be of a particular quality.delivery is to be made in instalments. Illustration A sells certain merchandise to B. As a consequence of breach B sold the ship in the open market and he could only get Rs 52. Illustrations (a) A agrees to sell to B 5 bags of rice at Rs 500 per bag..e Rs 550 per bag) on the date of delivery of 5 bags. B can recover by way of compensation Rs 8. and B becomes liable to pay C a sum of money by way of compensation. by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it [Illustration (c) to Section 73]. then he will be in the same position as if the contract has been performed. if any. they are such remote losses which are not the natural and probable consequences of the breach of contract. no time being fixed for delivery: A afterwards informs B that he will not accept the rice if tendered to him. These can be claimed if the special circumstances which would result in a loss in case of breach of contract are brought to the notice of the other party.000. The goods prove to be not according to the warranty. B can claim from A Rs 250. the excess of the contract price over the actual sale price [Adapted from Illustration (d) to Section 73]. 50 maunds of rice. the amount. whether the seller is aware of such a sale or not.000 for the ship. A refuses to deliver the bags to B. but breaks his promise. (b) A contracts to buy from B.e. In order that the purchaser should be able to claim such damages and costs it is an overriding requirement that the sub-contracts should have been made on the same terms and conditions as the first contract. being the difference between the contract price (i. Rs 500 per bag) and the market price (i. Under a contract of sale of goods. 2. at a stated price. and B. sells it to C with a similar warranty. Special Damages Special damages are those which arise on account of the special or unusual circumstances affecting the plaintiff. if there is a breach of warranty. special damages cannot be claimed as a matter of right. (c) A contracts to buy B s ship for Rs 60. delivery to be given after two months. On the date of delivery the price of rice goes up and the rate is Rs550 per bag. in reliance upon this warranty.

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 74 11.555 .knowledge of the special circumstances will not create any special liability on the guilty party.

in order that B may give possession of it at that time to C. two exceptions to this rule. and is prevented from performing a contract which B had made with a third person at the time of his contract with A. (ii) for the rent lost. by way of compensation. One may be ruined. and (iii) for the compensation made to C. and A could not procure other iron. in consequence rescinds the contract. and. who. and is obliged to make compensation for breach of that contract. before the first of January. the cardinal principle of the taw of damages for a breach of contract is to. A is informed of the contract between Band C.) (b) A contracts with B to make and deliver to B. In this case the amount of the damages will depend upon the extent of injury to the party s feelings. (c) A. (b) Dishonour of a cheque by a banker when there are . C must pay to A Rs 20. obviously exemplary damages have no place in the law of contract and are not recoverable for a breach of contract. A must pay to B. the difference between the contract price of the piece of machinery and the sum paid by B for another. [Illustration to Section 73]. (If C was not told of B s contract then only the difference in contract price and market price. compensate the injured party for the loss suffered and to punish the guilty party. (i) for the cost of rebuilding the house. in consequence of this. Hence. telling C that he does so for the purpose of performing his contract with B. and B. A builds the house so badly that. to be delivered at a stated time. (a) Breach of a contract to marry. contracts to erect and finish a house by the first of January. other may not mind so much.Illustrations (a) A having contracted with B to supply B 1. A must pay to B. and has to be rebuilt by B. by a fixed day. and is compelled to make compensation for breach of that contract. but not the sum paid by B to the third person by way of compensation [Illustration to Section 73]. contracts with C for the purchase of 1. Exemplary or Vindictive Damages These are such damages which are awarded with a view to punishing the guilty party for the breach and not by way of compensation for the loss suffered by the aggrieved party. in consequence loses the rent which he was to have received from C. B is obliged to procure another at a higher price than that which he was to be paid to A. could be claimed. it falls down. if any. for a specified price a certain piece of machinery.000 tons of iron at Rs 80 a ton. however.000 tons of iron at Rs 100 a ton.a builder. by way of compensation. As observed earlier. [Illustration (l) to Section 73] 3.000 being the profit which A would have made by the perform-ance of his contract with B. to whom B has contracted to let it. There are. C fails to perform his contract with A. A does not deliver the piece of machinery at the time specified. (but which had not been then communicated to A).

Of course. a rupee or two. under similar circumstances in his own case. These are neither awarded by way of compensation to the aggrieved party nor by way of punishment to the guilty party. He must use all reasonable means of mitigating the damage. he will be entitled to the full salary for the whole of the unexpired period of service. then the aggrieved party is entitled only to nominal damages. is on the defendant to show that the plaintiff has failed in his duty of mitigation and the plaintiff is free from the burden of proving that he tried his best to mitigate the loss (Pauzu. it is his duty to mitigate the damages by seeking other employment. The onus of proof. The rule in regard to mitigation must be applied with discretion and a man who has already put himself in the wrong by breaking his contract has no right to impose new and extraordinary duties on the aggrieved partys. 4. But if it cannot be proved that he has failed in his duty of mitigation. if the contract price and the market price is almost the same at the date of breach at the contract. Courts should take care to see that they have put the plaintiff in the same position as if the contract had been performed. if the contract of employment was for a fixed period. then the principle of awarding damages for a reasonable period of notice comes into play (S S Shetty vs Bharat Nidhi Ltd. He can recover only nominal damages if he refuses a reasonable offer of fresh employment. ). the greater the damage. the actual amount of damages will differ according to the status of the party. say. and have been overgenerous to the contract-breaker by too severe an application of the rule that the plaintiff must take reasonable steps to mitigate damages. however. just as a prudent man would. Duty to Mitigate Damage Suffered It is the duty of the injured party to mitigate damage suffered as a result of the breach of contract by the other party. vs Saunders). For example. These are awarded to establish the right to decree for breach at contract when the injured party has not actually suffered any real damage and consist of a very small sum of money. where in a contract of sale of goods. (b) A took a shop on rent from B and paid one month s rent in advance. He cannot recover any part of the damage. A sued B for breach of contract and claimed damages for the loss . Nominal Damages Nominal damages are these which are awarded only for the name sake. Ltd. A chose to do no business for 8 months though there were other shops available in the vicinity. the smaller the cheque. even though wrongfully. traceable to his own neglect to mitigate. If the contract of employment was not for a fixed term. B could not give possession of the shop to A.sufficient funds to the credit of the customer. Illustrations (a) Where a servant is dismissed. In this case the rule of ascertaining damages is.

he was entitled only to a refund of his advance. Held.555 75 .suffered. as he had failed in his duty to minimize the loss by not taking another shop in the neighborhood (Neki vs. Pribhu). LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. and nothing more.

Illustrations (a) A contracts with B to pay Rs 1. regardless whether it is a penalty or not. not exceeding Rs 1. are treated as invalid and the courts in that case calculate damages according to the ordinary principles and allow only rea-sonable compensation. gives any bond for the performance of any public duty or act in which the public are interested. not exceeding the amount so named in the contract. either by way of liquidated damages or penalty. In such a case. Exception.Liquidated Damages and Penalty Let us first know what we mean by the two terms. Thus. the whole shall become due. in default of payment of any installment. A fails to pay B Rs 500 on that day. according to the section. When any person enters into any bailbond. however. or under the provisions of any law or under the orders of the Government. recognizance or other instrument of the same nature. B is entitled to recover from A such compensation. Sometimes the parties fix up at the time of the contract the sum payable as damages in case of breach. Pen-alty means a sum fixed up in advance. which is a fair and genuine pre--estimate of the probable loss that is likely to result from the breach. which is extravagant and uncon-scionable in amount in comparison with the greatest loss that could conceiv-ably be proved to have followed Item the breach. [illustration (a) to Section 74] (b) A undertakes to repay B a loan of Rs 1. Under the Indian Law Section 74 does away with the distinction be-tween liquidated damages and penalty . There is.000 as the court considers reason-able.000 by five equal monthly installments with a stipulation that. This Section lays down that the Courts are not bound to treat the sum mentioned in the contract. one exception provided for by Section 74 to the above rule. determines only the maximum limit of liability in case of the breach of contract. as the sum payable as damages for the breach. . the named sum. without any regard to the actual loss sustained. Liquidated dam-ages means a sum fixed up in advance. however. it merely declares the law that notwithstanding any term in the contract pre-determining damages or pro-viding for forfeiture of any property by way of penalty.000 if he fails to pay B Rs 500 on a given day. Penalty clauses. Courts in England usually allow liquidated damages as stipulated in the contract. he shall be liable to pay the whole sum mentioned therein upon breach of the condition of any such instrument. Thus the essence of a penalty is a payment of money stipulated as per the terms of the offending party. Instead the courts are required to allow reasonable compensation so as to cover the actual loss sustained. The section does not confer a special benefit upon any party. a distinction is made in English Law as to whether the provision amounts to liquidated damages or a penalty . the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated.

This is a stipulation by way of penalty. 74]. The proportion the amount bears to the total sale price. Summary of the Rules Regarding the Measure of Damages The principles governing the measure of damages discussed . the court has jurisdiction to award such sum only as it considers reasonable but not exceeding the amount so agreed (Fateh Chand vs Balkishen Dass). [Illustration (j) to Section 74] (c) A borrows Rs 100 from B. the whole shall become due. (c) Payment of compound interest on default is allowed. The cost of suit for damages is in the discretion of the court. But where it is in the nature of penalty. from the date of default. Earnest money.This stipulation is not by way of penalty and the contract may be enforced according to its terms. to get the costs of getting the decree for damages tram the defaulter party. only if it is not at an enhanced rate (Bhushan Rao vs Subayyal). (b) Where a contract provides that the amount should be paid without interest by a particular date and on default it will be payable with interest. If the interest is exorbitant. in default of payment of any installment. the courts will give relief. generally speaking {Mahabir Prasad vs Durga Datt). [illustration (g) to Section 74] Stipulation regarding payment of interest. Cost of Suit The aggrieved party is entitled. Money deposited as security for the due performance of a contract is known as earnest money. with a stipulation that in case of default interest shall be payable at the rate of 75 per cent p. interest cannot be recovered legally as damages. a stipulation for increased interest from the date of default may be a stipulation by way of penalty. in addition to the damages. A gives B a bond for the repayment of Rs 1. It implies that such a stipulation maybe considered a penalty clause and disallowed by the courts.000 with interest at 12 percent per annum at the end of six months. Forfeiture of earnest money is allowed if the amount is reasonable. with a stipulation that. if the enhanced rate is exorbitant. such a stipulation may be allowed if the interest is reasonable. and gives him a bond for Rs 200 payable by five yearly installments of Rs 40.a. The following rules must also be noted in connection with payment of interest (a) Unless the parties have made a stipulation for the payment of interest or there is a usage to that effect. entitled to recover from A such compensation as the court considers reasonable. Illustration [(d) to Sec. The Explanation added to Section 74 states. This is a stipulation by way of penalty and B is only. the nature of the contract and other circumstances have to be taken into account in ascertain-ing the reasonableness of the amount.

555 . The damages are awarded by way of compensation for the loss suffered by the aggrieved party and not for the purpose of punishing the guilty party for the breach. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 76 11. The injured party is to be placed in the same position.above may be summarised as under: 1. so far as money can do. as if the contract had been performed. 2.

damages which are not the natural and probable consequence of the breach are usually not allowed until they are in the knowledge of both the patties at the time of entering into the contract. 5. reasonable compensation so as to cover the actual loss sustained. 7. It is the duty of the injured party to minimise the damage suffered. only nominal damages are awarded.e. Illustrations (a) P agreed to write a volume on ancient arm our to be published . The aggrieved party may file a suit upon quantum meruit and may claim payment in proportion to work done or goods supplied in the follow-ing cases: I.. This remedy may be availed of either without claiming damages (i. claiming reason-able compensation only for the work done) or in addition to claiming damages for breach (i. there is a breach of contract.contract. 9. the court will allow only. The injured party is entitled to get the costs of getting the decree for damages from the defaulter party. If the parties fix up in advance the sum payable as damages in case of breach of . 8. not exceeding the amount so named in the contract. Suit Upon Quantum Meruit (Sections 65 and 70) The third remedy for a breach of contract available to an injured party against the guilty party is to file a suit upon quantum meruit.e.3. Special or remote damages. 10. The fact that damages are difficult to assess does not prevent the injured party from recovering them. e. When no real loss arises from the breach of contract.in a magazine owned by C. arising naturally in the usual course of things. or the contract is discovered void or becomes void. 4.. For this he was to . i. The phrase quantum meruit literally means as much as is earned or in proportion to the work done. Exemplary damages cannot be awarded for breach of contract except in case of breach of contract of marriage or wrongful refusal by the bank to honour the customer s cheque. A right to use upon quantum meruit usually arises where after part performance of the contract by one party. 6. The aggrieved party can recover by way of compensation only the actual loss suffered by him. which has been discharged by the default of the defendant. claiming reasonable compensation for part per-formance and damages for the remaining unperformed part). Where work has been done in pursuance of a contract..

Illustrations (a) A. 3. 2. purporting to act under the agreement. It is important that in the case of a wrongful breach of contract the injured party can always claim payment quantum meruit. but not the whole. He is bound to pay A for them.receive $ 100 on comple-tion. B treats the goods as his own. Although the contract becomes void and stands discharged because of destruction of the house. rendered services to the company and sued for the sums specified in the agreement. the latter must compensate the former or restore the thing so deliv-ered. (b) A contracts with B to repair his house at a piece rate. One of such cases is provided in Section 70. alternatively. (b) A. provided the contract is divisible. leaves certain goods at B s house by mistake. or. to the damages for breach of contract. (i) without any intention of doing so gratuitously. Notice that in both the above cases the contract was wrongfully terminated by the defendant. (Craven-Ellis vs Canons Ltd. the contractor. and both damages as well as payment quantum meruit have been allowed. of his volume. ). C nevertheless. C abandoned the magazine. is entitled to get reasonable compensation for work done under the doctrine of quantum meruit in addition. When a person enjoys benefit of non-gratuitous act although there exists no express agreement between the parties. whether the contract is divisible or indivisible. a trader. and (ii) the benefit of the same is enjoyed by the other party.14 Section 70 lays down that when services are rendered or goods are supplied by a person. B. for a reasonable. Held. Where work has been done in pursuance of a contract which is discovered void or becomes void. After a part is constructed A prevents B from working any more. remuneration on a quantum meruit. Note that if under the contract a lump sum is to be paid for the repair job as a whole. then A cannot claim quantum meruit because no money is due till the whole job is done. (a) C was appointed as managing director of a company by the board of directors under a written contract which provided for his remunera-tion. After a part of the repairs were carried out. The contract was found void because the directors who constituted the Board were not qualified to make the appointment. a contractor. [Illustration (a) to Section 70] . engages B. to build a three storied house. A can claim payment for the work done on quantum meruit . the house is destroyed by lightning. When he had completed part. C could recover on a quantum meruit. Illustrations. P was held entitled to get damages for breach of contract and payment quantum meruit for the part already completed (Planche vs Colburn).

and (b) The other party must have enjoyed the benefit of the part which has been performed. it was held that A was entitled to payment as the work was not intended to be gratuitous and the other party has enjoyed the benefit of the same.(b) Where A ploughed the field of B with a tractor to the satisfaction of B in B s presence. (Ram Krishna vs Rangoobed). LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 77 . 4. A party who is guilty of breach of contract may also sue on a quantum meruit provided both the following conditions are fulfilled: (a) The contract must be divisible. although he had an option of declining it.

. It is only where it is just and equitable so to do. affords no ground for such an inference. A decree for specific performance is not granted for contracts of every description. He is not bound to keep unfinished a building which in an incomplete state would be a nuisance on his land. (iii) Where the contract is for personal services.Illustrations (a) Where a common carrier fails to take a complete consignment to the agreed destination. H himself completed the buildings using some materials left on his land by S. The mere fact that a defendant is in possession of what he cannot help keeping. for a decree by the court directing the defendant to actually perform the promise that he has made. Under certain circumstances an aggrieved party may file a suit for specific performance. S did part of the work and then abandoned the contract. e. In an action by S for the value of work done and of the materials used by H. Thus the courts refuse specific performance of it contract to lend or to borrow money or where the contract is for the sale of goods easily procurable elsewhere. be liable for breach of the contract. In such contracts injunction (i.g. It is usually granted in contracts connected with land buildings articles and unique goods having some special value to the party suing because of family association. a building construction contract. or even has done work upon it. i.g. he may recover prorata freight. The court observed. Specific performance is not granted. i.. but to accept that).) (b) S had agreed to erect upon H s land two houses and stables for $ 565.e. Moreover. in the following cases: (i) Where monetary compensation is an adequate relief. as a rule. (ii) Where the court cannot supervise the actual execution of the con-tract. that the courts issue a decree for specific performance. Notice that in all these contracts monetary compensation is not an adequate relief because the injured party will not be able to get an exact substitute in the market.. an order which forbids the defendant to perform a like personal service for other persons) is granted in place of . a contract to marry or to paint a picture. (Sumpter vs Hedges). it was held that S could recover the value of the materials (for H had the option to accept or to reject these) but he could not recover the value of the work done (for H had no option with regard to the partly erected building. in most cases dam-ages afford an adequate remedy. where the regal remedy is inadequate or defective.. e. Suit for Specific Performance Specific performance means the actual carrying out of the contract as agreed. Such a suit may be filed either instead of or in addition to a suit for damages. of course. e.e. (He will..

B in consequence of not receiving the money on that day. but granted an injunction restraining A from singing elsewhere and awarded damages to B to compensate him for the loss caused by A s refusal. It is a mode of securing the specific performance of the negative terms of the contract. the actual loss caused to him as a result of the delay. where a party is in breach of negative term of the contract (i. Practical Problems Attempt the following problems. agreed to sing at B s theatre for three months from 1st April and to sing for no one else during that period. restrained by an injunction from buying electricity from any other company. the court will allow only reasonable compensation so as . A does not pay the amount on that day. B cannot claim heavy damages unless A had notice of the special circumstances resulting in the special loss at the time of entering into the contract] 2.500. On a suit by B. the court may. where he is doing something which he promised not to do). B sued A for Rs 4. A agreed to erect a plant for B by 31st March. therefore. [Hint. Advise A. What damages will you award. by issuing an injunction. A is liable to pay interest only from the specified day upto the date of payment. Suit for an Injunction Injunction is an order of a court restraining a person from doing particular act. (Lumley vs Wagnerl) (b) G agreed to take the whole of his supply of electricity from a certain company. because when a sum is named in . In other words B can.specific performance. what he promised not to do. B claims heavy damages. 1976. giving reasons for your answers: 1. e. claim only ordinary damages. and why? [Hint B is entitled to recover Rs 2. The agreement was held to import a negative promise that he would take none from elsewhere. restrain him from doing. It is particularly appropriate in cases of anticipatory breach of contract where damages would not be an adequate relief. To put it differently. Subsequently she contracted to-sing at C s theatre and refused to sing at B s theatre. is unable to pay his debts and. is totally ruined..the contract as the amount to be paid in case of breach. A further agreed to pay Rs 500 per month as damages in case of delay beyond the agreed date. A was late by four months. Thus -injunction is a preventive relief.000 only. (Metropolitan Electric Supply Company vs Ginder). He was. the court refused to order specific performance of her positive engagement to sing at the plaintiff s theatre. A contracts to pay a sum of money to B on a specified day. Illustration (a) A.

within the limits stated in the contract.to cover the actual loss sustained. B could not get an alternate job elsewhere and files a suit for damages for breach of contract against A. assess the amount of damages recoverable by him.] 3. Without any lapse on the part of B. Will he succeed? If yes.555 .000. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 78 11. A dismisses him after two years of service. A employs B as manager of his factory for a term of three years at a monthly salary of Rs 3.

P. (2003). Tata Mc. Yes. A mate was engaged for a lump sum to be paid after the completion of voyage. Business Law . His legal representatives claim damages on quantum meruit. Ltd. Vikas Publishing House Pvt. Ltd. Pvt. The legal representatives of the mate cannot recover anything as the doctrine of quantum meruit is inapplicable under the circumstances (Cutter vs.html M.e. New Delhi. will be entitled to full salary for the whole of the un expired period of service i. Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Business Law .com/bareacts/soga. B. 6 T. because no money is due till the job is done. Decide. N. Graw Hill Pvt. Delhi.indialawinfo. Tata Mc. B will succeed.] 4. If it cannot be proved that B has failed in his duty to mitigate the loss subsequent upon the breach. if the contract is indivisible and a lump sum is to be paid for the job as a whole. The mate dies when only of the voyage was completed. Delhi.[Hint. Tulsian (2002). one year. Powell.C.. Graw Hill Rohini Aggarwal(2003). Delhi. Sultan Chand and Sons.R. 320). Hence the amount of damages recoverable by B amounts to Rs 36. The rule of law on the point is that party in default cannot sue upon quantum meruit. Student s Guide To Mercantile And Commercial Laws.C. Elements of Mercantile Law. http://www. Ltd.D. [Hint.000.555 79 . Kucchal ( 2002).] References Kapoor.

agreements in Restaurant of trade . 1872. Just like Indian Contract Act.LESSON 14: THE SALE OF GOODS ACT. before it is delivered or in solvency of the buyer. for example delivery of goods and payment of Price etc. 1930 INTODUCTION TO SALE OF GOODS AND ITS FORMATION Learning Outcomes After reading the lesson. This Act came into force on first July 1930. These rules are applicable to contract of Sales of Goods Act as for as they are not in consistent with the express provisions of sales of goods Acts. free consent. there should be offer and acceptance in the case of sales of goods. The provisions of this Act extends to the whole of India except the state of J&K. such as destruction of goods sold. certain minor amendments where made in this Act in 1963. Definition of Sale of goods Section 4 (1) the sales of goods Act defines a contract of sale of goods as A contract where by the seller transfers or agrees to transfer the property in goods to the buyer for a price . Two parties: There should be two parties namely the buyer . The sales of goods Act does not seek to fetter this discretion. wagering agreements and measure of damages. However the definition of consideration stands modified to the extent that in a contract of sale of goods consideration must be my way of Price . The parties to the contract enjoy unfettered discretion to agree to any terms they like. However the law gives full freedom to the parties to modify any provisions. Essential Characteristics of Sale of Goods 1. only money consideration. you should be able to know: Contract of Sale of Goods Formation of Sale of Goods Difference between Sale and Agreement to Sale Introduction Contract of Sale of Goods We have already studied rules relating to Indian Contract Act. it simply lays down certain positive rules of General application for those cases where the parties have failed to contemplate expressly for contingencies which may interrupt the smooth performance of a contract of sale. Some of the provisions of Indian Contract Act apply to this Act for example the rules relating to Capacity of parties.

Goodwill. as used in the Sale of Goods Act. A mere transfer of possession of the goods cannot be termed as sale. Thus where trees sold so that they could be cut out and separated from the land and then taken away by the buyer. Price: The consideration for a contract of sale must be . An undivided join owners must be distinguished from a part-owner who is a join owner with divisible share. For example. promissory note etc. But contracts for sale of things forming part of the land itself are not contracts for sale of goods.e. example a book debt. however. electricity. Incase the students of a Hostel take meals in a mess run by them . 1882.). such instruments cannot be sold. and includes stock and shares. there is no contract of sale because the student are undivided joined owners. he himself may buy them.. gas. and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. copyrights. It is not regarded as goods because it is the medium of exchange through which goods can be bought. the term property. decree of a court of law. Actionable Claims means claims which can be enforced by a legal action or a suit. means general property in goods as distinguished from special property 3. A book debt is not goods because it can only be assigned as per Transfer of Property Act but cannot be sold. In the case of land the grass which forms part of land have to be separated from the land. To constitute a contract of sale the seller must either transfer or agree to transfer the property in the goods to the buyer. who are running the mess on cooperative basis. where a person s goods are sold in execution of a decree. Same is case in the case of bill of exchange. Old and rare coins. water. Although the general rule is that a person cannot buy his own goods. are all regarded as goods. Transfer of Property: Property here means ownership . Example supposes X and Y jointly owns a typewriter and X sells the type writer to Y the ownership of type writer goes to Y. Transfer of property in the goods is another essential of a contract of sales of goods. Further. Goods: The subject-matter of the contract of sale must be goods According to Section 2(7) goods means every kind of movable property other than actionable claims and money. trade marks. The negotiable instrument like promissory note can be transferred under Negotiable Instruments Act by mere delivery or endorsement and delivery.and seller. many be treated as goods and sold as such. It may be mentioned that sale of immovable property is governed by the Transfer of Property Act. grass. there is one exemption i. 4. it was held that there was a contract for sale of movable property or goods (Kursell vs Timber Operators & Contractors Ltd. 2. growing crops. Money means current money. patents right. a contract for the sale of coal mine or building-stone quarry is not a contract of sale of goods.

But if goods are sold partly for goods and partly for money. If goods are sold or exchanged for other goods. the contract is one of sale (Aldridge vs Johnson). LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 80 11. governed by the Transfer of Property Act and not a sale of goods under this Act.555 . the transaction is barter.money consideration called the price .

000 and agrees to pay for that in two monthly installments. Where under a contract of sale the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled. the contract is called a sale [Sec. (b) A agrees to purchase B s car for Rs 5. 4(3)].5. No formalities to be observed: A contract of sales of goods can be made by mere offer and acceptance. since A agrees to transfer the ownership of the scooter to B at a future time. 6. It becomes a sale when the condition is fulfilled by B. if his solicitor approves.g. (c) B agrees to buy A s car for Rs. (d) A buys some furniture for Rs. It refers to an absolute sale . 4(3)]. 7. 2.000. Sale: Where under a contract of sale the property in the goods is immediately transferred at the time of making the contract from the seller to the buyer. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred [Sec. It is an agreement to sell for B. It is an executory contract and refers to a conditional sale. It is an agreement to sell. an outright sale on a counter in a shop. 3. Neither payment nor delivery is necessary at time of making the contract of sale. The term contract of sale is a generic term and includes both a sale and an agreement to sell [as is clear from the definition of the term as per Section 4(1) given carlier ]. It is an executed contract. Transfer of property (ownership) In a sale the property in goods passes to the buyer immediately at the time of making the contract. There is immediate conveyance of the ownership and mostly of the subject matter of the sale as well (delivery may also be given in future).000 provided B stands surety for him with C. There is an agreement to sell for the furniture dealer. Includes both a sale and an agreement to sell. Sale and Agreement to Sale Distinguished 1. In other words. e. a sale implies immediate conveyance of property so that the seller ceases . 4(4)]. the contract is called an agreement to sell [Sec. Let us try to understand the difference between sale and agreement to sale. A agrees with B that he will sell B his scooter on 15 January for a sum of Rs. Illustration (a) On 1 January.000 and pay for it. An agreement to sell. 30. the ownership to pass to him on the payment of second installment. It is an agreement to sell for A and an agreement to buy for B. It can be made either orally or in writing or partly orally or partly in writing or may be even implied from the contact of the parties.

lost if the subsequent buyer had bought them bonafide without notice of the previous sale (Sec. It is worth nothing that this is the basic point of distinction between a sale and an agreement to sell. even though the goods are still in his possession. In case of an agreement to sell. 30). 4. The conveyance of property takes place later so that the seller continues to be the owner until the agreement to sell becomes a sale either by the expiry of certain time or the fulfillment of some condition. The original buyer can sue and recover the goods from the third person as owner.e. The right to recover the goods from the third person is. It creates a just in rem. 2. if the goods are destroyed the loss falls on the buyer even though the goods may never have come into his possession because the property in the goods has already passed to the buyer. An agreement to sell creates a jus in person. if the buyer fails to accept and pay for the goods. it gives a right to either buyer or seller against the other for any default in fulfilling his part of the agreement. The transaction becomes a sale and the property in the goods passes to the buyer after the wheat is weighed and the buyer has notice thereof. 26). the risk of loss prima facie passes with property (Sec.e. Thus in case of sale. Consequences of breach. that is. In an agreement to sell there is no transfer of property to the buyer at the time of the contract. the transaction is an agreement to sell because as per Section 22. however. If he does so. the seller can only sue for damages and not for the price. All other points of distinction follow from this basic difference. i.to be the owner of the goods and the buyer becomes the owner thereof. On the other hand. the property in the goods remains with the seller and as such he can dispose of the goods as he likes and the original buyer can sue him for the breach of contract only. such loss has to be borne by the seller even though the goods are in the possession of the buyer. in case of an agreement to sell where the ownership in the goods is yet to pass from the seller to the buyer. the subsequent buyer having knowledge of the previous sale does not acquire a title to the goods. and can also sue the seller for the breach of contract as well as for the tort of conversion. gives right to the buyer to enjoy goods as against the whole world. The general rule is that unless otherwise agreed. Right of resale In a sale. In this case. whether the property in the goods has passed or is yet to pass from seller to buyer. In an agreement to sell. the subsequent buyer gets a good title to the .. In case of sale. in such a case the property does not pass to the buyer till the goods are weighed and the buyer has notice thereof. if the buyer wrongfully neglects or refuses to pay the price of the goods. i. 3. Risk of loss. even though the goods are in the possession of buyer. the property is with the buyer and as such the seller ( in possession of goods after sale ) cannot resell the goods. Thus where A agrees to buy 50 kg wheat from B and the wheat is yet to be weighed. the seller can sue for the price.

goods. 5. The seller is entitled only to a ratable dividend LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. in the absence of a right of lien over the goods. if the buyer is adjudged insolvent before he pays for the goods. irrespective of his knowledge of previous sale. Further.555 81 . goods forming the subject matter of an agreement to sell can also be attached in execution of a decree of a court of law against the seller. must deliver the goods to the Official Receiver or Assignee. the seller. Insolvency of buyer before he pays for the goods In a sale.

Let us now understand the difference between Sale And Hire Purchase Hire Purchase Although hire purchase resembles sale of goods it is different in many ways. in an agreement to sell. A cannot ask for its return. as the property in the goods rests with the buyer. B wants to sue A for breach of contract. the seller may refuse to deliver the goods to the Official Receiver or Assignee unless paid for. On the other hand. the essence of hire-purchase agreement is that there is no agreement to buy. Advise B. in these circumstances. d) A dealer in radios gives a Murphy radio to a customer on the terms that Rs. Thus. . which may or may not be exercised. No. But in an agreement to sell. It was further agreed that if the radio is found defective the customer may return it within a week but not later. if the buyer has already paid the price and the seller is adjudged insolvent. 100 should be paid by him immediately and Rs 200 more in two monthly equal instalments. the radio dealer connot take back the radio on default by the customer because it is a contract of sale and not of hire purchase] e) A sold 100 quintals of groundnut oil to B. Insolvency of seller if the buyer has already paid the price In a sale. as ownership has not passed to the buyers. B cannot insist on its delivery to him since the contract has become void (Sec. if the seller is adjudged insolvent. the buyer can only claim a ratable dividend (as a creditor) and not the goods because property in them still rests with the seller.for the price of the goods. but there is only a bailment of the goods coupled with an option to purchase them. 6. Under hire purchase agreement the goods are delivered to the hire purchaser for his use at the time of the 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. Can the radio dealer take back the radio on his default? [ Hint. Distinction between a sale and a hire-purchase agreement [Hint: B shall have to pay for the car already delivered a reasonable price. The customer makes default in paying the last installment. 10)]. Before it could be delivered to B. As regards the second car. the Government of India requisitioned the whole quantity lying with A in public interest. the buyer is entitled to recover the goods from the Official Receiver or Assignee.

the amount payable by the buyer regarded as hire charges and not as payment to the seller is reduced. and cannot be forced goods. 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. 4 If the buyer makes the payment in 4.Notes 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. The position of the hire-purchaser is that of owner. 3. The position of the buyer is that of the 2. to pay the further instalments. The instalments paid by the hire-purchaser are instalments. number of instalments is paid. The hire-purchaser has an option to terminate as such is bound to pay the price of the the contract at any stage. the bailee. Answer the following Questions . The buyer cannot terminate the contract and 3. 2. goods.

a furniture dealer. What are the rights of A and B? b) B agrees to buy A s Furniture at a price to be fixed by D. A asks for the return of the car already delivered whereas B insists on the delivery of the second car to him.a) A agrees to sell a horse to B who tells A that a) He needs the horse for riding to Ban galore immediately. On A s refusal to sell. can B legally compel him to sell the furniture for any price? c) A agrees to sell to B his two second hand cars on the terms that the price was to be fixed by C. Decide. refuses to fix the price. for a reasonable price of both the cars. D refuses to oblige A and B and fixes no price. G. B takes delivery of one car immediately.555 . The horse is ill at the time of agreement. however. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 82 11.

and 3. For example. which are not separately identified or ascertained at the time of the making of the contract. Existing goods: At the time of sales if the goods are physically in existence and are in possession of the seller the goods are called Existing Goods Existing goods can be classified into specific or unascertained. you should be able to know: Subject matter of Contract of Sale Kinds of Goods Perishing of Goods Fixation of Price Importance of time Document of title to the goods.LESSON 15: THE SALE OF GOODS ACT. Future goods. For example. They are indicated or defined only by description. Contingent goods 1. (a) Specific goods. Existing goods. The goods. it is a sale of . 2. 1930 SUBJECT MATTER OF CONTRACT OF SALE AND PRICE Learning Outcomes After reading the lesson. (b) Unascertained goods. there is a contract of sale of specific or ascertained goods. 2(14)]. Introduction Subject Matter of Contract of Sale The subject matter in sales of goods is goods . Let us know about its classification. It may be noted that in actual practice the term ascertained goods is used in the same sense as specific goods. where A agrees to sell to B a particular radio bearing a distinctive number. I have already explained what we mean by Goods. Goods identified and agreed upon at the time of the making of the contract of sale are called specific goods [Sec. are known as unascertained goods. Goods may be classified into 1. if A agrees to sell to B one bag of sugar out of the lot of one hundred bags lying in his godown.

e. which will be produced in his garden next year. e.g. Vs Phillips Ltd. In the case of unascertained goods. 2. their perishing does not affect the contract. 6 (2)]. it becomes ascertained or specific goods. A must supply ten bales of cotton after purchasing them from the market or pay damages for the breach. The distinction between specific or ascertained and unascertained goods is important in connection with the rules regarding transfer of property from the seller to the buyer. ). If the ship arrives but with no such goods on board.. It is contract of sale of future goods. You must note that it is only the perishing of specific and ascertained goods that affect the sales. Example (a) A agrees to sell to B all the milk that his cow may yield during the coming year. (b) X agrees to sell to Y all the mangoes. for the contract is to deliver the goods should they arrive. Anderson & Co. Example A agrees to sell specific goods in a particular ship to B to be delivered on the arrival of the ship. 3. where cement is spoiled by water and becomes almost stone or where sugar becomes sharbat and thus are unsaleable as cement or sugar. . Where A agrees to sell to B ten bales of Egyptian cotton out of 100 bales lying in his godown and the bales in the godown are completely destroyed by fire. their merchantable character as such has been lost (although they are not physically destroyed). (c) Where the goods have been lawfully requisitioned by the government (Re Shipton. Do you know what would happen if the goods are perished? Effect of Pershing of Goods The first we must know what we mean by perishing of goods. ). Pershing means not only physically destruction of goods but it also covers: (a) Damage to goods so that the goods have ceased to exist in the commercial sense. As soon as a particular bag is separated from the lot for delivery.. This is a contract for the sale of future goods. the contract does not become void. amounting to an agreement to sell. the seller is not liable. which may or may not happen [Sec. i.unascertained goods because it is not known which bag is to be delivered. these are the goods the acquisition of which by the seller depends upon a contingency. (b) Loss of goods by theft (Barrow Ltd. Contingent Goods: Though a type of future goods. There cannot be present sale in respect future goods because the property cannot pass. Future goods: Future goods are goods to be manufactured or produced or yet to be acquired by seller.

This provision is made either on the ground of mutual mistake as to matter of fact essential to agreement. without the knowledge of seller perish. the contract is void.Effect of Pershing of Goods May Fall Under 1. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 83 . at or before the time of contract . and they. or on the ground of impossibility of performance. both of which render the contract void ab-initio. Where specific goods from the subject matter of contract of sale (both actual sale and agreement to sell.

Again if the risk has passed to the buyer. If only part of the goods agreed to be sold perish. In case contract is divisible. Bank deposit etc. But the sum should be definite.g. i. A offers to B a cow. Modes of Fixing the Price: Sec 9 says that price may be paid in one or the other following modes: 1. A did everything needed but decease attacked and could produce only 20 tones. the price should be pay or promised to be paid. he must pay for the goods. The contract is valid as regards the part available in good condition. without any fault on the part of the seller or buyer. Price is very important in the contract of Sale of Goods. but after agreement to sell: Where there is agreement to sell specific goods. the requisite to make a valid sales of goods contract is to pay a price in money and not the mode of payment.2.g. in legal tender money. Sales becomes void and both parties are excused from performance. 100 tons of potatoes to be grown in A s land. 5000/. Without money (Price) there are no sales. Effect of Perishing of Future goods: Present sale of future goods is an agreement to sale.. 100/. It may be fixed in accordance with an agreed manner provided by the contract: It may by agreed that the buyer would pay the market price prevailing on a particular date or that the price is to be fixed by a third party ( e. then the party in default is liable for non-delivery or to pay for goods as the case may be. perishing of goods rule apply to the extent of perishing goods. A agreed to sell B. It is to be noted that if fault of either party causes the destruction of the goods . B agrees to buy for Rs. Unless otherwise agreed. 3.if it fails to do so. 2. The contract was held as void. the contract is void is if it is indivisible.e. hundi. Pershing of goods before sell. perish before the risk passes to buyer. This is based on Supervening Impossibility. E. if sufficiently identified. In case of future goods. E.g. Price may be paid by cheque. Let me now take up the meaning and fixation of price. Price For a sale of goods. though undelivered. are to be treated as specific goods. the agreement is thereby avoided.if cow gives 10 ltr milk and only Rs. the destruction of which makes the contract void. money consideration is known as price . the agreement is void ab-nitio as it involves an element of wager. The parties are free to fix any price they like and court will not bother as to adequacy of price. valuer ) appointed with consent of . Where an alternative price is fixed. and subsequently the goods. It may be Expressly Fixed by the Contract Itself It is the usual mode of fixing price.

unless otherwise agreed. If no price is fixed. In case of default by buyer. as regards which the buyer is bound to pay a reasonable price. If. In case of default by seller. if any. prevents the third party from making the valuation. where. 10 ) says where there is an agreement to sell goods and the price is to be fixed by the valuation of a third party and such that parties fails to fix the price (either because he cannot value of because he does not want to value ) the contract becomes void. the seller is entitled to add the same to the price. Agreement to Sell at Valuation (Sec. the buyer can get a back in addition to damages. It is treated as part payment and only balance to be paid by the buyer. the buyer is bound to pay to the seller A reasonable price . the seller can forfeit this. unless otherwise agreed. Earnest or Deposit Money Money deposited by buyer with seller is known as earnest or deposit money for fulfillment of contract. namely. 4. the course of dealing suggest that in subsequent transactions also the price as on the date of order will be paid. payment of price and delivery of goods are concurrent condition. a new or increased custom or excise duty of sale or purchase tax is imposed and the seller has to pay it. Generally. . 3. Sec:32 says that. if the rate of duty or tax is lowered. Although in this case also the contract becomes void. the market price of the goods prevailing on the date of supply is taken as reasonable price. however any one of the parties . What is reasonable price depends of circumstances.parties. It may be determined by the course of dealings between the parties. Conversely. the buyer would be entitled to a reduction in price. the sellers or the buyer. the innocent party may maintain a suit for damages against the party at fault. Escalation Clause Secton-64A. after making of the contract and fixing the price but before the delivery of the goods. except to as part of goods delivered and accepted. yet the party at fault is bound to compensate the other party for the actual loss suffered by him because of the Act of prevention. If the price is not capable of being determined in accordance with any of the above modes. under the contract. If the buyer has been previously paying to a particular seller the price prevailing on the date or placing the order. then the contract is void for uncertainty because in that case law usually allows market price prevailing on the date of supply of goods as the price bargained for.

Importance of Time To Goods Do you know that as regards the time fixed for the delivery of goods. therefore. In case of late delivery. The lost time is never back. You must understand the importance of time to goods. Stipulations as to time in a contract of sale fall under the following two heads: 1. time is usually held to be of the essence of the contract. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 84 11. Stipulation relating to time of delivery of goods. the buyer may refuse to accept the delivery and may put an end to the contract.555 . It is important to realize the importance in the contract of sale of goods.The time is very important in life. ? Thus if time is fixed for the delivery of goods and the seller makes a delay. the contract is voidable at the option of the buyer.

Does this buyer get a . the perishing of which does not affect the contract. the seller cannot avoid the contract on that account. Any document used in ordinary cause of business. B can compel A. A hirer. the possessor of document to transfer or receive goods thereby represented is a document of title of goods. Documents of title to goods are unconditional under taking on the part of issuing authority to deliver goods. or authorizing or purporting to authorize. Documents to Title To Goods Section-2(4) Lays down rules regarding above.2. The wheat is completely destroyed by fire. The seller may. who obtains possession of a refrigerator from its owner under a hire-purchase agreement. sells the refrigerator to a buyer who buys in good faith and without notices of he right of the owner. Yes. the general rule is that time is not deemed to be of the essence of the contract. because the goods forming the subject-matter of the contract in question are unascertained goods. Although these documents can be transferred by mere delivery or by endorsement. Attempt the Following Problems 1. He has to deliver the goods if the buyer tenders the price within reasonable time before resale of the goods. yet it is regarded as quasi negotiable instrument . however. either by endorsement or by delivery. As regards the time fixed for the payment of the price. Examples of the Documents of Title to Goods Bill of lading Dock-warrant Warehouse keeper s certificate. unless a different intention appears from the terms of the contract (Sec. It is a proof of ownership of goods and authorizes its holder to receive goods or further transfer such right to another person by proper endorsement of delivery. claim compensation for the loss occasioned to him by the buyer s failure to pay on the appointed day. Where finger s certificate Railway receipt Delivery order etc. A must supply the wheat from elsewhere or pay damages for the breach] 2. Can B compel A to supply the wheat as per agreement? [Hint. as proof of the possession or control of goods. A agrees to sell to B 10 bags of wheat Kalyan (superior) out of 100 bags lying in his godown for Rs. because the title of transferee ( even if bonafide will not be superior to that of the transferor in the case of transfer of such documents.500. 6. Stipulation relating to time of payment of the price.11). Thus even if the price is not paid as agreed.

C refuses to oblige A and B and fixes no price. A agrees to sell a horse to B who tells A that he B needs the horse for riding to Mumbai immediately. Tata Mc. (2003). Graw Hill LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. P asks for the return of the car already delivered whereas Q insists on the delivery of the second car to him for a reasonable price of both the cars. Kucchal ( 2002). The case is governed by Section 10 which provides that if the third party refuses to fix the price. Delhi. The horse is ill at the time of agreement.] 4.C. [ Hint: No. What are the rights of A and B? [ Hint: The agreement is void (Sec. 10)]. Elements of Mercantile Law. N.555 85 . P.html M.C. Ltd.good title to the refrigerator? State reasons for your answer. B agrees to buy A s furniture at a price to be fixed by C. On A s refusal to sell. Pvt. [Hint. Ltd.D. Q cannot insist on its delivery to him since the contract has become void. the contract becomes void except as to part of goods delivered and accepted as regards which the buyer must pay a reasonable price. 3. Q takes the delivery of one car immediately. References Kapoor. Vikas Publishing House Pvt. Delhi.indialawinfo. Notes: Business Law . http://www. Tulsian (2002). a furniture dealer. agrees to sell to Q his two motor cars on the terms that the price was to be fixed by R. As regards the second car.com/bareacts/soga. 8)]. P. Thus as regards the car already delivered. Sultan Chand and Sons. can B legally compel him to sell the furniture for any price? [Hint: No (Sec. New Delhi. 5. R refuses to oblige P and Q and fixes no price. Decide the case. P cannot ask for its return and must accept a reasonable price for that. Business Law . as the hire-purchaser has no title to the refrigerator].

. if the buyer of the horse does not actually become a millionaire later) does not give rise to any legal consequences. In addition he can claim damages from the guilty party Warranty Sec. In law of sales major terms are called Conditions and minor terms are called warranties From the terms of contract. For Example: Where a horse dealer. 1930 CONDITIONS AND WARRANTIES Learning Outcomes After reading the lesson. delivery of goods etc. states that the horse is very lucky and one whosoever shall purchase it must very soon become a millionaire. They do not form part of contract and give no right of action. the breach of which gives the aggrieved party a right to repudiate the contract itself. you should be able to know: The meaning of conditions and warranties The difference between conditions and warranties The important conditions and warranties The doctrine of caveat emptor Introduction In a contract of sale of goods various terms or stipulations regarding quality of the goods. while others may be minor terms which are not very vital that their breach may seem to be breach of contract as such. are very important. being mere commendatory in nature. . 12 (2) defines as A condition is a stipulation essential to the main purpose of the contract. it is necessary to distinguish mere statements commendation or praise or expressions made by the seller in reference to goods. price mode of payment. does not form a part of the contract and its breach ( i. delivery of goods etc. while praising his horse. and not to avoid the contract itself . are very important are known as conditions and warranties There is a difference between conditions and warranties. The commendatory statements are neither conditions nor warranties. 12(3) defines A warranty is a stipulation collateral to the main purpose of the contract. his statement. While some of them may not be very important but some stipulations may be major terms which go to the very root of contract and any breach may frustrate the contract. These stipulations are known as conditions and warranties.LESSON 16: THE SALE OF GOODS ACT. Conditions and Warranties Stipulations regarding quality of the goods. Condition Sec. Let us know about it. price mode of payment.e. the breach of which gives the aggrieved party a right to sue for damages only.

and sys. 2. so any breach of condition will make contract void. aggrieved parties can claim only damages. But if P says to R. This is a good horse and it can run at a speed of 30 kilometers per hour. But if instead of buying a particular horse. 12(2)(3). The best test is to see whether a stipulation is fatal to the aggrieved party. The court is not to be guided by the terminology of the parties but has to look to the intention of the parities by referring to the terms of the contract. A condition is a stipulation which is essential to the main purpose of the contract. the buyer s only remedy is to claim damages. I want a good horse. but in the case of warranties. P buys the horse. then such stipulation is a condition. and P buys the horse and finds later on that it can run at a speed of 20 kilometers per hour only.Conditions are the very basis of contract of sale. return the horse to R and get back the price. The above illustrations are a clear proof of the fact that an exactly similar term may be a condition in one contract and a warranty in another depending upon the construction of the contract as a whole. (b) P goes to R. R shows him a horse and says. Later on P finds that the horse can run only at a speed of 20 kilometers per hour. If the horse turns out to be vicious. there is a breach of warranty because the stipulation made by the seller did not form the very basis of the contract and was only subsidiary one. the stipulation is a condition. Distinction between condition and warranty You may summarize the difference as follows: 1. As to breach. As to value. a horse dealer. I want a horse which can run at a speed of 30 kilometers per hour. The breach of a condition gives the aggrieved . its construction and the surrounding circumstances to judge whether a stipulation was a condition or a warranty. whereas a warranty is a stipulation which is collateral to the main purpose of the contract. [Sec. There is no hard and fast rule as to which stipulation in a contract is a condition or warranty. a man asks a dealer to supply him with a quiet horse and the dealer supplies him with a vicious one. This will suit you. P can repudiate the contract. The seller gave the assurance about the running speed of the horse of his own without being asked by the buyer hence it is only of secondary important. and the buyer can return the horse and can also claim damages for breach of contract ( Hartley vs Hyman). Sec 12(4) lays down whether a stipulation in a contract of sale is a condition or a warranty stipulation may be a condition though called a warranty in the contract. There is a breach of condition. Example (a) A man buys a particular horse which is warranted quiet to ride and drive. The horse dealer points out a particular horse and says.

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 86 11. A .555 depends in each case on the construction of contract. whereas the breach of warranty gives the aggrieved party a right to claim damages only.party the right to repudiate the contract and also to claim damages.

he can repudiate as regards remaining goods. Condition as to title: Sec. he cannot reject them. he will have to treat the breach of condition as a breach of warranty and accept the remaining part also. if he has accepted only part thereof.3. This provision is merely an application of the general maxim of law what is expressly done puts an end to what is tacit or implied and custom and agreement over-rule implied conditions and warranties . the price of which is Rs. When they are inserted in the contract they are expressed and they are implied when the law presumes their existence in the contract . 625 per bag but supplies only second quality sugar. 25 per bag. or by course of dealing between the parties or by the useage of trade. Voluntary waiver by buyer. There is a breach of condition and the buyer can reject the goods. Implied condition and warranties may. accept the second quality sugar and claim damages @ Rs. although they are not been put in express words. When breach of Condition is to be treated as Breach of Warranty: Sec-13 deals. This case does not depend on the will of the buyer but the law compulsorily treats a breach of condition as a breach of warranty. Example: A agrees to supply B 10 bags of first quality sugar @ Rs. the law incooperates following conditions in to a contract for sale of goods. But if the buyer so elects. In case the buyer has accepted only part of the goods and the contract indivisible. but can only maintain an action for damages. As to treatment. The Cases are as Follows 1. Express and Implied Conditions and Warranties Conditions & warranties may be either express or implied. A breach of condition may be treated as a breach of warranty. 1. Implied Conditions Unless otherwise agreed. In this situation the buyer can claim only damages and cannot rescind contract. be negatived by express agreement. he may treat it as a breach of warranty. 600 per bag. however. Acceptance of goods by buyer When the buyer has accepted the goods and subsequently he comes to know of the breach of the conditions.e to treat the breach of condition as a breach of warranty and accept goods and sue the seller for damages. But a breach of warranty can not be treated as a breach of condition.-14(a) In every contract of sale the . where breach of condition is to be treated as breach of warranty. But in case of divisible contracts. In a breach of condition by seller the buyer may instead elect to waive the condition i.

that is. M tendered a substantial portion in cases containing 24 tins. D had no title to the car and. Example R. The description may be in term of the qualities or characteristics of the goods. and Landaure & C. If the defect is patent one. the seller is guilty of breach of this condition although he had full ownership of the goods. to be packed in cases each containing 30 tins. Example (b) M agreed to supply to L 3.30 or may mention trademark. Condition in a sale by Description Where there is a contract of sale of goods by description. R sued D to recover back the price which he had already paid. in case of sales he has a right to sell the goods and that. R was compelled to return the car to the true owner. therefore. E.first implied condition on the part of the seller is that. he will have a right to sell to goods at the time when the property is to pass. purchased a motorcar from D used the same for several months. The goods must correspond with description whether it is a sale of specific goods or of unascertained goods. there is an implied condition that the goods shall correspond with description . which would not be apparent on reasonable examination of the sample In other words. Basmati Rice. Usually the seller has right to sel the goods if either he is the owner or he is owner s agent. It may be noted that the implied condition as to title makes it obligatory upon the seller that he must not only be the owner but also must be able to uphold the validity of the contract. Condition in a sale by sample: The implied conditions under the contract for sale by sample are The bulk of goods should correspond with sample quality Buyer shall have reasonable opportunity to compare the sample That the goods shall be free from any defect. L was entitled to reject the whole consignment ( Re Moore & co.) 3. Sugar S.000 tins of canned fruit. type of packing etc.g. Thus if the goods sold bear labels infringing the trade mark of another. 2. there should not be any latent defect in the goods. rendering them unmerchantable. He was held entitled to recover the whole of the price paid by him despite the fact that he had used the car for some months ( Rowland vs Divall). therefore. kalyan wheat. and the buyer takes delivery after . in the case of agreement to sale. long staple cotton. easily discoverable by the exercise of ordinary care. This implies that if seller s title is defective the buyer is entitled to reject the goods and to recover his price. brand name. It was held that the mode of packing constituted a part of the description and.

4. was adulterated with hemp oil. It must correspond with both. the buyer is entitled to reject the goods. Example (b) N agreed to sell G some oil described as foreign refined rape oil. Held that since the oil supplied was not in LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 87 . or vice versa. Condition in a sale by sample as well as by description: The implied condition is that the bulk of goods shall correspond. The oil supplied. there is no breach of implied condition and the buyer has no remedy. If it corresponds with only sample and not with description.inspection. though corresponded with the sample. both with the sample and with description. warranted only equal to sample.

. The buyer ought to have disclosed his particular purpose to the seller in order to make him liable for the breach of implied condition as to fitness (Rs. Andrew Yule & Co. 5. whether he buys them for his own use or to sell. The cloth was supplied accordingly. 6. which should be apparent on reasonable examination. Condition as to merchantability: This condition is applicable only when the sale is by description.accordance with the description the buyer was entitled to reject the same ( Nichol vs godts). and (ii) The buyer should rely on the seller s skill or judgment and (iii) The goods sold must be of a description which the seller deals in the ordinary course of his business. Held. the rule being Caveat Emptor that is. if the following conditions are satisfied: (i) The buyer. 7. let the buyer beware. expressly or impliedly. acting reasonably.) The purpose need not be told expressly if the goods are fit for one particular purpose only or if the nature of the goods itself tells the purpose by implication. Example A buyer ordered for the Hessian cloth. without specifying the purpose for which he wanted the same. which is generally used for packing purposes. But an implied condition is deemed to exist on the part of the seller that the goods supplied shall be reasonably fit for the purpose for which the buyer wants them. The term merchantable quality means that the goods are such quality and in such condition that a reasonable man. would accept them under the circumstances of the case in performance of his offer to buy those goods. In such case the purpose is deemed to be made known to the seller impliedly. Condition as to fitness or quality: Usually in a contract of sale of goods there is no implied condition or warranty as to quality or fitness for any particular propose of goods supplied . whether he be a manufacturer or not (b) The buyer must not have any opportunity of examining the goods or there must be some latent defect in the goods. that the buyer had no right to reject the cloth as it was suitable for packing purposes alright. On receiving the cloth the buyer found that it was not suitable for packing food products as it had an unusual smell. whether he be the manufacturer or not. should make known to the seller the particular purpose for which the goods are required. Sec-15 Lays down another implied condition that the goods should be merchantable quality and it should satisfy following conditions: (a) The seller should be a dealer in goods of that description. The goods should correspond with description.

The beer was contaminated with arsenic. This condition is implied only in a contract of sale of eatables and provisions. C has to make payment for the pledge amount to B. Warranty of freedom from encumbrances: Sec. he becomes bound by the same and he is not entitled to claim compensation from the seller for discharging same. this warranty is regarded as an extension of the implied condition of the title provided in section-14(a) Example: A buys a typewriter and spent some money for repairs.Condition as to wholesomeness. Later gets the watch for limited purpose and A sales it to C. free from any defect which render them unfit for human consumption. Example (b) The plaintiff bought a bun at a baker s and confectioner s ship.. If the buyer knows about the encumbrance on the goods at the time of entering into the contract. B tells C about the pledge. Warranty of disclosing the dangerous nature of goods to the ignorant buyer: The third implied warranty on the part of seller is that in case the goods sold are of dangerous . Warranty of quite possession: Sec 14 (b). 2. If the buyer is in anyway disturbed by a person having a superior right than that of the seller. i.-14 (c) Says that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made if goods are afterwards found to be subject to a charge and the buyer has to discharge the same . 3. a dealer in wines. W. Implied Warranties Unless otherwise agreed. the seller was liable in damages because he violated the condition of wholesomeness (Chaproniere vs Mason). the first implied warranty on the part of the seller is that the buyer shall have and enjoy quite possession of goods. the law in-corporate following Implied Warranties 1. feel ill. Since disturbances of quite possession is likely to arise only where the seller s title of goods is defective. The bun contained a stone which broke one of the plaintiff s teeth. In such cases the goods supplied must not only answer to description and be merchantable but must also be wholesome. A is entitled to get back what he paid plus repair charges. on taking the beer. H was held liable to W for the consequent illness (Wren vs Halt ). Held. there is a breach of warranty and the buyer is entitled to damages. (c) W bought a bottle of beer from H. Here is breach of warranty and C can get compensation from A.e. Example A pledges a watch with B. It turns to be a stolen article. the buyer can claim damages from the seller.

555 . The seller is bound to give some warning of the danger in the goods to the buyer.nature he will warn the ignorant buyer of the probable danger. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 88 11. Example C. A is liable in damages to C as he should have warned C of the probable danger. A knows that the lid of the tin is defective and if it is opened without special care it may be dangerous. C opens the tin in the normal ways whereupon the disinfectant powder flies into her eyes and causes injury. If there is a breach of warranty the buyer is entitled to claim damages for injury. but tells nothing to C. Purchases a tin of disinfectant powder from A.

See implied condition in a sale by description discussed earlier). if the buyer has examined the goods. Where the goods are bought by sample. If the buyer depends on his own skill and makes bad choice he must suffer in the absence of any misrepresentation or fraud or guarantee by the seller.15). Such a contract being voidable at the option of the innocent party. 17). Where the goods are purchased by description and they do not correspond with the (Sec. the buyer has a right to rescind the contract. 4. Where the seller makes a mis-representation and the buyer relies on it. 3. The horse was found fit only for carriage. and in the absence of any inquiry from the buyer. the seller is not bound to disclose every defect in goods of which he may be aware. or if the buyer is not provided an opportunity to compare the build with the sample. or where the seller actively conceals a defect in the goods so that the same could not be discovered on a reasonable examination. Example: A buys a horse from B for riding but did not mention this. A cannot claim damage. But the doctrine applies. If the goods turn out to be defective the buyer cannot sue the seller because there is no implied undertaking by the seller that he shall supply goods to suit the buyer s purpose. 2. or if there is any hidden or latent defect in the goods (Sec. 6. Where the seller makes a false representation amounting to froud and the buyer relies on it. the doctrine of caveat emptor does not apply. Such a contract is also voidable at the option of the buyer and the buyer is entitled to avoid the contract and also claim damages for fraud. However caveat emptor is subject to following exceptions: Exceptions. Where the goods are bought by sample as well as by description and the bulk of the goods does not . (See implied condition as to merchantability discussed earlier). the doctrine of caveat emptor does not apply if the bulk does not correspond with the sample. 5. as regards defects which such examination ought to have revealed [Sec. Where the goods are purchased by description from a seller who deals in such class of goods and they are not of merchantable quality .Doctrine of Caveat Emptor: The maxim of caveat emptier means Let the buyer beware according to this it is the duty of the buyer to be careful while purchasing goods of his requirement. the doctrine of caveat emptor does not apply. 16(2)]. (See implied condition in a sale by sample discussed earlier). The buyer must examine the goods thoroughly and must see that the goods he buys are suitable for the purpose for which he wants them. The doctrine of caveat emptor is subject to the following exceptions: 1. the doctrine of caveat emptor does not apply.

the tailors are entitled to recover damages. 5. the principle of caveat emptor does not protect the seller and he is liable in damages [Sec. Are they entitled to damages? [Hint. It turns out that the car sold by B to A was a stolen one and had to be returned to the rightful owner. A. A purchases a car from B and uses it for some item. 16(3)]. Worsted coating of quality equal to sample was sold to tailors who could not stitch it into coats owing to some latent defect in its texture. B was injured by the bursting of one of the bottles. a farmer. Where the buyer makes known to the seller the purpose for which he requires the goods and relies upon the seller s skill and judgement but the goods supplied are unfit for the specified purpose. Will he succeed? [Hint: Yes (sec. Attempt the following problems for better understanding: Practical Problems 1. M was shopping in a self-service super market. 17). 15). the buyer is entitled to reject the goods (Sec. The tailors had examined the cloth before affecting the purchase. Decide. Can M claim damages for the injury? . Can B claim damages from S? [Hint. (See condition as to fitness or quality discussed earlier). the doctrine of caveat emptor does not apply and the seller is liable in damages [Sec. 3. B can claim damages from S for the injury as the bottle is not of merchantable quality and there is a sale of goods by description. 2. 7. 4. Rowland v. 8. As this implied condition is broken in the instant case. A brings action against B for the return of the price. B wants. the bottle exploded in his hand and injured him. In fact they are new oats. Divall]. He picked up a bottle of orange squash from a shelf. (Refer to Condition as to Merchantability)]. B wants to return the oats and refuses to pay the price.correspond both with the sample and with the description. Where the trade usage attaches an implied condition or warranty as to quality or fitness and the seller deviates from that. B buys the oats in the belief that they are old oats. Soda-water was supplied by S to B in bottles. While he was examining it. [Hint: B cannot return the oats as the doctrine of caveat emptor will apply]. (See implied condition in a sale by sample as well as by description discussed earlier). In a contract of sale by sample there is an implied condition that the goods shall be free from any latent or hidden defect (Sec. 16(1)]. 14(a). simply exhibits oats in his farm.

Decide. it burst and injured his wife. A sues for damages. A purchased a hot-water bottle from a retail chemist. 7. The bottle could stand hot water but not boiling water. The timber is merchantable and commercially fit for the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 89 . there was no implied condition. [Hint: There is a breach of implied condition as to fitness and hence A can recover damages (Priest v. As there was no sale (since M may decide not to buy and put back the bottle in the shelf). A agrees to supply to B a certain quantity of timber of half-inch thickness. When it was filled by A with boiling water.[Hint: M cannot claim damages because a warranty or condition as to merchantability does not arise unless there is a sale. Last)]. The timber actually supplied varies in thickness from one-third inch to five-eighth inch.] 6.

] 8. Are they entitled to damages? [Hint. Hence in the given case there is no breach of implied condition as to fitness and as such the seller is not liable. What remedy is available to A against the shopkeeper? [Hint The chocolates are not of merchantable quality and hence A can repudiate the contract and recover damages (Sec. stipulate for it. 17. the bottle broke because of defect in the glass and M was injured. A ton does not mean about a ton. 470. Still less. 11. 12. asked for a bottle of Stone s Ginger Wine at F s shop which was licensed for the sale of wines. Fitch and Gibbons)]. measurement and the like. Drummond v. in which case Lord Atkin observed: If the contract specifies conditions of weight. as there is a latent defect in cloth (Sec. A sold to B a tin of disinfectant power. If the buyer is suffering from an abnormality and does not inform the seller about the same. 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. A purchases some chocolates from a shop. those conditions must be complied with.C. One of the chocolates contains a poisonous matter and as a result A s wife who has eaten it falls seriously ill. as the bottle is not of merchantable quality and there is a sale of goods by description [Sec. bought a tweed coat and developed skin trouble by using it. The buyers had examined the cloth before effecting the purchase. Can M claim damages for the injury? [Hint: Yes.. Yes. The facts of the given case are similar to Arcos Ltd. B without knowledge of the danger. M. Morelli v. Is the seller liable for breach of implied condition as to fitness or quality? [Hint. Ronaasen & Son. B is entitled to reject the goods. While M was drawing the cork. The implied condition as to fitness or quality is with regard to the suitability of the goods to a normal buyer. (Griffths vs peter Conway Ltd. Vs E. 1939. A. Van Ingen)]. He knew that it would be dangerous to open the tin without special care but he did not warn B. opened the tin whereupon the power flew into his .purpose for which it was ordered. 17: Drummond v. 10. and in my experience does. Is his action justified? [Hint. this implied condition does not apply. She did not disclose to the seller that her skin was abnormally sensitive. Van Ingen)]. If the seller wants a margin he must. when you descend to minute measurements. A lady. B rejects the timber. 15 and 16(2). 9. 1933. does half an inch means about half inch.A. who knew that her skin was abnormally sensitive. Yes. or a yard about a yard.

14.00 tins of canned fruits to be packed in cases each containing 30 tins. Business Law . as the goods do not correspond with the description of the goods ordered [ Sec. Delhi. Pvt. (2003).)]. Moore & Co. a housewife. Ltd. Tata Mc.com/bareacts/soga. A knows that B thinks so. Vikas Publishing House Pvt. Delhi. A does not correct B s impression. Elements of Mercantile Law. 15.html M. B thinks that it is Indian silk. Kucchal ( 2002). 16(2)]. a coal merchant.C. Notes: Business Law . A contract to sell B a piece of silk. H. B afterwards discovers that it is not Indian silk. P. When part of the consignment was put on fire in an open grate in H s house. In a contract for the purchase of 3. Can the buyer reject the cases? [Hint: Yes. New Delhi. Ltd. B filed a suit for damages for the injury.eyes and injured him. 15. References Kapoor. Can he repudiate the contract? [Hint: Yes. a ton of coalite and it was duly delivered to her. as the rule of caveat emptor will apply in this case]. 13.D. Will he succeed? [Hint: Yes (Sec. 16(2)]. but knows that it is not Indian silk. N. H claims damages.C. Is she entitled to sue? [Hint: Yes. http://www. v. ordered from C. Tulsian (2002).indialawinfo. an explosion occurred which caused damage.555 . Graw Hill LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 90 11. Landaur & Co. a substantial part was tendered in cases containing 24 tins instead of 30. Sultan Chand and Sons. as the goods are not of merchantable quality (Sec.

thus. if after the contract the goods are destroyed or damaged the question who is to bear the loss is to be decided not on the basis of possession of the goods but on the basis of ownership of goods. The Following Require special Notice 1. Property in goods is different from possession of goods. Transfer of property in a contract of sale is primarily the transfer of property in goods by the seller to the buyer. you should be able to know: The meaning of transfer of property The rules relating to transfer of property The transfer of property by non owners Introduction You must know what we mean by transfer of property. Risk prima-facia passes with property. As a general rule the risk of the loss of goods is prima-facie in the person in whom property is. The opening words of Section 26. the goods remain at the seller s risk until the property therein is transferred to the buyer. but when the property therein is transferred to buyer. the goods are at the buyer s risk whether delivery has been made or not. A must bear the loss and pay the price of goods to B. The exact time at which property in goods passes from seller to the buyer is of great importance. Section 26 provides to the same effect. if he has not paid it so far. but the goods remained in B s warehouse. but a prima facie one. Example A buys goods from B and property has passed to him.LESSON 17: THE SALE OF GOODS ACT. Before delivery of goods to A. unless otherwise agreed are of great significance. Possession simply refers to the custody of goods. Unless otherwise agreed. Risk is no test of property passing. Thus. but the goods may be in possession of the seller as unpaid seller or as a bailee for buyer. there is a fire in B s warehouse and all the goods are destroyed. The transfer of property in goods means transfer of ownership of goods. These words imply that risk passes with property is not an absolute or inflexible rule. namely. In some cases the property in goods to still be with the seller although the goods may be in possession of the buyer or his agent or a carrier for transmission to the buyer. Whosoever is the owner of the goods at the time of loss must bear the loss. 1930 TRANSFER OF PROPERTY Learning Outcomes After reading the lesson. There is nothing to prevent the parties from contracting that risk shall . Although the property in goods may pass from the seller to the buyer.

Insolvency of the seller or the buyer: In case of insolvency of the buyer or seller.23. The shopkeeper agrees to do so. When goods are in a deliverable state(Sec 20). The bicycle immediately becomes the property of A. Do you know that there is a difference in transfer of property in specific /ascertained goods and unascertained goods. the property in the goods passes to the buyer as soon as the contract is made. Rule regarding Transfer of Property in specific or ascertained goods: In the case of specific or ascertained goods the property is transferred to the buyer at such time as parties intend to be transferred. the goods having damaged by a third party. The property in the table has passed to P and the is bound to pay the price. not subject to any condition precedent to be fulfilled by the parties) contract for the sale of specific goods in a deliverable state. it is only the person in whom the property vests who can take action against the wrong doer. 1.pass even before passing of property or vice versa. Action against third parties: If after the contract of sale. (b) P buys a table for Rs 100 on a week s credit and arranges to take delivery of the table the next day. The goods are said to be in a deliverable sate when they are in . or when goods are delivered or when the goods are paid. For ascertaining the intention of parties regard shall be had on terms of the contract. Example: If the seller becomes insolvent before giving delivery of the goods but the property in goods has already passed on to the buyer who has paid the price. Only when the intention of parties cannot be judged from the contract or conduct or circumstances of the case. or both are postponed. and it is immaterial whether the time of payment of the price or the time of delivery of the goods. whether official receiver or assignee can take over goods shall depend upon whether the property in goods was with the party who has become insolvent. Suit for price: Generally speaking the seller can sue for the price if the property in goods has passed to the buyer. the conduct of parties and circumstances of the case.. Where there is an unconditional (i.22. 1. 3. 2. The parties may intend to pass the property as wanted at the time making the contract. Let us try to understand the difference. Example (a) A buys a bicycle for Rs. 21. the official receiver have no claim on goods. the rules in Section-20. will apply.e. A fire broke out in the furniture mart the same evening and the table is destroyed. 300 on a month s credit and asks the shopkeeper to send it to his house.

such a state that the buyer would. if the seller has to polish the table to make it acceptable to the buyer. For example.2(3)]. be bound to take delivery of them [sec.555 91 . it is not in a deliverable state until it is LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. in illustration (b) above. under the contract.

A) for ascertaining the price. the property does not pass until such thing is done and the buyer has notice thereof.e. but before they are removed or the remainder filled. It is further agreed that the oil is to be put into casks by A and then B is to take them away.g. When goods have to be put into a deliverable state: (Section. the property does not pass until such act is done and the buyer has notice thereof. each bale containing five dozens.e. and the buyer does not acquire property at the time of the contract.e. uses the goods. Example: A agrees to sell to B the whole of turpentine oil lying in a cistern. Something may be like polishing. measure. It is important that that something to be done must be completed and the fact that it has been done must be brought the notice of buyer. test or do something with reference to the goods for the propose of ascertaining price. etc. Example A sold to B 289 bales of goat skins. at whose risk they continued (Rugg vs Minett). the whole is destroyed accidentally bye fire. or on other similar terms. but the seller is bound to weigh.B) as something still remained to be done by the seller (i. Some of the casks are filled in the presence of B. to ascertain price: In a contract of specific sale of goods in deliverable state. and the price was for certain sum per dozen skins. . that the property in the goods had not passed to the buyer (i. The fact that the goods having put in a deliverable state must come to the knowledge of the buyer in some way or the other. Held. It may be noted that if the seller has done all what he was required to do under the contract and nothing remains to be done by him. But the property in the casks not filled up remained in the seller. pledges the goods or resells them. 21) in the case of sale of specific goods. When goods are delivered on approval: (Section 24) When goods are delivered to the buyer on approval or on sale or return. when the seller is bound to do something to do goods for making them in a deliverable state. 3. packing. the property passes to the buyer even if the buyer has to do something for his own satisfaction. B must bear the loss of oil which had been put into the casks because in all these casks the property has passed to him as nothing further remained to be done to them by the seller. the property therein passes to the buyer: (i) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction. When the goods have to be measured etc. the bales were destroyed by fire. (ii) . A) (Zagury vs Furnell)..so polished.. finishing. Before A could do the same. It was the duty of A to count the goat skins in each bale. e. 4. and as such the loss caused by fire had to be borne by the seller ( i. 2.

e. These sections provide that where goods contracted to be sold are not ascertained or where they are future goods. the following point should be noted: (i) The appropriation must be of goods answering the contract description. either by the seller with the assent of the buyer or by the buyer with the assent of the seller. and may be given either before or after the appropriation is made. without giving notice of beyond the time fixed for the return of goods. It involves separating. and it must not be due to mere accident or mistake. counting or similar acts done in relation to goods with an intention to identify and determine the specific goods to be delivered under the contract. weighing. example: Sale of ten tons of wheat from a granary. Transfer of Property in Unascertained and future goods In section 18 and 23 the rules relating to transfer of property in unascertained and future goods are laid down.. within 8 days. has not the effect of transferring property to buyer (It is an agreement to sell only) until ten tons are appropriated to the contract by the seller and the buyer knows it.If he does seller but rejection. Held. appropriation involves the element of mutual consent of the seller and the buyer. measuring. the property in goods does not pass to the buyer unless and until the goods are ascertained or unconditionally appropriated to the contract so as to bring them in a deliverable state. The horse died on the third day without any fault on the part of B. The distinction between ascertainment and appropriation is that whereas ascertainment can be a unilateral act of the seller. if no time Example not signify his approval or acceptance to the retains the goods. Such assent may be expressed or implied. The above rule is fundamental rule and it applies irrespective of what the parties intended until goods are ascertained or appropriated there is merely as certained agreement to sell . B had automatically become the owner of the horse on the expiry of 8 days. A was to bear the loss as the horse was still his property when it perished (Elphick vs Barnes). (ii) The appropriation must be intentional. Essentials of valid appropriation: As regard a valid or proper appropriation of goods. i. it must be made with intention to appropriate goods to specific contract. or has been fixed. that is. . B continued to retain the horse even after the expiry of 8 days without giving notice of rejection A. The process of ascertainment or appropriation consists in earmarking or setting apart goods as subject-matter of the contract. (a) A delivered a horse to B on the terms of sale or return. (b) A delivered a horse to B on trial for 8 days. he alone may set apart the goods. both as to quality and quantity. beyond a reasonable time.

the seller should not reserve to himself the right of disposal of the goods until and unless certain conditions are fulfilled.e. whether before of after the appropriation is made for a valid appropriation. i.555 . LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 92 11. (iv) The appropriation must be unconditional.(iii) The appropriation must be made either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Assent of the other future party is thus necessary.

When the seller reserves such a right the property in the goods does not pass until those conditions are fulfilled. Reservation of right of disposal: (Sec. If a thief disposes of a stolen property. He may also reserve this right by implication. the seller is deemed to have reserved the right of disposal of the goods. Where the bill of lading or railway receipt is taken in the seller s or his agent s name and is sent to the agent of the seller to be delivered to the buyer on the fulfillment of certain conditions.Delivery to Carrier: When a seller delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer and does not reserve the right of disposal. 25) Reservation of the right of disposal means reserving a right to dispose of the goods until certain conditions (like payment of the price) are fulfilled. Rule on transfer of title on sale: The rule is the seller can not transfer to the buyer of goods a better title when he himself has . The maxim is nemo det quod non habet. for example. If the railway receipt is sent to banker with instructions to deliver the same on payment. the buyer acquires no better title to goods than the seller had . The delivery to the carrier may be: (i) Absolutely for the buyer. Where the bill of lading or railway receipt is made out in the name of the buyer and is sent to him. As soon as goods are loaded and railway receipt obtained and the same is sent to buyer direct the ownership is passed on delivery of goods to railway company. the presumption is that no right of disposal has been reserved by the seller in respect of those goods. the property passes on to the buyer at once. The ownership in such a case passes from the seller to the buyer. The seller may reserve such a right expressly while making a contract or while making appropriation of unascertained goods. (ii) Absolutely for the seller. the right of disposal is said to be reserved impliedly. and real owner of the goods is entitled to recover . In such a case the ownership does not pass to the buyer until the necessary conditions are fulfilled and the documents of title are delivered to the buyer. which means that no one can give what he has not got. the buyer acquire no title though he may have purchased the goods bonabfide for value. the right of disposal is said to be reserved and the property will not pass to buyer at the time of delivery of goods to railway co. when the seller while transporting goods takes the railway receipt or the bill of lading in his own name or where the seller has taken the R/R or B/L in the name of the buyer but has delivered the same to his bank with the instructions that the document is to be delivered to the buyer only when he makes payment of the price or accepts the bill of exchange. Sector 27 says where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner. The general rule aims at protecting the interest of the true owner and is deemed necessary in the larger interest of society.

27 ) A mercantile agent means an agent having in the customary course of business as such agent authority either to sell goods. But by virtue of this provision ( proviso to Sec. he cannot afar wards deny the seller s authority to sell. Sometimes the doctrine of estop or preclude the owner from denying the seller s right to sell the goods and thus an innocent buyer may have a good title dispite the want of authority of the seller. Held. provided the following conditions are satisfied: (a) He should be in possession of the goods or documents of title to the goods in his capacity as mercantile agent and with the consent of the owner. (c) The buyer should act in good faith without having any notice. 1. When the true owner of goods by his conduct or word or by any act or omission leads the buyer to believe that the seller is the owner of the goods or has the authority to sell them. 27 ) Estoppal means that a person who by his conduct or words leads another to believe that certain state of affairs existed. The buyer in such case gets a better title when that of the seller. The estopal may arise in any of the following ways: . or to raise money on the security of goods [Sec. Thus as a rule a mercantile agent having an authority to sell goods conveys a good title to the buyer. a bonafide purchaser. S resold the car to K. or to buy goods. Transfer of Title by Non-Owners The above rule as to the title is however subject to following exceptions where the buyer gets a better title to the goods than what the seller himself possesses. (b) He should sell the goods while acting in the ordinary course of business. S obtained a good title to the car from the mercantile agent and he conveyed a good title to K and therefore F was not entitled to recover the car from K (Kolkes vs King). or to consign goods for the purposes of sale. Example: F entrusted his car to a mercantile agent for sale at a stated price and not below that. So the buyer cannot get a good title to the goods unless he purchase the goods from a person who is the owner thereof or who sells them under the authority or with the consent of the owner. that the agent has no authority to sell. 2. 27) a mercantile agent can convey a good title to the buyer even though he sells goods without having any authority from the principal to do so. below the reserve price and misappropriated the proceeds. at the time of the contract. 2(9)]. Transfer of title by estoppel (Sec. would be estopped ( precluded ) from denying later that such as state of affairs did not exist. An unauthorized sale by a mercantile agent:( Sec.possession of goods without paying anything to the buyer. the defendant. The agent sold it to S.

when the sale is effected. or LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.1. Still more. or 3. by his assisting the sale.555 93 . By permitting goods to go into the possession of another with all the insignia of possession thereof and apparent title. The owner standing by. or 2.

6. It is to be noted that this Section (Sec. Example: A. Sale by buyer in possession after agreement to buy [Sec. Thus it does not apply to a contract originally void or where goods have been obtained by theft.28) If one of several joint owners of goods has the sole possession of them by permission of the co-owners of goods has the sole possession of them by permission of the co-owners. 28) the buyer would have obtained only the title of the co-owners and would have become merely a co-owner with the other coowners. Hence the provision constitutes an exception to the rule no one can give what the has not got. to have his name painted on it. D gets a good title. 3. B and C are three brothers.4. Sale by Seller in possession after sale [Sec. C purchased the wagon from K in good faith. B and C entrust the work of looking after the cow to A and leave the cow in A s possession. C acquires a good title. 5. Connor vs Clark). Example: M.e. he will convey a good title to the buyer or the pledge provided the buyer or the pledge acts in good faith and without notice of the previous sale. 4. the property in the goods is transferred to any person who buys them from such joint owner in good faith without notice of the fact that the seller has no authority to sell. For the application of this exception it is essential that the possession of the seller must be as seller and not as hirer or bailee. If he has otherwise acted or made representations so as to induce the buyer to alter his position to his prejudice. 30(2)]. Where a buyer has agreed to buy the goods and has . continues to be in possession of the goods or of the documents of title to them and again sells or pledges them either himself or through a mercantile agent. Sale by person in possession under voidable contract: (Sec. C purchases the cow in good faith and without notice of the seller s defective title. D purchases bonafide for value. M did so for the purpose of inducing the public to believe that the wagon belonged to K. 29) When a person has obtained possession of goods under voidable contract and sells those goods before the contract has been rescinded acquires a good title to them provided he acts in good faith and without notice of the seller s defect in title. A sells the cow to D. Sec.. 30 (1)] Where a seller. 29) does not apply unless there is a contract. the owner of a wagon allowed one of his employees K. by misrepresentation induces B to sell and deliver to him a cow. It may be noted that in the absence of this provision (i. Sale by joint owner: (Sec. They own a cow in common. Example: A. C acquires a good title as M is estopped from denying K s authority to sell (O. after having sold the goods. A sells the cow to C before B has rescinded the contract.

the subsequent buyer acquires a good title thereto as against the original buyer. It was held that B. 7. (d) Under the Negotiable Instruments Act. for an option to buy is not an agreement to buy (Belsize Motor Supply Co. The furniture dealer cannot take back furniture from B. The Indian Contract Act. resells the goods (of which ownership has passed to the buyer). who obtains a good title to the same. But the solicitor subsequently disapproved of the transaction. because A agreed to buy ( Marten vs Whale). resells or pledges the goods either himself or through a mercantile agent. 54(3)]. These persons are not owners of the properties they deal in. no notice of the resale has been given to the original buyer. (b) Sale by Pawnee or pledgee under certain circumstance (Sec.. Example (a) A buys some furniture and agrees to pay for that in two monthly installments. a holder in due . however bonafide.obtained possession of the same or the documents of title to them with the consent of the seller. For example. vs Cox). the ownership to pass to him on payment of the second installment. as in a hire-purchase agreement. sue A for the breach of the contract and claim damages. he will convey a good title to the buyer or the pledge provided the person receiving the goods acts in good faith and without notice of any lien or other right of the original seller in respect of those goods. Where an unpaid seller.. 8. Having obtained possession of the furniture. got a good title. cannot convey a good title to a sub-buyer. who has exercised his right of lien or stoppage in transit. A. of course. (b) A agreed to buy a car and pay for it. the bonafide buyer.). The Indian Contract Act). (c) Sale by Official Receiver or Assignee in case of insolvency of an individual and Liquidators of companies.e. Other Acts also contain some provisions under which a non-owner may pass to the buyer a better title than he himself has. It is to be noted that a person who has got merely an option to buy. Subsequently A does not pay the second installment. A obtained possession of the car and sold the same to B. if his solicitor approved.e. The dealer can. In order to make this exception applicable it is essential that the person must have obtained possession of the goods under an agreement to sell (i. sells the furniture to B before paying the second installment. i. 169. Resale by an unpaid seller: [Sec. Exceptions under other Acts. but convey a better (good) title to the buyers than they themselves possess. 176. under and agreement to buy from the buyer s point of view). even though the resale may not be justified in the circumstances. B buys the furniture bonafide. (a) Sale by finder of lost goods under certain circumstances (Sec.

Solve the following problems for a better understanding: Practical Problems Attempt the following problems. In other words. a person who takes a negotiable instrument in good faith and for value becomes the true owner even if he takes it from a thief of finder.555 . giving reasons: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 94 11.course gets a better title than what his endorser had.

A absconded with the price money. 5. and the price to be paid on the 1st February following. The property in sugar passes to B when A gives notice to B (Sec. B pays to A money from time to time on account of price. a jeweler. Discuss the rights and liabilities of the parties. (b) B orders A. Can P recover the diamond from S? [Hint: No. 24. 21). In a mixed contract for storage of paddy and the sale of the same thereafter. A. (c) Yes. . It is agreed between A and B that property is not to pass to B till he has paid price of the necklace. Shall B be liable if the goods are destroyed before he exercises this option? [Hint: No.)]. P cannot recover the diamond from S who bought it in good faith from A who is a mercantile agent (Sec. The fact that the time of delivery and of payment of price is postponed does not prevent the property from passing at once. C does not get a good title to the necklace. Jewellery was sent by A to B on sale or return . A should sell it to the offer or. Has the property in the goods passed in the following cases? (a) B offers for a specific horse Rs. (b) No. Without paying the price. A delivers a gold necklace to B on sale or return basis. 20. was entrusted with a diamond by P with the instructions that A should obtain offers for it. a boat-builder. Chidambaram Chettiar v. [Hint: (a) The property in the horse would pass to B as soon as the seller accepts the offer. Afterwards A puts ten quintals of sugar in sacks and gives notice to B that the sugar is ready and requires him to take it away. Does C get a good title to the necklace? [Hint: No. While the boat is being built.000 the horse to be delivered on 5th January. 4. and if any such offer was approved by P. having a quantity of sugar which is more than twenty quintals.1. B says he will take it as soon as he can. B had the option to name a particular day on which he was to buy the paddy at the current prevailing rate. (c) A. 27)] 3. Steel Bros. to make him a boat. 19. 21)]. [Hint: A can recover the price of jewellery from B. as B himself has no title to the necklace till he pays its price (Weiner v. Acting contrary to P s instructions A sold the diamond to S who bought it in good faith. Smith)]. He cannot recover the jewellery from C [Sec. 2. B pledged the jewellery with C. contracts to sell to B ten quintals out of it. B sells the necklace to C. The property in the boat would pass to B when the boat is ready and A gives a notice to B to this effect (Sec. the paddy was delivered by A to B for storage. Kirkham v. (Sec. Thereafter.

200 specified bales of goatskins containing 60 pieces in each bale were sold. 6. 8. the bales were destroyed by fire. X was. The property in the car had passed on the fall of hammer. B has to bear the loss as the property in the goods had passed to him at once at the time of endorsement of the R/R in his name. therefore. The goods were not with the seller at that time but had been dispatched from Hapur on 4th May. which according to A contains 10 quintals. there is a fire and the whole of the wheat is destroyed. however.. Who should bear the loss. X s only remedy is to sue Y for the price. In a contract of sale of goods. Y offers to pay for the car by a cheque and he is allowed to do so provided he signs a document stating that the property in the car would not pass to him until the amount of the cheque has been credited to the seller s account. A sells to B the whole content of a certain heap of wheat. Who shall bear the loss? [Hint. dies before it is delivered and paid for. entitled to refuse delivery of car until paid and could have exercised his right of lien as an unpaid seller. the buyer or the seller? [Hint: The seller (Sec. 7. But once he has given the delivery of car. on 6th May while the loss occurred on 7th May]. A entered into a contract for the sale of 100 bags of wheat to B and received Rs 2. since lien is lost once possession is lost. A sells to B a horse which is to be delivered to B the next week. The cheque is subsequently dishonored. A asks his servant to keep the horse separate from other horses. Hence B should bear the loss]. B is to pay the price on delivery. X s contention is not justified. Delivery and payment are concurrent conditions.] 10. 22)]. The horse. a subsequent agreement that the property would not pass until the cheque is realized is of no effect and therefore X having lost his title to the car cannot recover back the same from Y.500 in part payment of the price. i. Can A recover the price of wheat from B? . his right of lien is lost. It was necessary for the seller to count them before delivery. On 6th May. Who shall bear the loss? [Hint. 9. When the wheat is being weighed. B gets the wheat weighed for his own satisfaction. The goods never reached the destination as they were burnt of 7th May while in transit. A had received the R/R which he endorsed in favour of B on 6th May.Attenborough)]. Is X s contention justified? [Hint: No. Before counting was completed. It is a contract of sale of specific goods in a deliverable state and therefore the property in the horse passes to B at once at the time of contract. X asks Y to return back the car as he has not become the owner of the car because the cheque given by him has been dishonored. X sells a car by auction to Y. who is the highest bidder.e.

the property passes to the buyer as soon as the contract is made. 20 applies to such a case alright]. 11. On the same day B gives those diamonds to C on sale or return and from him they are lost.[Hint. Who shall bear the loss? LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. the passing of property is not affected by that and Sec. Yes. therefore. When the buer gets something done for his own satisfaction. and. A gives some diamonds to B on sale or return basis. It is a contract of sale of specific goods in a deliverable state (as nothing remained to be done by the seller to ascertain the price).555 95 . A can recover the price from B.

D. Vikas Publishing House Pvt.C. Ltd.com/bareacts/soga.indialawinfo. therefore. Delhi.html M. Ltd. References Kapoor. Delhi. P. Tata Mc. Business Law . Business Law . Tulsian (2002). Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 96 11. Sultan Chand and Sons. Kucchal ( 2002). New Delhi. http://www.555 . Elements of Mercantile Law. (2003). passed to him. N.[Hint: B must bear the loss because by transferring the diamonds further he has adopted the transaction and the property in them has. Graw Hill Pvt.C.

delivery of the goods and payment of the price are concurrent conditions. you should be able to know: The meaning of performance of contract of sale The rules as to delivery of goods Introduction Now you know much about the contract of Sale. 1. by the seller. e. symbolic.. Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or his agent (sec. both these must take place at the same time as in. the delivery is said to be actual. Try to answer what you could mean by Performance of Contract of Sale The performance of contract of sale implies delivery of goods.32). Actual delivery.g.LESSON 18: THE SALE OF GOODS ACT. the delivery may be symbolic. If the contract contains any special terms as to delivery and acceptance. these must be complied with. Symbolic delivery. . place and manner of delivery of goods. acceptance there of and payment of the price. or constructive. Where the goods are handed over by the seller to the buyer or his duly authorized agent. Delivery of goods may also be made by doing anything which has the effect of putting the goods in the possession of the buyer [sec 33]. Delivery of goods (section. 2(2)]. a cash sale over a shop over counter (sec. Handing over of the key of a warehouse to the buyer is symbolic delivery of the goods to the buyer and is as effective as actual delivery. even though there is no change in the possession of the goods. 1930 PERFORMANCE OF CONTRACT OF SALE Learning Outcomes After reading the lesson. that is . and acceptance of the delivery of goods and payment for them by the buyer. in accordance with in contract. 2(2) Delivery means voluntary transfer of possession of goods from one person to another [sec. If there are no terms in the contract to this effect. The parties are free to provide any terms they like in their contract about the time. haystack in a meadow. for instance.33) Delivery of goods may be actual. Where the goods are ponderous or bulky and incapable of actual delivery. 2. But if the parties are silent and do not provide any thing regarding these matters in the contract then the rules contained in the sale of Goods Act are applicable.

Buyer to apply for delivery. (sec. there takes place a delivery by attornment or constructive delivery [sec. for the purpose of passing the property in such goods. just like in a cash sale over a shop counter.36(3)]. 33) Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorized to hold them on his half.g. 9. Illustration A contracts to sell to B 10 bags of sugar for Rs. Apart from any express contract. In other words. when property in goods is to pass on delivery (sec. in progress of the delivery of the whole. asking him to transfer the goods to B. (b) Where the buyer is in possession of the goods and the seller agrees to the buyer s holding the goods as owner. 3. as a delivery of the whole. A gives an order to C. 2. Constructive delivery or delivery by attornment . the seller should be ready and willing to deliver the goods to the buyer in exchange for the price and the buyer should be ready and willing to pay the price in exchange for possession of the goods simultaneously. the delivery of the goods may be either actual or symbolic or constructive.34). 32. A delivery of part of the goods. a bailee) who is in possession of the goods of the seller at the time of the sale acknowledges to the buyer that he holds the goods on his behalf. that is . has the same effect. This may happen in the following cases: (a) where the seller in possession of the goods agrees to hold them on behalf of the buyer. delivery of the goods and payment of the price are con-current conditions. Rules as to Delivery of Goods 1. Effect of part delivery.35). Delivery and payment are concurrent conditions (sec. and B need not pay for the goods unless A is ready and willing to deliver them on payment. A sells to B 10 bags of wheat lying in C s Go down. C assents to such order and transfer the goods in his books to B. the seller of goods is not bound to deliver them until the buyer applies for delivery (sec. this is a delivery by attornment. Example. the buyer has no cause of action against the seller if he does not apply for delivey.000. He should intimate this to the buyer and the buyer should then apply for delivery. Unless otherwise agreed .3.. when delivery of .) unless otherwise agreed. where the goods are subsequently acquired by the seller. 4.Where a third person (e. Delivery may be either actual or symbolic or constructive. (c) Where a third person in possession of the goods acknowledges to the buyer that he holds them on his behalf. A need not deliver the goods unless B is ready and willing to pay for the goods on delivery. Thus.

the property in the whole of the goods is deemed to pass to the buyer as soon as some portion is delivered.555 97 .part of the goods has been made with the intention of delivering the rest also. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.

this does not amount to delivery of the whole as it shows an intention to separate the part delivered from the rest of hay (Bunnery vs Poyntz). Unless otherwise agreed. demand of delivery by the buyer or the tender of delivery by the seller should be made at a reasonable hour. 36(3). all expenses of . A ship arrives with a cargo consigned to X. e. delivery 2. there is no delivery by the seller to the buyer unless and until such third person acknowledge to the buyer that he holds the goods on his behalf. Delivery of goods where they are in possession of a third party (sec. the buyer of the cargo. And delivers over part of the goods to X in progress of the delivery of the whole. 1. and the assent of the third party is not required. Place of Delivery SEC. Where under the contract of sale the seller is bound to send the goods to the buyer. Cost of delivery. upon the condition that the property is to pass to him on delivery. it is not regarded as delivery of the whole of the goods and the property is deemed to pass to the buyer in that portion of the goods only which has been delivered. Where the goods at the time of sale are in the possession of a third person. (i) in respect of existing goodsAt the place at which the goods are manufactured or (ii) In respect of future goods produced. If in a contract for the sale of a stack of hay the buyer is permitted to remove only a part of it. but no time for sending them is fixed. the seller. the seller is bound to send them within a reasonable time. Here.36(1) The delivey of goods should be effected as per the terms contained in the contract.Illustration.g. there is no delivery unless the seller s agent holding the goods has assented thereto. he delivers of the portion of the goods to X is equivalent to the delivery of the whole of the cargo and he property in the whole of the goods passes to X. Time of delivery [sec. But when a part of the goods is delivered with the intention of severing it from the whole. 36(2) & (4)]. 2. Such a delivery is known as constructive delivery or delivery by attornment and requires the consent of all the three parties. the buyer (Dixon vs Yates ). where there is no contract as to the place of At the place at which the goods are at the time of sale. (a) In case of saleAt the place at which the goods are at the time of (b) In case of an agreement to sellagreement to sell. Further. the buyer and the person having possession of the goods. 3. the buyer is deemed to be in possession of the goods represented by such document. where the seller hands over the delivery order to the buyer. What is a reasonable hour is a question of fact. railway receipt or bill of lading. The rules are 1. delivery. But where the goods have been sold by the transfer of the document of title to goods.. where there is a contract as to the place of At the agreed place. The captain begins to discharge it.

(2) Delivery of goods in excess of the quantity contracted for. or may reject the whole [sec 37(3)]. Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell. A may either (i) accept 75 tons of cane sugar which is in accordance with the contract. If he accepts them. he must pay for them at the contract rate [sec. he shall pay for them at the contract rate [sec. A sells to B 2. The seller can make. 43]. (1924)A. Example. B may reject the goods. or (ii) reject the whole . or he may accept 25 and reject the rest. v.and incidental to making of delivery are borne by the seller. delivery of a wrong quantity. The average being shortage of about 6 per cent. but all expenses of and incidental to obtaining of delivery are borne by the buyer (sec. A delivers to B 75 tone of cane sugar and 25 tons of beet sugar. the buyer may accept the goods which are in accordance with the contract and reject the rest. are: (1) Delivery of goods less than contracted for . Delivery of wrong quantity or different quality. he is liable to pay the price of the goods at the contract rate [Back etc. within the time limit. synzmanoski. 37(2) Example . [Sec 37] the delivery of the quanti ty of goods contracted for should be strictly according to terms of the contract.A is entitled to reject the whole. another delivery in accordance with the terms of the contract. 4. i. A places an order with B to supply 25 bottles of orange syrup.or (iii) accept the quantity he ordered and reject the rest. B sends 30. he must pay for them at the contract rate. (3) Delivery of goods contracted for mixed with other goods. The three different contingencies which may arise in case of a defective delivery. A defective delivery entities the buyer to reject the goods. Example. After taking delivery B finds that the length of the cotton per reel is less than 200 yards. If he accepts all the 30.. the buyer may reject the goods. A contracts with B to buy 100 tons of cane sugar. and reject 25 tons of beet sugar which is of a .e. where the seller delivers to the buyer a quantity of goods less than he contractecd to sell. If he waives the right of rejection. If the buyer accepts the whole of the goods so delivered. Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description. 37(1)]. If the goods have been rejected for short delivery.36(5)).000 OF 200 yards reels of sewing cotton.C. the buyer may (i) accept the whole .

10. If quantity deliver is deficit or excess which is negligilgible . Delivery by installment [sec 38] unless otherwise agreed.37(4)].555 . The maxim is the law does not take trival deviations into account. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 98 11. The provision of sec. special agreement.different description. the buyer of goods is not bound to accept delivery thereof by installments. or course of dealing between the parties [sec. the court does not take it into account. If the parties so agree then only the delivery of the goods may be made by installments. or (ii) reject the whole sugar.37 are subject to any usage of trade.

unless from the special circumstances of the case (e. Illustration A sold to B 1.g. that B was entitled to do so (Robert A. he would not have been allowed to repudiate the whole contract but only the damages for the loss in that particular installment delivery would have been allowed. and therefore he refused to take further deliveries. Munroe & Co. the goods shall be deemed to be at his risk during such transit [section 39(3)]. in circumstances in which it is usual to insure.) Generally. B discovered that it was not of the contract quality and could have been rejected. (if B might have discovered the defect just after first installment. Delivery to carrier or wharfinger [section 39] where the seller is authorized or required to send the goods to the buyer. the seller must inform the buyer to enable him to insure them during their sea transit. or not) for the purpose of transmission to the buyer. the buyer may decline to treat the delivery to the carrier or wharfinger as a delivery to himself. delivery of the goods to carrier (whether named by the buyer. is prima facie deemed to be a delivery of the goods to the buyer (section 39(1)].When the parties agree that to be separately paid for. the seller shall make a reasonable contract with the carrier or wharfinger on behalf of the buyer. failure to deliver or pay for one installment does not amount to a breach of the whole contract.Ltd. the factory is closed because of a labour strike or the buyer become insolvent) it can be inferred that similar breaches will be repeated. (a) The quantitative proportion which the breach bears to the contract as a whole. . Vs Meyer). The seller is further required to perform the following two duties also. or delivery of the goods to wharfinger custody. and if the seller fails to do so. and either buyer or seller commits a breach of contract in respect of one or more installments. unless otherwise agreed the following two factors must be borne in mind in deciding the whole matter. If the seller omits to do so.. After about half the meat was delivered and paid for.. or any hold the seller irresponsible for damages (section 39(2)] (b) To give notice to the buyer to enable him to insure the goods: unless otherwise agreed. (a) To make a reasonable contract with the carrier or wharfinger: unless other wise authorized by the buyer. and (b) The degree of probability of the repetition of the breach (Maple Flock co. and the goods are lost or damaged in course of transit or whilst in the custody of the wharfinger. Held. there arises a question as to whether such a breach amounts to a breach of the whole of the contract or a breach of only a part of it? The answer to this question depends upon the terms of the contract and the circumstances of the case.Ltd. 11. where goods are sent by the seller to the buyer by a route involving sea transit.500 tons of meat of a specified quality to be shipped 125 tons monthly in equal weekly installments.vs Universal Furniture products Ltd.

But if he is not satisfied. pledges or resells the goods or puts his mark on them. rejection must be within that period. Liability of buyer for neglecting or refusing to take delivery of goods. and also for a reasonable charge for the care and custody of the goods. It may be mentioned that on rejection of goods because of defective delivery. vs fowler). 2. (Sec. when. after the lapse of a reasonable time. whether the horse is in conformity with the contract.12.) to examine and test the goods in order to be sure as to whether they are in conformity with the contract regarding quality etc. offered the goods for sale by auction at reduced price and the auction having failed to produce a purchaser.g. Example (a) Where the buyer having seen that samples drawn from bulk were inferior to the samples originally shown to him. and the buyer does not within a reasonable time after such request take delivery of the goods. he must act promptly to inform the seller about rejection. in the case of a horse sale conditioned to run at 25 kilometers per hour it is necessary to use the horse for ascertaining.41. when he intimates to the seller that he has accepted the goods. he retains the goods with out intimating the seller that he has rejected them. What is reasonable time is a question of fact. Acceptance of Delivery by Buyer The mere fact that the buyer has taken the delivery of the goods does not amount to acceptance of them. when he does any act in relation to the goods which is inconsistent with the ownership of the seller. the buyer purported to reject the goods.. e. mere informing the seller is enough and the buyer is not bound to return the rejected goods to the seller (sec. consumers. it was held that the buyer could not do so as he had in law accepted the goods (parker vs plamer) (b) Where the buyer took delivery of wheat and sold a part of it. he becomes liable to the seller for any loss occasioned by his neglect or refusal to take delivery. Attempt the following problems for a better understanding: Practical Problems .43). 3. and afterwards found that the wheat was not of contract quality and therefore sought to reject it. the buyer is deemed to have accepted the goods in either of the following circumstances. when the seller is ready and willing to deliver the goods and requests the buyer to take delivery. namely: 1. uses.44). it was held that he had lost the right of rejection as he had accepted the wheat by a dealing inconsistent with the rights of the seller. According to section 42. (Sec. in so far as he had sold out a portion of it ( Hardy & co. If time for rejection is stipulated.

and Y refused to take further delivery.555 99 . 15. it was found that it was not of the contract quality. 1.000 tons of meat and bone-meal of specified quality to be shipped. sold to Y.250 tons monthly in equal instalments. Advise X. a dealer in cattle feed. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.1. X. another such dealer. After about half the meat was delivered and paid for.

] 7. 2 per cent more or less. X of Cochin agreed to sell 400 tons of rice to Y of Calcutta to be shipped in November or December 1995. 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.17 and 42. along with them. 5. The seller delivered meal greatly in excess of the permitted variation. A hands over to B the key of the godown. Perkins v. whereupon B claimed to be entitled to reject it. B resold the barley to D. not ordered. Bell)]. A contracts with B to buy 50 easy-chairs of a certain quality. What are B s rights? [Hint: B is not entitled to reject the barley (Secs. 37 (3)]. A of Agra ordered certain specified goods from B of Mumbai. Munro & Co. X puts the rice on ship on 20 October 1995. being a symbolic delivery. 37 (3).[Hint: Y is entitled to refuse to take further delivery as he is not bound to take the risk of having put upon him further deliveries of goods which do not conform to the contract (Sec. Lillico & Sons]. Payne & Routh V. B sends the goods.000 tons of meal. 4. 37(3)]. puts the juice in casks and keeps it ready for delivery. 38. B delivers 25 chairs of the type agreed upon and 25 chairs of some other type. There was a contract for the sale of 4. v. The barley was delivered at T station and B. 2. Myer. What are the rights of the buyer? [Hint: The buyer can reject the whole quantity (Sec. Is A liable to pay the price? {Hint: Yes]. A sells to B 100 bags of wheat which are locked up in a godown. 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 . A delays to take the delivery and the juice goes putrid and has to be thrown away. Robert A. sent it on to D. Does it constitute delivery of the goods to B? [Hint. 6.(1930) 2 K. B crushes the apples. 312)] 1. after inspecting a sample of it. Yes. this is a delivery to B. What are the rights of A? [Hint: A may accept the chairs which are in accordance with the contract and reject the rest or may reject the whole (Sec.B. A contract with B to purchase 30 tons of apple juice. 3. delivery to be made at T railway station. D rejected it as not being according to sample. P sold barley to B by sample.

(2003).] References Kapoor. New Delhi.. whereupon B seeks to reject the goods.html M. R accordingly sends the book by parcel post. sent it on to X. delivery to be made at T railway station. Can R recover its price from P? [Hint. P sold barley to B by sample. Ltd. Notes: Business Law . Sultan Chand and Sons. B sold the barley to X. Pvt.555 . N. he had in law accepted the goods. http://www. an essential term of the contract has been broken.] 9. Tulsian (2002). Ltd.essence of all mercantile contracts. as by reselling those goods to X and ordering to send them to X. P of Delhi writes to R of Bombay to send him a book by parcel post. Will B succeed? [Hint. Delhi. Kucchal ( 2002). The parcel is lost on the way. Business Law .C. the post office) is delivery to the buyer and the buyer becomes the owner thereafter who should bear the loss. after inspecting a sample of it. P. Elements of Mercantile Law.indialawinfo. Tata Mc. The barley was delivered at T railway station and B. Graw Hill LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 100 11. Delhi. Vikas Publishing House Pvt.D.C.com/bareacts/soga.] 8. B cannot reject the barley. X rejected it as not being according to sample. Yes. delivery to the carrier (i. R can recover the price of the book from P because as per Section 39 of the sale of Goods Act.e.

According to above the following are the characteristics of and unpaid seller . He must sell goods on cash terms and not on credit. Rights of an Unpaid Seller According to (section 45) the term seller includes any person who is in the position of a seller. . Let us first start with the study of rights of an unpaid seller.. 50 Introduction 47 to 49 to 52 Today will be discussing about the remedies in case of breach by seller and buyer.LESSON 19 THE SALE OF GOODS ACT. or is directly responsible for. 1. as. or (b) where a bill of exchange or other negotiable instrument has been received as a conditional payment. or a consignor or agent who has himself paid. 46(2) The rights of an unpaid seller against the buyer personally Lien Stoppage The rights of buyer (Secs. and he must be unpaid. i. subject to the realization thereof. The seller of goods is deemed to be an unpaid seller (a) when the whole of the price has not been paid or tendered.e.46(1) passed (Sec. and the same has been dishonoured. for instance. an agent of the seller to whom the bill of lading had been endorsed. Secs. the price. 1930 REMEDIES IN CASE OF BREACH BY BUYER AND SELLER Learning Outcomes After reading the lesson. you should Against the goods Against the buyer persona llybe 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 Passed (Sec.

the same must be dishonoured. Rights of unpaid seller against the buyer personally. remains unpaid. We shall now examine these rights in detail. 2. I. 60) (Sec. If. He must not refuse to accept payment when tendered. Where the price is paid through a bill of exchange or other negotiable instrument. Even if only a portion of the price. 1. 47) Lien is the right to retain possession of goods and refuse to deliver them to the buyer until the price due in respect of them is paid or tendered. before payment the buyer becomes insolvent. Right of lien (Sec. 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. 3. If the buyer has tendered the price but the seller wrongfully refuses to take the same. Rights of unpaid seller against the goods. but the term of credit has expired: (c) Where the buyer becomes insolvent.61) Rights of an Unpaid Seller An unpaid seller has two-fold rights. 54) delivery Transit Suit for Suit forRepudiation Suit for Price damages of contract interest (Sec. Right of lien. 1. 56) (Sec.. 3. Rights of Unpaid Seller against the Goods. An unpaid seller has the following rights against the goods notwithstanding the fact that the property in the goods has passed to the buyer: 1. 46 (1)]. however small. viz. the seller is entitled to exercise this right and hold the goods as security for the price. An unpaid seller in possession of goods sold is entitled to exercise his lien on the goods in the following cases: (a) Where the goods have been sold without any stipulation as to credit. Re-sale Withholding Stoppage in (Sec. and II. (b) Where the goods have been sold on credit. Right of stoppage of goods in transit. He must be unpaid either wholly or partly. Right of resale [Sec. even though the period of credit may not have yet expired. he is deemed to be an unpaid seller. therefore.2.55) (Sec.. he ceases to be an unpaid seller. When he goods are sold on credit the presumption is that the buyer shall keep his credit good. .

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 101 .

provided the goods remain in the actual possession of the seller. maintenance or custody charges. 2(8)]. 53). When lien is lost? As already observed. Where the property in goods has not passed to the buyer. Also. Further. In fact when property has passed to the buyer then only retaining of goods is called technically lien. In other words the buyer is not entitled to claim delivery of a portion of the goods on payment of a proportionate price. Section 46(2) provides: The term insolvent here does not mean a person who has been adjudged insolvent under the Insolvency Law. In Sale of Goods Act a person is said to be insolvent who has ceased to pay his debts in the ordinary course of business. the seller s lien is defeated (Sec. the lien can be exercised as long as the seller remains in possession of the goods. The seller s lien when property has not passed to the buyer is termed as a right of withholding delivery. anomalous to say that the seller has a lien against his own goods. But if the buyer has transferred the documents of title to a bonafide purchaser. in addition to his other remedies. Transfer of property in the goods or transfer of documents of title to the goods does not affect the exercise of this right. which the seller may have to incur for storing the goods in exercise of his lien for the price. Section 49 accordingly provides that the unpaid seller of goods loses his lien thereon in the following cases: (a) When he delivers the goods to a carrier or other beilee for the purpose of transmission to the buyer without . 47(2)]. Where the property in goods has not passed to the buyer and the title is still with the seller then it is. whether he has committed an act of insolvency or not [Sec. 48). the lien is also lost. where an unpaid seller has made part delivery of the goods. 49(2)]. This right of lien extends to the whole of the goods in his possession even though part payment for those goods has already been made. the lien can be exercised even though the seller has obtained a decree for the price of the goods [Sec. i. Accordingly.e.e. I will not deliver the goods until I see that I shall get my price paid (Griffiths vs Perry2) The unpaid seller s lien is a possessory lien. He may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer [Sec.The effect of buyer s insolvency is that all stipulations as to credit are put to an end and the seller has a right to say. a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transit where the property has passed to the buyer. This right of lien can be exercised only for the non-payment of the price and not for any other charges. i. strictly speaking. unless such part delivery has been made under such circumstances as to show an agreement to waive the lien (Sec.. the unpaid seller has.. he may exercise his right of lien on the remainder. or cannot pay his debts as they become due. lien depends on physical possession of goods. Once the possession is lost.

Cargo Fleet Iran Co. [Lord Reading in Booth Steamship Co Ltd. .e. Lances and Yorks Rly.). if once lost. (iii) The buyer must have become insolvent. to regain possession and to retian them till the full price is paid. it was held that the seller could not exercise his lien over the refrigerator ( Eduljee vs John Bros. whether he has committed an act of insolvency or not. Note: The buyer is said to be insolvent when he has ceased to pay his debts in ordinary course of business. Had made the following observation in this regard: The essential feature of stoppage in transit is that the goods should be in the possession of a middleman or some other person intervening between the vendor who has parted with and the purchaser who has not received them. It may be noted that right of lien.] Duration of Transit [Section 51(1)]: Goods are deemed to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer.. Right of Stoppage of Goods in Transit: Meaning of Right of Stoppage of Goods in Transit: The right of stoppage in transit means the right of stopping the goods while they are in transit. the goods must not be in the possession of seller. An implied waiver takes place when the seller grants fresh term of credit or allows the buyer to accept a bill of exchange payable at a future date or assents to a sub-sale which the buyer may have made. where a refrigerator after being sold was delivered to the buyer and since it was not functioning properly. will not revive if the buyer redelivers the goods to the seller for any particular purpose. Note: The seller s right of stoppage in transit is based on the principle that one man s goods shall nto be applied to the payment of other man s debt. or (b) When the buyer or his agent lawfully obtains possession of the goods.reserving the right of disposal of the goods. 2. or cannot pay his debts as they become due. V. Thus. until the buyer or his agent in that behalf takes delivery of them from such carrier or other bailee. or (c) When the seller expressly or impliedly waives his right of lien. Lord Cairns LJ in case of Schotsmans v. Conditions under which Right of Stoppage in Transit can be Exercised [Section 50]: The unpaid seller can exercise the right of stoppage in transit only if the following conditions are fulfilled: (i) The seller must have parted with the possession of goods. i. the buyer delivered back the same to the seller for repairs. (ii) The goods must be in the course of transit.

Note: The carrier must hold the goods in the capacity of an independent person and not in the capacity of an agent for the seller or buyer. Transit comes to an end in the following cases: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 102 11. If the carrier holds the goods as an agent for the seller. there is no question of exercising the right of stoppage in transit because the seller can exercise his right of lien. If the carrier holds the goods as an agent for the buyer. Circumstances under which Right of Sopttage is Lost [Sections 51 and 53 (1)]: The right of stoppage in transit is lost when transit comes to an end. the seller cannot exercise the right of stoppage in transit because the delivery to the carrier amounts to delivery to buyer.555 .

How to Exercise Right of Stoppage in Transit [Section 52(1)]: The unpaid seller may exercise his right of stoppage in transit in anyone of the following two ways: (i) by taking actual possession of the goods. even if a further destination for the goods may have been indicated by the buyer [Section 51(3)]. (vi) Where the sub-sale or other disposition by the buyer has been done with seller s consent [Section 53(1)]. [Provision to Section 53(1)]. Duty of Carrier [Section 51(2)]: When notice of stoppage in . it is a question depending on the circumstances of the particular case. (iv) Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf [Section 51(6)].(i) If the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed destination [Section 51(2)]. may communicate it to his servant or agent in time to prevent a delivery to the buyer. after the arrival of the goods at the appointed destination. (ii) If. whether goods are in the possession of the master as a carrier or as agent of the buyer [Section 51(5)].. (iii) When goods are delivered to a ship chartered by the buyer. (v) Where part delivery of the goods has been made to the buyer or his agent in that behalf. or (ii) By giving notice of his claim to the carrier or other bailee who possesses the goods. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case. by the exercise of reasonable diligence. bill of lading or railway receipt ) has been issued or lawfully transferred to any person as buyer and that person transfers the document by way of sale to a person who takes the document in good faith and for consideration.g. (vii) Where a document of title to goods ( e. the remainder of the goods may be stopped in transit and such part delivery has not been given in such circumstances as to show an agreement to give up possession of the whole of the goods [Section 51(7)]. the notice to be effectual shall be given at such time and in such circumstances that the principal. the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent.

Right of Stoppage in as an Extension of the Right of Lien: The right of stoppage in transit is an extension of the right of lien in the sense that the right of stoppage in transit begins when the right of lien ends and the purpose of the right of stoppage in transit is to regain possession of the goods. pledge) of the goods which the buyer might have made. This right can be exercised by the seller himself. Right of stoppage in transit The goods must be in the possession of a carrier or other bailee who is acting as an independent person. The purpose of right is to retain possession of the goods. Vs. he shall redeliver the goods to or according to the directions of the seller. Effect of Sub-sale or Pledge by Buyer upon the Two Rights of the Unpaid Seller Discussed Above (Sec. This right comes to an end when the seller delivers the goods to a carrier. Before the goods reach their destination P comes to . The purpose of this right is to regain the possession of the goods.g. 53) The unpaid seller s right of lien or stoppage in transit is not affected by any sale or other disposition (e. End. This right can be exercised by the seller through the carrier or the other bailee. Distinction Between Right of Lien and Right of Stoppage in Transit Basis of distinction 1. This right commences only when the seller delivers the goods to a carrier.. The right can be exercised even when the buyer is solvent but refuses to pay the price. Solvency 3. This right can be exercised only when the buyer has become insolvent. Purpose Mode of exercising the right Right of lien The goods must be in actual possession of the seller. The expenses of such redelivery shall be borne by the seller. Possession of goods 2. P sells certain goods to R and delivers them to a carrier for transmission to R.transit is given by the seller to the carrier or other bailee in possession of the goods. For example. Commencement on delivery to carrier 4.

the unpaid seller s right of lien or stoppage in transit is defeated.g. the unpaid seller s right of lien or stoppage in transit can only be exercised subject to the rights of the pledgee.. pledge) which the buyer may have made. pledge) of the goods by the buyer. then.know that R has become insolvent. and (b) if such last mentioned transfer was by way of pledge. These exceptions are: (i) When the seller has assented to the sale or other disposition (e. But there are two exceptional cases when these two rights of the unpaid seller are affected by a sale or other disposition (e. In the meanwhile R sells those goods to Q. the unpaid seller s right of lien or LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.g. The sale of goods between R and Q will not affect the right of P to stop them in transit. Rights of Unpaid Seller in case of Transfer of Document by way of Pledge [Proviso to Sections 53(1) and 53(2)] (i) Where the transfer was by way of pledge or other disposition for value..555 103 .g. a bill of lading or railway receipt) has been issued or transferred to a buyer. (ii) When a document of title to goods (e. But in this case the unpaid seller may require the pledgee to satisfy his claim against the buyer first out of any other goods or securities of the buyer in the hands of the pledgee.. (a) if such last mentioned transfer was by way of sale. and the buyer transfers the document to a person who takes the document in good faith and for consideration.

when so required. Thus. however. Rights of Unpaid Seller against the Buyer Personally The unpaid seller. namely. if he cannot pay. the buyer acquires a good title thereto as against the original buyer. If the buyer continues to remain in default. to supervise the sale to see that the same is properly made. the unpaid seller s other rights against the goods. Right of Resale The right of resale is a very valuable right given to an unpaid seller. arising from the resale. It is important that absence of notice. In the absence of this right. or (c) Where the seller has given a notice to the buyer of his intention to resell and the buyer does not pay or tender the price within a reasonable time. If on a resale there is a loss to the seller. there neither the goods are of perishable nature nor such a right was expressly reserved. lien and stoppage in transit. he cannot recover the loss from the buyer and it under an obligation to hand over the surplus. out of any other goods or securities of the buyer in the hands of the pledgee and available against the buyer. he can recover it from the defaulting buyer. no notice of resale [as required in case(c) above] is given to the buyer. is reversed. has the following three rights of action against the buyer personally: . It is so because such a notice gives an opportunity to the buyer either to pay the price and have the goods. as far as possible. gives to the unpaid seller a limited right to resell the goods in the following cases: (a) Where the goods are of a perishable nature. the seller can keep it with him because the buyer cannot be allowed to take advantage of his own wrong.stoppage in transit can only be exercised subject to rights of the transferee (ii) Where the transfer is by way of pledge. the right of seller to claim loss and retain surplus. therefore. the unpaid seller may require the pledgee to have the amount secured by the pledge satisfied in the first instance. to the buyer. then should the seller be expected to retain the goods indefinitely. in addition to his rights against the goods as discussed above. 3. or. II. if the unpaid seller fails to give notice of resale to the buyer. would not have been of much use because these rights only entitle the unpaid seller to retain the goods until paid by the buyer. If. In other words. if any. if any. when so required. this cannot be the intention of the law. it will be seen that giving of notice to the buyer. or (b) Where such a right is expressly reserved in the contract in case the buyer should make a default. notwithstanding that no notice of the resale has been given to the original buyer. But if there is a surplus on the resale. is very necessary to make him liable for the breach of contract. Section 54(3) specially declares Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods. Section 54. affects the rights of the unpaid seller himself only as discussed above and it does not affect the title of the subsequent buyer who will acquire a good title to the goods. specially when the goods are perishable? Obviously.

who were car dealers. Where property in goods has passed to the buyer. 55). Held.. The Section also recognizes unpaid seller s right to get interest at a reasonable rate on the total unpaid price of the goods sold. that is. from the time it was due until it is actually paid. T Ltd.. irrespective of the delivery of goods. We have discussed a lot about the rights of an unpaid seller. if the goods have been manufactured to some special order and they are unsaleable and have been manufactured to some special order and they are unsaleable and have no value at all for other buyers. It was found as a fact that the supply of cars exceeded the demand at the time of breach and hence in a sense there was no market price on the date of breach. 1. the seller can get only nominal damages ( Charter vs Sullivan). then the seller may even be allowed the full price of the goods as damages. the seller would file a suit for price normally when the goods have been manufactured to some special order and thus are unsaleable otherwise. Suit for special damages and interest (Sec. Where the buyer wrongfully neglects or refuses to accept and pay for the goods.R refused to accept delivery. or where the sale price is payable on a day certain . 56). the measure of damages is the estimated loss arising directly and naturally from the buyer s breach of contract. For example.61) This Section entitles the seller to sue the buyer for special damages also for such loss which the parties knew. But where the goods do not have any ready market. to be likely to result from the breach of it. The seller s remedy in this case is a suit for damages rather than an action for the full price of the goods.. the measure of damages will depend upon the facts of each case. 2. In fact the Section is only declaratory of the principle regarding special damages laid down in Section 73 of the Indian Contract Act. of course! Let . contracted to supply a motorcar to R. Vs Robinson the damages were assessed on the basis of profits lost. The damages are calculated in accordance with the rules contained in Section 73 of the Indian Contract Act. Where the goods have a ready market the principle applicable is that the seller may recover from the buyer damages equal to the difference between the contract price and the market price on the data of the breach of the contract.1. Yes. although the property in goods has not passed. But does the buyer too enjoys some rights. Suit for damages for non-acceptance (Sec. in Thompson Ltd. when they made the contract. Thus. Where the goods have not been delivered. were entitled to damages for the loss of their bargain viz. T Ltd. if the difference between the contract price and market price is nil. the seller is entitled to sue the buyer for price. In that case. Suit for price (Sec. as they had sold one car less than they otherwise would have sold. the seller may sue him for damages for nonacceptance. To take another illustration. the profit they would have made. and the buyer wrongfully neglects or refuses to pay the price according to the terms of the contract. (Telu Ram Jain vs Aggarwal & Sons).

Rights of Buyer The rights available to the buyer have been shown below in Let us discuss these rights one by one.555 .me throw a light on it. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 104 11.

but he may (i) Set up against the seller the breach of warranty in diminution or extinction of the price.] 2. B pays A through a cheque. the buyer is not by reason only of such breach of warranty entitled to reject the goods. or he may treat the contract as rescinded and sue for damages for the breach. Practical Problem 1. or (ii) Sue the seller for damages for breach of warranty. (c) Suit for Breach of Warranty [Section 59] Where there is a breach of warranty by the seller. or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty.(a) Suit for Damages for Non-delivery [Section 57] Where the seller wrongfully neglects or refuses to deliver the goods to the buyer. A s action is justified. his cheque has been dishonored by the bank. B pays to A through a cheque. because the right of lien is linked with possession and not with title or passing of property. [Mason v. In fulfillment of a contract of sale B transfers that document of title to . [Section 59(2)] Example: X sold a second hand Radio to Y who spent Rs 100 on the repair of this Radio. Burmingham] (d) Right to Treat the Contract as Rescinded or Operative in Case of Repudiation of Contract by Seller before due Date [Section 60] Where seller repudiates the contract before the date of delivery. It was held that Y was entitled to recover the same. Note: The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he suffered further damage. This Radio was seized by the police as it was a stolen one. (b) Suit for Specific Performance [Section 58] In any suit for breach of contract to deliver specific or ascertained goods. the buyer may sue the seller for damages for non-delivery. A sells goods to B. Before B could obtain the delivery of goods. A. Is A s action justified? [Hint: Yes. the buyer may either treat the contract as subsisting and wait till the date of delivery. refuses to give delivery of the goods until paid. Y filed a suit against X for recovery of damages for breach of warranty of quite possession including the cost of repairs. the court may direct that the contract shall be performed specifically. (e) Suit for Interest [Section 61(2)] In case of breach of the contract on the part of the seller. therefore. the buyer may sue the seller for interest from the date on which the payment was made. A sells goods to B and transfers him the document of title to the goods.

which A had read was that biddings once made. A s action is not justified. Hence A can stop the goods in transit only when he pays Rs. Purporting to accept the bid the auctioneer strikes the hammer.53)]. 4. Can A stop the goods in transit? [Hint. his being the highest bid.C. P is entitled to retain the goods as security for the price until he is paid. Where the sale price is payable on a day certain. Hence A gives instructions to stop delivery of the goods to C until paid. 53)]. irrespective of passing of property and delivery of goods (Sec. shall not be withdrawn.00 on the railway receipt. Yes. B assigns the railway receipt to C to secure a specific advance of Rs. Decide. 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.000 on credit. Yes. [Hint. 5. 10. It is agreed that three months credit shall be given to R.] 5. 55)]. Before C could obtain the delivery of goods. 600. Who is to bear . P sells to R a quantity of wheat lying in P s warehouse. The auctioneer has the right to make the auction subject to any conditions he likes (The Coffee Board vs Famous Coffee and Tea Works. Before the expiry of the three months R becomes insolvent and the Official Assignee demands delivery of the wheat from P without offering to pay the price. Can A sue B for the price before the delivery of the goods takes place? [Hint.C can recover the amount of pledge from the goods or from A. the property in the goods is to pass to B on delivery which is to take place on Ist August 1987. A gives notice to stop the goods in transit but C claims them. A sells certain goods to B. 6. ] 7. provided the goods are still in possession of the seller (Sec. and the payment to be made by property in the goods has not passed to him.000 to C (Sec. 47). 50. At an auction sale. A sells and consigns to B goods of the value of Rs. A can sue B for the price. One of the conditions of the sale. B. A is liable to pay Rs 600 because as per the conditions of the auction no bid can be withdrawn. 600 for a typewriter but withdrew the offer before the fall of the hammer. the seller can sue the buyer on his default. A can stop the goods in transit but subject to the pledge of C. A was sued for Rs. Yes.s cheque has been dishonoured by the bank. A attended an auction sale and made a bid of Rs. A makes the highest bid for a flower vase. No. 3. Before the goods reach the destination B becomes insolvent. An unpaid seller s right of lien is defeated against transferee who takes a document of title in good faith and for consideration (Sec.R allows the wheat to remain in P s warehouse. but strikes the vase and breaks it. Is A s action justified? [Hint. Is P entitled to retain the goods until paid? [Hint.

on which the vase was kept. The loss in both the cases is to be borne by the owner of the flower vase. the goods forming the subject matter of the contract have perished. namely.555 105 . because at the time of the completion of the contract. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.the loss? Would your decision differ if the auctioneer had struck the table. with the hammer and the vase fell down and broke into pieces? [Hint. and as such impossibility of performance at the time of contract renders the agreements void ab-initio. striking the hammer.

Vikas Publishing House Pvt. P. Ltd. Tata Mc.html M.555 . Tulsian (2002). New Delhi. Sultan Chand and Sons. http://www. Ltd. Business Law .References Kapoor.com/bareacts/soga. Kucchal ( 2002). Delhi. Pvt. Graw Hill LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 106 11.C. Elements of Mercantile Law.C.indialawinfo. (2003).D. Delhi Notes: Business Law . N.

It was felt although the use of ready cash is desirable due to acceptability but may cause risk and inconvenience in dealing.LESSON 21: THE NEGOTIABLE INSTRUMENT ACT 1881 MEANING AND TYPES OF NEGOTIABLE INTRUMENTS Learning Outcomes After reading the lesson. It extends to the whole of India except the State of Jammu & Kashmir. The term Negotiable Instrument consists of two parts viz. The Negotiable Instrument Act 1881 came into force on 1st March 1881. (b) Meaning of Negotiable instrument Payable to Bearer. 1. It means an instrument possessing the quality of Negotiability is entitled to be called negotiable instrument According to Will A negotiable instrument is one the property in which is acquired by anyone who takes it bonafide and for value not withstanding any defect of title in the person from whom he took it Thus a negotiable instrument must possess two features. The right of ownership contained in the instrument can be transferred from one person to another by mere delivery. Negotiable and Instrument. bill of exchange or cheque is payable to order if. Its substitute leads to development of Negotiable Instruments. The word negotiable means transferable by delivery and the word instrument mean written documents by which a right is created in favour of some person. . you should be able to know: The meaning of Negotiable Instruments The important types of Negotiable Instruments Introduction We are aware that money is most common medium of exchange itself has the exchange value and is freely transferable. The transferee taking the instrument in good faith and for consideration gets a good title to the same even though the title of the transfer is defective. A promissory note. either of the following two conditions is fulfilled: (a) It must be expressed to be so payable (b) It must be expressed to be payable to a particular person and it must not contains words which prohibit transfer or indicate and intention that it shall not be transferable. if it is payable to bearer or by endorsement and delivery if payable to order and 2. (a) Meaning of Negotiable Instrument Payable to order.

Payable to order or bearer 2. Freely transferable 3. Presumption as to consideration Let us discuss these one by one 1.A holder in due course ( i. Presumption as to Holder:.e. Freely Transferable:.It must be payable either to order or bearer 2. Promissory Note.Every holder of negotiable instrument is presumed to be holder in due course (Section 118) 4. accepted. the person who become the possessor of negotiable instrument before maturity. signed by the maker to pay a certain sum of money only to or to the order of. . for valuable consideration and in good faith ) get the instrument free from all defects in the title of transferor 5. Title of holder in due course:. negotiated or transferred for consideration. bill of exchange or cheque is payable to bearer if either of the following condition is fulfilled (a) It must be expressed to be so payable (b) The only and last endorsement must be endorsement in blank Essential Characteristics Feature of a Negotiable Instrument The essential characteristics of a negotiable instrument have been shown as under: 1. endorsed . The same are being discussed in some detail. Bill of exchange and cheque. drawn.A Promissory note.A instrument payable to order is negotiable by endorsement and delivery and an instrument payable to bearer is negotiable by mere delivery 3. Presumption as to holder 4. Payable to order or bearer: . Since the Negotiable Instrument Act deals with only three Negotiable Instruments. Let us come to the definition aspect of important negotiable instruments Definitions (a) Promissory Note: A promissory note is an instrument (not being a bank note or a currency note ) in writing containing an unconditional undertaking. a certain person or to the bearer of the instrument ( Section 4). Title of holder in due course 5. Presumption as to considerations:-Every negotiable instrument is presumed to have been made.

In other words. even the word promise need not necessary is that whatever language is show that the maker is unconditionally sum. the requirements of promissory note are as follows: (i) It must be in writing: This means that cannot be oral. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 108 11.555 the engagement form of language for be used. There is no prescribed this. it must clearly bound to pay the . What is used.

500 deducting any money which B may owe me. it would become valid when it is endorsed by the maker. Since the signature is intended to authenticate the instrument it can be on any part of the instrument. provided D leaves me enough to pay the sum . such an instrument also will not be a promissory note. Certainty must be as to the amount and also as to the person by whose order and to whom payment is to be made. 350 and all other sums which shall be due . 15 days after the death of B . I promise to pay to B Rs. (iii) The amount promised must be a certain and a definite sum of money: Certainty is one of the essential characteristics of a promissory note. the sum in words must be taken into account. Hence the necessity of certainty. An instrument runs thus: I acknowledge myself to be indebted to B of Rs. Thus instrument would be a promissory note. 500 to be paid on demand. A signs an instrument made out as follows. if endorsed in blank. it is not a valid promissory note as the sum is not certain within the meaning of Section 4. I promise to pay to B Rs. for value received . Remember that a promissory note cannot be made payable to the maker himself. is not a promissory note and hence invalid. It may be noted that a promise to pay will not be conditional under Section 4. Where the name of the payee is not mentioned as a party. The instrument will not be a promissory note. you should also remember that: (a) consideration need not be mentioned.(ii) The promise to pay must be unconditional: If a condition is attached to the promise to pay then the instrument will not be construed as a promissory note. Suppose. However. For example. it is not conditional as it is certain that B will die though the exact time of his death is uncertain (Section 4). In connection with the promissory note. Let us now take a converse case. For example. 500 on D s death. Uncertainty in such matters has a tendency to restrict credit and to hamper commerce. or it becomes payable to the endorsee or his order. if endorsed specially.000. where an instrument contains: I promise to pay Rs. where a promissory note is in this form: I promise to pay to A Rs. where it depends upon an event which is certain to happen but the time of its occurrence may be uncertain. (b) place and date of making it need not the mentioned: (c) an undated instrument will be treated as having been made on the . if A signs thus. the instrument becomes invalid. This is because it then becomes payable to bearer. You should also remember that in the event of figures and words indicating the sum payable being contradictory. (v) The person to whom the promise is made must be a definite person:-The payee must be a certain person. Thus. 2. a note. Similarly. (iv) The instrument must be signed by the maker: It is incomplete till it is so signed. You should also note that payment with interest of at a specified rate of exchange is certain within the meaning of Section 4. which runs I promise to pay myself .

(f). (d) I promise to pay B Rs. A sells goods worth Rs.1.000. for value received. 800 for value received . Suppose. This point. and (d) an antedated or post dated instrument is not invalid. Let us discuss some of the illustrations. It is of the essence of the bill that its drawer orders the drawee to pay money to the payee. 500 first deducting there out any money which he may owe me. (b) I acknowledge myself to be indebted to B in Rs. It must be imperative mere predatory words do not suffice.date of its delivery. 800 within the time stipulated therein. (f) I promise to pay B Rs. needs no further annotation.000. to be paid on demand. If B writes across the bill accepted . it will indicate that B undertakes the liability to pay a sum of Rs. or to the order of certain person to the bearer of the instrument (Section 4). and allows him three months time to pay the price. 500 seven days after my . You should now try to understand the application of the points emerging from the said definition: (i) The bill of exchange must be in writing. (d). you must know how a bill of exchange ordinarily comes into existence. A will present it to B for acceptance.B.1. since these have not yet been deleted there from by the Parliament: Nevertheless. A bill of exchange is an instrument in writing containing an unconditional order signed by the maker. B is the drawee and after acceptance B will be the acceptor. (g) and (h) are not promissory notes. The words or to the bearer of the instrument still appear in Section 4 to the Act. N. A will them draw a bill on B in the following terms Three months after date pay to my order the sum of Rs. (ii) There must be money to the payee. (e) I promise to pay B Rs. It comes into being. when a trader decides to sell goods on credit. 800 to B. (e). (c) Mr B I. in view of the provision contained in Sub-section (2) of Section 31 of the Reserve Bank of India or the Central Government can make or issue a promissory note payable to the bearer of the instrument. Here A is the drawer. After signing the bill. The instruments respectively marked (c). (b) Bill of Exchange: Before going into the definition.U Rs. LEGAL ASPECTS OF BUSINESS (a) I promise to Pay B or order Rs.O. excessive politeness may nonetheless prompt one to disregard it as an order.500 . Illustrations A signs instruments in the following terms: The instruments respectively marked (a) and (b) are promissory notes. directing a certain person to pay a certain sum of money only to. Although terms of politeness may be admissible. 500 and all other sums which shall be due to him. we take it for granted.

555 109 . (g ) I promise to pay B Rs. 500 and to deliver to him my black horse on lst January next. 500 on D s death. © Copy Right: Rai University 11. (h) I promise to pay B Rs.marriage with C. provided D leaves me enough to pay that sum.

(v) It cannot be made payable to the maker himself.Promissory Note Bill of exchange (i) It contains a promise to pay. (v) The drawer. Once can play the role of two. the maker (debtor) and the payee (creditor). A conditional bill of exchange is invalid. as the bill is payable at all events. The instrument without the proper signature will be inchoate and hence ineffective. Thus it is absolutely necessary for the drawer s order to the drawee to be unconditional. (iv) The maker of promissory note stands in immediate relationship with the payee (Explanation to Section 44) and is primarily liable to the payee or the holder. It is permissible to add the signature at any time after the issue of the bill. (vii) A promissory note cannot be drawn in sets. that is the maker and the payee cannot be the same person. viz. (iv) The drawee must sign the instrument. (vi) In the case of a promissory note there are only two parties. (ii) The liability of the maker of a note is primary and absolute (Section 32) (iii) It is presented for payment without any previous acceptance by the maker. However. the instrument remains ineffectual. Where a bill contains an order to pay the amount specified therein out of a particular fund it will be conditional and therefore invalid. The order must not make the payment of the bill dependent on a contingent event. But if it is not so added. The reason for this invalidity is that it is uncertain whether the funds will be in existence or prove sufficient on the bill becoming payable. an unqualified order to pay together with an indication of a particular fund out of which the drawee is to reimburse himself. You should remember that all these three parties may not necessarily be three different persons. . But there must be two distinct persons in any case. Hence such as indication does not vitiate the instrument. the drawee (acceptor) and the payee the necessary parties to a bill are to be specified in the instrument with reasonable certainty. (viii) A promissory note can never be conditional. (iii) This order must be unconditional. is not conditional.

8.The liability of the drawer of a bill is secondary and conditional.In the case of bill. drawee and payee.It contains an order to pay.In the parties.The maker or drawer of an accepted bill stands in immediate relationship with the acceptor and the payee (Explanation to Section 44). the expressions (a) a cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque. of these the same case of a bill of exchange there are three viz. 2. 6. 4.If a bill is payable some time after sight. (vi) The sum must be certain [what we have discussed on this point in relation to promissory note vide requirement (iii) on page 2 will equally hold goods here]. He would be liable if the drawee. and is generated. (vii) The medium of payment must be money and money only. For the purposes of this section.The bills can be drawn in sets. it is required to be accepted either by the drawee himself or by some one else on his behalf. before it can be presented for payment. 7. after accepting the bill fails to pay the money due upon it provided notice of dishonour is given to the drawer within the prescribed time (Section 30) 3. the drawer and payee or the drawee and the payee may be the same person. either by the clearing LEGAL ASPECTS OF BUSINESS . The distinctive order to pay anything in kind will vitiate the bill.1. (c) Distinction between a promissory note and a bill of exchange: The distinctive features of these two types of negotiable instruments are tabulated below: You should carefully note that neither a promissory note nor a bill of exchange can be made payable to bearer on demand.A bill of change too cannot be drawn conditionally. written and signed in a secure system ensuring the minimum safety standards with the use of digital signature ( with or without biometrics signature ) and asymmetric crypto system. and any two three capacities can be filled by one and person. (b) a truncated cheque means a cheque which is truncated during the course of a clearing cycle. drawer. (d) Definition of Cheque: A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. but it can be accepted conditionally with the consent of the holder. 5.

© Copy Right: Rai University 110 11.555 .

It needs only is advisable to present them for acceptance even when it is not essential to do so. also it is not meant to be payable to bearer on demand. and a cheque is as a rule. payable on demand. whereas a bill cannot be bearer if it is made payable on demand. however. whereas bill must be stamped according to the law. immediately on generation of an electronic image for transmission.house or by the bank whether paying or receiving payment. one which is expressed to be so payable words against its transfer or indicating an intention that it shall not be transferable (Section 18). 3) In the case of a dishonour of a cheque. In England and . A cheque is an exception to the general rule that a bill of exchange cannot be drawn payable to bearer on demand Section 31. A cheque. it is not necessary to present it for acceptance. one which is either expressed to be so payable or on which the last or only endorsement is an endorsement in blank). A cheque being specie of bill of exchange. be signed by the drawer and must contain an unconditional order on a specified banker to pay a certain sum of money to or the order of the specified person or to the bearer of the instrument. is a peculiar type of negotiable instrument in the sense that it does not require acceptance.. (Section 6. For the purposes of this section. and (iii) crossed cheque is a cheque which can be only collected through a banker. it must..e. substituting the further physical movement of the cheque in writing. viz. 2) No days of grace are allowed in the case of a cheque. Negotiable Instruments Act) That is to say. 6) Cheque do not require to be stamped in India.. the expression clearing house recognized as such by the Reserve Bank of India. (The Reserve Bank of India Act). it is a bill drawn on a banker which is payable on demand. A cheque may be drawn up in three forms.e.e. 5) In the case of a cheque. Difference between Cheque and Bill of Exchange (1) In the case of a cheque the drawee i. the person on whom the bill is drawn must always be banker whereas in the case of a bill of exchange the drawee may be any person. (i) bearer cheque (i. notice of dishonour is not necessary whereas notice of dishonour is usually required in the case of a bill. (ii) order cheque i. 4) A cheque can be drawn to bearer and made payable on demand.. under the Section 5. whereas three days grace is allowed in the case of a bill.

(h) Crossed cheque (a) The usage of crossing cheques: Cheques are usually crossed as a measure of safety. The banker. action can be taken by the customer against the banker for the loss of his reputation. Moreover.e.several other countries. The banker charges for his services a small commission. it is. A draft is drawn either against cash deposited at the time of its purchase or against debit to the buyer s current account with the banker. in a sense. is under liability. Thus a banker who collects a draft on behalf of a customer will not be protected by Section 131. will be liable to his customer ( drawer).. where a draft purports to have been endorsed by or on behalf of the payee the paying bank is discharged from liability by its payment in due course even though the endorsement of the payee has been forged. are not liable even if a bank has marked a cheque as good for payment (Bank of Baroda vs. since the Reserve Bank of India. by definition. Crossing is made by drawing two parallel transverse lines across the face of . laid down in Sections 123 to 131. cheques also are required to be stamped. In such a case. (g) Marked cheque: A cheque need not be presented for acceptance. In other words. if he wrongly refuses to honour the cheque. The buyer of the draft generally furnishes particulars of the person to whom the amount thereof should be paid. Such a certification of marking is strictly not equivalent to an acceptance but is very similar to it and protects the person to whom the cheque is issued against the cheque being refused for payment subsequently by Banking in India. Section 131A of the Act makes all rules as regards crossed cheques. however. 7) A cheque may be crossed. it must be remembered that cheques are negotiable instruments and the most of the rules in relation to bills of exchange also apply to cheques. do not mark or certify cheque in this manner. applicable to drafts definition by Section 85A. specially allows such a draft be issued. they are drawn by one person upon another person (Section 85A). as a rule. can be made payable to drawer on demand without any legal objection thereto. however . to the person in whose favour the cheque is drawn. Generally. an order drawn by one person upon himself. a cheque is marked or certified by the banker on whom it is drawn as good for payment . In certain cases. Bankers in India. Act. This affords great protection to the paying banker in so far as it is always possible for the paying banker to identify the signature of the payee. (f) Bank Draft: A bank draft is. whereas a bill cannot be crossed. ). the banker. Punjab National Bank Ltd. Therefore the drawee of the cheque i. The draft like a cheque. an order drawn by an office of a bank upon another office of the same bank. under Section 31. whereas in the case of bills.

555 111 . (b) Special crossing: Where a cheque bears across its face an entry of the name of a banker either with or without the words not negotiable . The object of general crossing is to direct the drawee banker to pay the amount of the cheque only to a banker.the cheque with or without the addition of certain words. the cheque is considered to have been crossed specially to that banker. The usage of crossing distinguishes cheques from other bills of exchange. In the case of special crossing the addition of two parallel transverse lines is not essential though generally the name of the bank to which the cheque is crossed LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. to prevent the payment of the cheque being made to wrong person (Section 123).

he can claim payment over again from the banker (Section 129). the holder thereof may cross it either generally. specially. the title of the holder in due course would not be affected by the defect in the title of the transferor (Section 130). banker making payment in due course is protected. Again. pays it in due course. it is to be presumed that he has made payment to the true owner of cheque. . This is the only case where the Act allows a second special crossing by a banker and for the purpose of collection [Akro Kervi Mines vs.B. (iii) If it is crossed. It may be noted that the crossing of a cheque is an instance of an alteration which is authorized by the Act. his agent. the banker on whom it is drawn shall refuse payment thereof. crossed generally or specially (Section 126 & 127): If a cheque is crossed generally. the holder may cross it. In other words. 465 (Section 125)]. Thus. in fact. (iv) If a cheque is crossed specially. the banker on whom it is drawn shall not pay it otherwise than to a banker. though in fact. (d) Payment of cheque. in the case of a bill negotiated in the ordinary way. But. Economic Bank (1904) 2 K. received by the true owner of the cheque (Section 128). the banker to whom it is crossed. if the money does not reach the true owner. whether the money is or is not. either generally or specially the holder may add the words not negotiable . (c) Crossing after issue: (f) If cheque has not been crossed. Where a cheque is crossed specially to more than one banker except when it is crossed to an agent for the purpose of collection. the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for collection. This is because. (ii) If it is crossed generally. In consequence if the title of the transferor is defective. the amount of the cheque may not reach the true owner. for collection. where a cheque is crossed specially. (e) Payment in due course of crossed cheque: Where the banker on whom a crossed cheque is drawn. (f) Payment out of due course: Any banker paying a crossed cheque otherwise than in accordance with the provisions of Section 126 shall be liable to the true owner of the cheque for any loss he may have sustained. or specially. the title of the transferee would be vitiated by the defect. in such a case. may again cross it specially to another banker. (g) Cheque marked not negotiable : A person taking a cheque crossed generally or specially bearing in either case the words not negotiable shall not have or shall not be able to give a better title to the cheque than the title the person from whom he took had.specially is written between two parallel transverse lines (Section 124). the instruction by the drawer would not be clear (Section 127).

by means of fraud. obtained from Y a cheque crossed not negotiable and got it cashed at a bank other than the drawee bank. In other words.For example. an account payee. his claim is not defeated or affected by the defective title of the transferor. Once the title of the transferor or endorser become defective the title of the transferee is also affected by such defect and the transferee cannot claim the right of a holder in due course. Y sued the bank for conversion. cheque can be collected only for the account of the payee named in the cheque and not for anyone else. Therefore. (1901) A. When such a crossing is placed on a cheque. The courts of law have held that an account payee crossing is a direction to the collecting banker as to how the proceeds are to be applied after receipt. but if the transferor has a defective title. In other words. The addition of the words not negotiable in a crossed cheque has a special significance. A banker collecting an account payee cheque for a person other than the payee named in the cheque may be held liable for conversion. broadly. the principle of the nemo dat quod non habet (that is. the title of the holder in due course also becomes defective. If the holder takes the instrument in good faith . the holder in due course does not get any better title than what the transferor had: If the transferor had defective title. he can still transfer it with a good title.C. But the addition on the words not negotiable to the crossing of a cheque. he will have to refund the amount of the bill to the true owner. Thus. The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor. The banker can disregard the direction only at his own risk and responsibility. The use of the words does not render the cheque non-negotiable but only affects one of the main features of negotiability. the transferee is affected by such defects. before maturity and for valuable consideration. and he cannot claim the right of a holder in due course by providing that he purchased the instrument in good faith and for value. As X in the case in question had obtained the cheque by fraud. A similar decision was taken in Great Western Railway Co. nobody can pass on a title better than what he himself has ) will be applicable to a cheque with a not negotiable crossing. In case of any dispute. X. it is the transferor with the defective title who is liable. is that if the holder has a good title. As per the latest instructions issued by the Reserve Bank of India (9-9-1992) it would be safer for the drawer to cross a cheque not negotiable with the words account payee added to it. cheques with not negotiable crossing are negotiable so long as their title is good. London and Country Banking Co. vs. . Is the bank liable for conversion? The effect of Section 130 of the Act. he had no title to it and could not give to the bank any title to the cheque or the money and the bank would be liable for the amount of the cheque for conversion. 414 the facts whereof are exactly the same as the example cited above. makes the position different.

It is imperative on the part of collecting bank. therefore to take utmost care to enquire into the title of its customer and satisfy LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 112 11.In other words. if the bank collects an account payee cheque for a person other than the payee it does so at its own risk.555 .

was not stolen but instead presented for payment by B s agent on endorsing the same Per Pro for B and the cheque is cashed the banker could debit the account of the drawer. and that it is otherwise in order. the thief or someone else forges B s endorsement and presents the cheque to the bank for encashment. (h) Cheque marked Account Payee : It is a form of restrictive crossing. On paying the cheque. the banker is exonerated for the failure to direct either the genuineness of the validity of the endorsement on the cheque purporting to be that of the payee of his authorized agent. even though the endorsement of the payee subsequently terns out to be a forgery. if the cheque in the above case. In other words. he may be held guilty of a negligence in the event of an action for wrongful conversion of funds being brought against him. Likewise. agent without his authority . the banker would be able to debit the drawer s account with the amount of the cheque. the paying banker must make payment only to the bank named in the crossing. a cheque is drawn payable to B on order and it is stolen. the paying banker needs only to see that the cheques bears no other endorsement but that of the payee. He would not be held guilty of the ground that he has cashed the cheque endorsed by the agent of B who has misappropriated the amount thereof. Thereafter. Such a protection is also available in respect of drafts drawn by one branch of a bank of another payable to order (Section 85A). Such a crossing acts as a warning to the collecting bankers that the proceeds are to be credited only to the account of the payee. he is authorized to debit the account of his customer with the amount so paid. These words are not an addition to the crossing but are mere direction to the receiving or collecting bankers. If the collecting banker allows the proceeds of the cheque so crossed to be credited to pay any other account. But where the cheque is also crossed specially. In the case of a cheque bearing Account Payee crossing which is not specially crossed to another banker. or though the endorsement may have been made by payee. These do not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person named as the payee. represented by the words Account Payee entered on the face of the cheque.itself that there is no defect in the title of the customer presenting such cheque for collection. (j) . If has been held that crossing cheque with the words Account Payee and mentioning a bank is not a restrictive endorsement so as to invalidate further negotiations of the cheque by the endorsee. For example. (i) Protection in respect of uncrossed cheque: When a cheque payable to order purports to be endorsed by or on behalf of the payee and the banker on whom it is drawn pays the cheque in due course.

to any person in possession thereof in the circumstances which do not excite any suspicion that he is not entitled to receive payment of the cheque.. either originally or by endorsement. When an instrument. if the payment has been made in due course i.Protection in respect of crossed cheques: When a banker pays a cheque (drawn by his customer).e. Let us know in detail about the other important classification of instruments.e. is made payable to the order of a specified person and not to him or his order. (3) when it is payable to a specified person without the addition of the words or his order and does not contain words prohibiting transfer or indicating an intention that it should not be transferable. where an instrument is made payable to bearer it is transferable merely by delivery.. can be altered subsequently. bearer ) may. i. An instrument is payable to bearer which is expressed to be so payable on which is expressed thus Pay to R or bearer . without any further endorsement thereon. however. and if crossed specially then to banker. he can debit the drawer s account so paid. be it a promissory note. the payee must be indicated with reasonable certainty. it is payable to him or his order. by writing above . which is expressed to be so payable or on which the last endorsement is in blank (Explanation 2 to Section 13 of the Negotiable Instrument Act ). Classification of Instruments (a) Bearer and Order instruments: An instrument may be made payable: (1) to bearer. at his option. (2) to a specified person or to his order. It is also payable to bearer when the only or last endorsement on it is an endorsement in blank. to whom it is crossed or his agent for collection (also being a banker). in good faith and without negligence. The protection in either of the two cases aforementioned can be availed of. An instrument is payable to order (i) when it is payable to the order of a specified person or (2) when it is payable to a specified person or his order or. even though the amount of the cheque does not reach true owner. This character of the instrument. without signing his own name. according to the apparent tenor of the instrument.e. For Section 49 provides that a holder of negotiable instrument endorsed in blank (i.. if crossed generally then to any banker. Significance of bearer instruments The expression bearer instrument signifies an instrument. bill of exchange or a cheque. When an instrument is not payable to bearer. Under Section 46.

despite any endorsement whether in blank or full appearing thereon notwithstanding that any such instrument purported to restrict or exclude further negotiation. An endorsee thus. direct that the payment of the instrument be made to another person. however the law is a little different from the one stated above.the endorser s signatures. can convert an endorsement in blank into an endorsement in full. In the case of a cheques.555 113 . In such a case. According to the provisions of Section 85(2) where a cheque is originally expressed to be payable to bearer. In other words. He will be required to endorse the instrument before delivering it. the holder of the instrument would not be able to negotiable the instrument by mere delivery. the original character of the cheque LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. the drawee is discharged by payment in due course to the bearer thereof.

. (b) Inland and Foreign Instrument (Sections 11 & 12): A promissory note. But if A is charged as drawer. protest is optional (Section 104).is not altered so far as the paying bank is concerned. a bill drawn by a person on himself in favour of a third person or where the drawee is a fictitious person. Foreign bills must be protested for dishonour if the law of the place where these are drawn prescribes for such a protest. He is liable too pay interest at the rate of 6% only. he thereby give . and the respective liability of the acceptor and endorser by the law of the place where the instrument is made payable (Section 134). For example. In the case of inland bills. the liability of the maker or drawer of a foreign promissory note or bill of exchange is regulated in all essential matters by the law of the place where he made the instrument. Section 20 of the Negotiable Instruments Act provides that when one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India and either wholly blank or having written thereon an incomplete negotiable instrument.g. An incomplete instrument called an inchoate instrument. provided the payment is made in due course. In the absence of a contract to the country. bill of exchange or cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument. An action on the bill is brought against B in the States. The law on the point is that the holder of such a bill is at liberty to treat the instrument as bill or a promissory note. Hence the proposition that once a bearer instrument always a bearer instrument. E. a bill of 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 interest is 6%. The distinction between inland and foreign bills is of importance in connection with Sections 104 and 134 of the Act. Inland bills need not be protested for dishonour. protest in this case is optional. he is liable to pay interest at 25. Any such instrument. the foreign bills are: (a) bills drawn outside India and made payable in or drawn upon any person resident in any country outside India. made or payable shall be deemed to be a foreign instrument. not so drawn. c) Ambiguous and inchoate bills An ambiguous bill means an instrument which can be constructed either as a promissory note or as bill of exchange (Section 17). (c) bills drawn in India upon persons resident outside India and made payable outside India. But foreign bills must be protested when law of the place of making or drawing them requires such protest. The question by what law are the contracts on negotiable instruments governed is also important. or drawn upon any person resident in India. The nature of the instrument will be as determined by the holder. (b) bills drawn outside India and made payable in India. The bill is endorsed in the State and is dishonoured. Thus.

upon amount specified therein by the stamp. endorser or acceptor must deliver the instrument to another. the signer as a maker. if the bill has been accepted or a after noting for non-acceptance or protest for non-acceptance soon).: (Sections 21 To 25) (i) Instruuments payable on demand: Bills and notes are payable either on demand or at a fixed future time. or at sight or presentment . Till this filling in and completion. Sight And Time Bills Etc. Further. and within a reasonable time after its endorsement to render the endorser liable. and complete the paper as a negotiable instrument. the paper so signed and delivered must be stamped in accordance with the law prevalent at the time of signing and on delivering otherwise the signer is not estopped from showing that the instrument was filled without his authority. In the absence of delivery. and no action is maintainable on it. Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended to be paid by them there under. Such a bill or note may be presented for payment at any time at the option of holder. i. a promissory note after presentment for sight. to any holder in due course for such amount.e. acceptor or endorser. A promissory note or bill of exchange in which no time for payment is mentioned is payable on demand. It is useful to make a bill or not payable at so many months or days after sight. maker. . the signer is not liable. it denotes that sight must appears in legal way .prima facie authority to as the case may be. His signature on the blank paper purports to be an authority to the holder to fill up the blank. it is only a technical expression meaning immediately payable . it a negotiable instrument for an and not exceeding the amount covered so signing shall be liable upon such instrument in the capacity in which he signed the same. but it must be presented within a reasonable time after its issue in order to tender the drawer liable. In the former case. for a note is incapable of being accepted. it denotes that payment is not to be demanded till it has been exhibited to the maker. The person the holder thereof to maker or complete. noting for non-acceptance or protest for non acceptance. after acceptance. the instrument is not a valid negotiable instrument. as a condition of liability. (ii) Time Bills: The expression after sight means. after acceptance. Furthermore. while in the latter case. By such signature he binds himself as drawer. drawer. The term after sight is differently used in a note and a bill.. and in a bill of exchange. Cheques are always payable on demand. A bill or promissory note is also payable on demand when it is expressed to be payable on demand. Prima facie authorizes the latter as his agent to fil it up and give to the world the instrument as accepted by him ) is one of estoppel. The principle of this rule (namely that a person who gives another possession to his signature on a blank stamped paper. It should be noted that the expression on demand does not imply that any actual demand is to be made.

at sight or on presentment. A note or bill. The maturity of a note or bill is the date on which it falls due. not payable on demand.555 . Where bill or note is payable at fixed period after sight. the question of maturity becomes important.(iii) Maturity. Three days are LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 114 11. is at maturity on the third day after the day on which it is expressed to be payable.

When a note or bill is made payable. If the months in which the period would terminate have no corresponding day. 1878. the expression after sight means after exhibition thereof to maker for the purpose of founding a claim for payment. a stated number of months after date. ). The instrument is at maturity on the 3rd December. the instrument is due and payable on the preceding business day (Section 15). the period stated terminates on the day of the month. When the last day of grace falls on a day. 1878. which is public holiday. the time is to be calculated from the date of acceptances if the bill is accepted and from the date of noting or protest if the bill is noted or protested for nonacceptance (For the explanation of noting and protesting. which corresponds. Illustrations (a) A negotiable instrument dated 29th January. 1878. The instrument is at maturity on the third day after the 28th February. Three days of grace are allowed to these instruments after the day on which they are expressed to be payable (Section 22). In calculating the date at which a note or bill made payable a certain number of days after date or after sight or after a certain event is at maturity on the days or the date. (iv) Calculation of maturity: Where a bill is payable at a fixed period after sight. with the day on which the instrument is dated. the period terminations on the day of the months which corresponds with the day on which the event happens (Section 23). (b) A negotiable instrument. 1878. is made payable three months after date. or the day of presentment for acceptance or sight or the day of protest for non-acceptance. the date of its maturity is calculated from the date of acceptance for honour. dated 30th August. at sight on presentment. When it is payable a stated number of months after a certain event. is made payable at one month after date. (For the explanation of the phrase acceptance for honour . In the case of a bill payable after a stipulated number of months after sight which has been accepted for honour. When it is made payable after a stated number of months after sight the period terminates on the day on the month which corresponds with the day on which it is presented for acceptance or sight or noted for non-acceptance or protested for non-acceptance. read Section 99 and 100 of the Negotiable Instruments Act). or the day on which the event happens shall be excluded (Section 24). In the case of note. (a) . the period terminates on the last day of such month (Section 23).allowed as days of grace. read Section 108 of the Negotiable Instruments Act. No days of grace are allowed in the case of a note or bill payable on demand.

] 2. In this case it is presumed that the drawee accepted the bill on a date when he was minor. Can the holder treat this bill as a promissory note? [Hint: Yes. which I borrowed. In the margin the amount stated is Rs. The acceptance bore no date. 10. Will the drawee be liable on the bill? [Hint: No. Thompson [1841] 3 M & G. 10.000 which is to be paid by installments for rent. X. And I have to be accountable to you for the same with interest. and the drawee attained the majority the day before the bill matured. dated 31st August. (c) order. A bill of exchange is drawn stating Pay to the X or his order a sum of ten thousand rupees . The instrument is at maturity on the 3rd December. 1. it is an ambiguous instrument and holder may treat it as a bill or note at his option. Mr.000. Decide giving reasons for your answer whether the promissory note in the above case in a laid promissory note. the amount stated in words shall be taken as final. 576] 4. (c) XYZ signs a note reading I am liable to A in a sum of Rs. nad hence it cannot be . 6. Is it a valid bill? If so.000 in the event of latter s retirement from the partnership firm.A promissory note or bill of exchange. Solve the following problems for a better understanding 1. I owe you Rs. his partner.000. (a) to X (b) to bearer (c) to X or order (d) to X bearer (e) to the order of X [Hints: (a) order. (b) XYZ signs a note reading I have received Rs.000 the note is signed by Y. A bill was payable three months after the date it was accepted. 1878. form you. The Bombay house draws a bill on Calcutta house. 10. Are the following instruments promissory notes? (a) Mr. X promises by way of promissory note to pay Mr. (b) bearer. 1878. a sum of Rs. is made payable three months after date. Y. 1. The facts of this case are similar to those of Roberts v. A minor being incompetent to contract will not incur any liability under the bill. it will represent Rs. [Hint. (e) order] 3. Section 18 of the Act says that if the amount in words and figures is different in a negotiable instrument. The facts of this case are similar to those of Miller v. (d) bearer. Classify the following instruments as payable to bear or to order. 10.000. Bethel [1852] 12 CB 778. A firm carries on business in Bombay and Calcutta. 5. how much amount it will represent? [Hints : Yes. The promise of X is conditional.

A company issued a cheque to its bankers.555 115 A receipt the banker form at foot Is the . cheque valid? LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Further retirement of Y from the partnership firm is not a certain event] 1. stamped and dated. was appended to the cheque and it ordered to make the payment provided the receipt hereof is duly signed.constituted as a valid promissory note.

Elements of Mercantile Law. because its payment is conditional upon signing of the receipt. Rohini (2003). Kucchal (2002). X draws a bill of exchange on Y and negotiates it to Z.com/bareacts/soga. Vikas Publishing House Pvt. Business Law .[Hint: No. the drawee is a fictitious person. Where in a bill.C. it is an ambiguous instrument and the holder has an option to treat it as a bill or note].] 8. Ltd. is this instrument a promissory note or a bill of exchange? [Hint: it is promissory note. New Delhi Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 116 11.indialawinfo.555 . Y is a fictitious person. New Delhi. London & south western Bank Ltd.D. Tulsian (2002). References Kapoor. Taxmann s. An instrument on which the word hundi was written was in the following form sixty days after date we promise to pay a or order the sum of Rs. Student s Guide to Mercantile and Commercial Laws. N. P. Delhi. Tata Mc. Graw Hill Aggarwal.000 only for the value received across the document was written accepted and it was signed by the maker x y. Delhi. An instrument does not become a bill of exchange for the reason of appearance of word hundi on its face. Sultan Chand and Sons.html M. http://www. Business Law . 1.[1990] 1 KB 270] 7. Facts of this case are similar to those of Bevin v. Pvt. Can Z treat it as a promissory note made by X? [Hint: Yes.C. Ltd. (2003).

.e. Under Section 34. The acceptor becomes liable to the holder after he has signified his assent but not before. (iii) The drawee of a bill of exchange who has signified his assent to the order of the drawer is called the acceptor. the person directed to pay. Parties to a cheque: Drawer. Drawee.. Now a question would naturally arise as to who can be acceptors? Under Section 33 of the Act. indorser. acceptor for honour. payee. Maker. Payee. Drawee or Acceptor. you should be able to know: The Parties to a negotiable instrument The liability of various parties to negotiable instrument Introduction The important parties to Negotiable Instruments can be listed as follows: Parties to a promissory note: Maker. can bind himself by an acceptance.. no person except the drawee of a bill of exchange. (ii) The party on whom such bill of exchange of cheque is drawn is called the drawee. indorsee Parties to a bill of exchange: Drawer. (b) . indorser. drawee ( always a banker). etc.: (i) The party who draws a bill of exchange or a cheque or any other instrument is called drawer.LESSON 22: THE NEGOTIABLE INSTRUMENT ACT 1881 PARTIES TO A NEGOTIABLE INTRUMENTS Learning Outcomes After reading the lesson. or all or some of several drawees or a person named there in as drawee in case of need. each of them can accept it for himself. drawee in case of need. Acceptor. If follows from the aforesaid provisions that the following person can be acceptors: (a) Drawee. indorsee. where they are several drawees of a bill of exchange who are not partners. i. In other words the person who is thereby directed to pay is called the drawee. payee. indorser. indorsee Let us learn about them Drawer. but none of them can accept it for another without his authority.

It may be sufficient acceptance even if just a bare signature is put without additional words. It is thus essenial that the agent. evident that a general authority to transact business and to discharge debits does not confer upon an agent the power to endorse bills of exchange so as to bind his principal. himself or through a duly authorized agent. it would not be an acceptance. draw. What is essential is that it must be written on the bill. the words accepted may be written across the face of the will with a signature underneath. The agent may sign in two ways. (d) An acceptor for honour. may make. Alternatively. every person capable of legally entering into a contract. bill of exchange or cheque. into the particular contract. From a perusal of Section 27 and 28 it is. for his principal who must be sui juris. (c) A drawee in case of need. viz. deliver and negotiate a promissory note. therefore. else it creates no liability as acceptor on the part of the person who signs it. an acceptance written on the back of a bill has been held to be sufficient in law. Under Section 27 of the Act. accept or endorse notes and bills depends on the general law of agency and is a question of fact. for it is immaterial what hand actually signs the name of the principal. (e) Agent of any of the persons mentioned above.. accept endorse. (a) he may sign the principal s name. (b) he may sign by procreation stating on the face of the instrument that he signs as agent.All or some of the several drawees when the bill is addressed to more drawees than one. however. . when in fact there exists an authority for the agent to put it these. (c) Acceptance must be on the bill: That the acceptance should be on the face of the bill is not necessary. Acceptance. means the signification of assent to the order of the drawer by delivery or notification thereof. draw. But it should be remembered that an oral acceptance is not valid in law. What do you think constitutes a valid acceptance: The essentials of a valid acceptance are as follows: (a) Acceptance must be written: The drawee may use any appropriate word to convey his assent. then he may be stopped from denying his liability as an acceptor. The authority of an agent to make. if it is not so signed. nor can an agent escape personal liability unless he indicates that he signs as an agent and does not intend to incur personal liability. must have either express or implied authority to enter. (f) When no drawee has been named in a bill but a person accepts it. Now what will happen if acceptance is signed upon a copy of the bill and the copy is not one of the part of it or if acceptance is made on a paper attached . Acceptance is ordinarily made by the drawee by the signing of his names across the face of the bill and by delivery. while putting his signature to the instrument. (b) Acceptance must be signed: A mere signature would be sufficient for the purpose.

in either of the cases. (d) Acceptance must be completed by delivery: It would not complete and the drawee would not be bound until the drawee has either actually delivered the accepted bill to the holder or tendered notice of such acceptance to the holder of the bill or some person on his behalf. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.to the bill. acceptance would not be sufficient.555 117 .

a bill drawn for Rs. Acceptance may be either general or qualified. cheque or promissory note is payable is the payee. e.Where a bill is drawn in sets. Amazon accepted payable when a cargo consigned to me is sold (2) When it undertakes the payment of part only of the sum ordered to be paid. a bill drawn payable three months after date is accepted as accepted.g. The acceptance of bill is said to be qualified. The holder of the bill is at liberty to choose whether be will resort to the drawee in case of need or not. (5) Drawee in case of need: When in the bill or any endorsement thereon the name of any person is entered. (3) When. 4. unless he has obtained their consent. (4) Where it undertakes the payment at a time other than that at which under the order it would be legally due e. The holder of a bill is entitled to require an absolute and unconditional acceptance as well as to treat it as dishonoured. By a general acceptance. the acceptance should be put on one part only. he may become liable on each of them separately. Where the drawee signs his acceptance on two or more parts. such a person is called a drawee in case of need. payable six months after date.. since thereby he discharges all parties prior to himself. no place of payment being specified on the order. in addition to the drawee. According to the Explanation to Section 86 of the Act. an acceptance to be treated as qualified. it undertakes to pay only at a specified place and not elsewhere or to pay at a place different from that specified in the bill and not elsewhere. to be restored to in case of need. for it is possible to qualify the acceptance of a bill in other ways as well. (1) Where it is conditional. In case of need means in the event of the bill being dishnoured by the drawee by non-acceptance or non-payment.S.000 only . accepted payable when in funds accepted payable on giving up bills of lading for cover per S. but he does so at his own peril. declaring the payment to be dependent on the happening of an event therein stated. the acceptor assents without qualification to the order of the drawer . The aforementioned list of examples is only illustrative of the different respects in which the bill may be qualified. (6) Payee: The party to whom or to whose order the amount of a bill of exchange. 5. when the drawee does not accept it according to the apparent tenor of the bill but attaches some conditions or qualification which have the effect of either reducing his (acceptor s) liability or acceptance of the liability subject to certain conditions. if it is not so accepted.000 but accepted for Rs. However he may agree to qualified acceptance.g. (7) ..

must have become the payee of the instrument in good faith i. (iii) In case a bill or note is negotiated to a holder in due course. as against a holder in due course.. to endorse the same (Section 121). at the rate of the note or bill.Delivery means transfer of possession from one person to another. You must be able to distinguish between a holder and a holder in due course: (i) A holder may become the possessor or payee of an instrument even without consideration whereas a holder in due course is one who acquires possession for consideration. to a person who takes it as a holder. (ii) In case a bill of exchange is drawn payable to the drawer s order in a fictitious name and is endorsed by the same hand as the drawer s signature. the stamp being sufficient to cover the amount (Section 20). In . (8) Issue of negotiable instrument means its first delivery. without having sufficient cause to believe that any defect existed in the transferor s little Privileges of a Holder in Due Course : (i) A person signing and delivering to another a stamped but otherwise inchoate instrument is debarred from asserting. (ii) A holder in due course as against a holder must become the possessor payee of the instrument before the amount thereon become payable. and no drawer of a bill or cheque and no acceptor of a bill for the honour of the drawer shall. complete in form. (vi) No maker of a promissory note and no acceptor of a bill payable to order shall. in a suit thereon by a holder in due course be permitted to deny the validity of the instrument as originally made or drawn (Section 120). (iv) The person liable in a negotiable instrument cannot set up against the holder in due course the defence that the instrument had been lost or obtained from the former by means of an offence or fraud or for an unlawful consideration (Section 58). the other parties to the bill or note cannot avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only (Section 42 and 47 ). that the instrument has not been filled in accordance with the authority given by him. A holder may become the possessor or payee of an instrument even without consideration whereas a holder in due course is one who acquires possession for consideration.e. it is not permissible for acceptor to allege as against the holder in due course that such name is fictitious (Section 42). in a suit thereon by a holder in due course. be permitted to deny the payee s capacity. (iii) A holder in due course as against a holder. (v) No maker of a promissory note.

The term legal representative includes heirs. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 118 11.short. executors and administrators. a holder in due course gets a good title to the bill.555 . who signs his own name on an instrument. but he may expressly limit his liability to the extent of the assets received by him as legal representative. You must understand the liability of various parties to negotiable instrument Liabilities of Parties (a) Liability of legal representatives (Section 29): A legal representative of a deceased person. is personally liable for the entire amount.

he is bound to compensate the holder whatever be the state of the account between himself and the drawee or acceptor (Seth Ka Haridas vs. the drawer becomes liable immediately for the full amount of the bill. in the case of dishonour by the drawer or acceptor thereof to compensate the however. till the instrument is discharged. (c) Liability of drawee of cheque (Section 31) The drawee of the cheque is always a banker. or received by him provided in Section 93 to 98 of the Act. It is the duty of the banker to pay the cheque. under Section 36 of the Act. The drawer of a bill or cheque is a prior party to the instrument and as such as liable for every holder in due course. it arises only in the event of a dishonour by the drawee or acceptor. The amount of compensation. for the principal sum together with interest calculated according to the rules mentioned in Section 79 & 80 and form the expenses properly incurred by him in presenting noting and protesting the instrument. the holder chooses to wait till its maturity before he sues the drawer he ones not acquire a fresh cause of action by reason of its non-payment of the due date. unless the case is one covered by Section 98 of the Act and notice of dishonour is dispensed with. The principle is: The lesser the value of the cheque dishonoured. The bank is required to compensate. The drawer s liability is conditional. he is liable in the instrument as a principal debtor and thereafter as a surety (Section 37). On dishonour of a bill of exchange by non-acceptance followed by a notice of dishonour to the drawer. that the drawee would have to pay to the drawer is to be measured by the loss or damage say loss of credit. The banker must pay the cheque. If any trustee opens an account the banker is entitled to refuse to pay cheques drawn for purposes other than those of the trust. provided he has in his hands sufficient found of the drawer and the founds are properly applicable to such payment. Walker [1842] 9 M and W 506. Bhan 3. not the holder. If however. he must compensate the drawer for any loss caused by such improper refusal..e. suffered by the drawer). the greater the damage to the credit of the drawer . The only pre-condition of the liability of the drawer is that notice of dishonour should have been received by him. If there is any agreement between the drawer and the banker that the former shall not draw more than one cheque every week. the banker is not bound to pay the second cheque. The drawer cannot ask the holder to wait till the date of maturity to see whether it will be dishonoured by non-payment [Whitehead vs. Provided due notice of dishonour has been given to.(b) Liability of drawer (Section 30): The drawer of a bill of exchange or cheque is bound. Until acceptance. i. only when he is duly required to do so. Bom 182). The holder will have to be compensated. If the banker refuses payment without sufficient case being shown. Trust money is not properly applicable to the payment of a cheque drawn in breach of trust. . Once there has been dishonour and the notice of dishonour has been served on the drawer. but the drawer.

viz. (v) If the customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn (vi) If the bankers receive notice of customer s insolvency or lunacy . The National bank of India 22 Bom. 499]. 118]. 889]. (viii)If a garnishee or other legal order from the Court attaching or otherwise dealing with the money in the hand of the banker. provided due notice of dishonour is received by him.In addition to such a general right. he will indemnify the holder or subsequent endorser who is compelled to pay. any payment made prior to the receipt of the notice of death is valid [Tata vs. is served on the banker [Rogers vs. (if a bill). Hbert 9 Ves. (e) Liability of endorser (Section 35): The endorser of an instrument by endorshing and delivering the instrument. his position is better than that a drawer or an acceptor. before maturity. and paid and that if it is dishonoured by the drawee. affirmed 1892 A. or making his liability conditional . 1 Ch. maker or drawer. however can make his acceptance conditional. should the funds in the banker s hand s be subject to a lien or should the banker be entitled to a set-off in respect of them. However.B. 111. Thus the . in re Beaumant. a banker will be justified or bound to dishonour a cheque in the following cases. Whitely ( 1889). the funds cannot be said to be properly applicable to the payment of the customer s cheque. 236. .. which may vary three months to a year after its issue dependent on the circumstances of the case (iii) If the instrument is inchoate or not free from reasonable doubt If the cheque is post-dated and represented for payment before its ostensible date (iv) If the customer s funds in the banker s hands are not properly applicable to the payment of cheque drawn by the former. An acceptor. (i) If a cheque is undated (ii) If it is stale.C. (vii) If the customer countermands the payment of cheque the banker s duty and authority to pay on a cheque ceases [Mowji Shamji vs. that is if it has not been presented within reasonable period . in the endorsement. and the banker would be justified in refusing payment. (ix) If the authority of the banker to honour a cheque of his customer is undermined by the notice of the latter s death. stipulations excluding. In this respect. acceptor or maker. acceptor and all intervening endorsers to an instrument is liable to a holder in due course until the instrument is satisfied. undertakes in effect the responsibility that on the due presentment it shall be accepted.D. 22 Q. neither of whom can exclude his liability. (f) Liability of parties to holder in due course (Section 36 ) : Every prior party ( ie. Thus. But he may insert.

If the payee endorses it to A. (g) Liability of maker.555 119 . the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. drawer and acceptor as principals (Section 37 & 38): The maker of a promissory note is liable as the principal debtor.maker and endorsers of a note are jointly and severally liable for the payment and may be sued jointly.

As between E ( holder and B. but at the same time . for acceptance. the holder. Being surety. in that case the liability of D and C upon the bill will come to an end. Under Section 134 of the Contract Act. E. A draws a bill payable to his own order on B who accepts it. D is the principal debtor and E is surety. If D is released by the holder under section 39 of the act. each prior party is also liable as a principal debtor in respect of each subsequent party. rather he will not be allowed to lead evidence that the name is fictitious. Similarly. Suppose X uses a fictitious name in drawing a bill upon Z and that the bill is made payable to the order of the drawer X then endorses the bill in the same fictitious name to Y. may intentionally strike out the endorsement by D and C. will be discharged. The rule may be stated thus: when the holder without the consent of the endorser impairers the endorser s remedy against a prior party. As between the parties so liable as sure ties. E A.maker will be liable to A as the principal debtor and the payee will be liable as a surety. For instance. the endorser is discharged from liability to the holder. (ii) Liability on an instrument made drawn etc. the release of the principal debtor has the effect of discharging the surety. C is the principal debtor and D his surety. (i) Liability of acceptor of a bill drawn in a fictitious name: the acceptor is not relieved from liability by proving that the drawer is fictitious. (h) Nature of suretyship (Section 39): The holder of an accepted bill may waive his claim against the acceptor. As between E and C. he may expressly reserve his right to change the other parties. B Second Endorsement. Suppose that A is the holder of bill of exchange of which B is the payee and it contains the following endorsement in blank: First Endorsement. C and D are his sureties. the drawer of a bill until acceptance and the acceptor are respectively liable as sureties. If Z accepts the bill. in spite of the fact that the name of the drawer is fictitious. but in the case of a bill it is not so. But if the holder does not reserve his right expressly against the other parties . D Fourth Endorsement. C to D to E. But if the endorsements of D and C are struck out without the consent of E. they too will be discharged if he released the acceptor. the drawer of a cheque. C Third Endorsement. he cannot escape liability to pay by showing that the name of the drawer is fictitious. (i) Discharge of endorser s liability (Section 40): Any party liable on the instrument may be discharged by the intentional cancellation of his signature by the holder. B is the principal debtor and A. A will not be entitled to recover anything firm E the reason being that as between D and E. without . Afterwards A endorses the bill to C. who presents the Bill to Z.

if the consideration fails. But if any party to an instrument made. For example. X is primarily liable on the bill. the loser of the instrument has the right to apply to the drawer for a duplicate of the lost bill. If the drawer does not grant the application the loser many compel him to provide him with a duplicate. Do you know what are the rights and obligations of a person who had obtained an instrument by unlawful means of for unlawful consideration? Let us discuss it. Y fails to deliver the cotton cannot claim payment from X. accepted. Under section 45A. X and Z are respectively the drawer. Though Y accepts the bill. in the above illustration. the acceptor is only surety for the party accommodated. or transferred without consideration creates no obligation of payment between the parties to the instrument. Liabilities on an accommodation note or bill (Provision to Section 59): In the case of accommodation bills or notes. recover anything from Y. or for a consideration which fails. . is transferred by X to Z for good consideration after maturity and Z becomes the holder in good faith. has transferred the instrument to a holder for a consideration such holder and every subsequent holder deriving title from him. An accommodation may be explained as follows: X draws a bill payable to himself on Y. X makes note in favor of Y in anticipation of Y s supplying a bale of cotton. However.consideration: an instrument made. who accepts the bill without consideration just to accommodate X. nothing can be claimed from the endorser. a defect in the title of the transferor does not affect the title of the holder acquiring after maturity. to enable X to raise money by negotiating the bill in the market. Similarly. the acceptor though Z s transferor X could not. if the accommodation bill. Z will be able to realize the amount of the bill from Y. y transfers the bill to P for consideration. and he cannot demand the amount from Y. there is no obligation on the parties to pay. that is. For example. may recover the amount due on such instrument from the transfer for consideration or from any party prior thereto. at the date of transfer. accepted. if an instrument is endorsed without consideration. drawn. Again. if the maker delivers a promissory note to the payee as a gift. endorse. the payee and the acceptor of a bill of exchange drawn without consideration. a bill that is drawn or accepted without consideration does not impose any liability either on the drawer or on the acceptor to pay the holder. endorsed or transferred without any consideration. for in an accommodation bill. P can claim payment from Y and also from Z and X. For example. the payee cannot endorse it against the maker. (a) Is also entitled to receive amount when the person through whom he claims was a holder or the lost instrument in due course. Similarly.

acceptor or holder by means. if collected. ordinarily. X does not acquire any title to the instrument. entitled to received the amount under it from such maker. the possessor is not.a) Rights and obligations of a person who had obtained an instrument by unlawful means: If an instrument is obtained from any maker.555 . could be recovered from X by acceptor. of an offence or fraud. and the proceeds of the bill. acceptor. If X transfers it to Y who is a gratuitous LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 120 11.

Effect of forgery: When a signature on a negotiable instrument has forged.R. if it is endorsed to him for valuable consideration without any notice having been received by him as to the consideration being unlawful. unless he is holder in due course. the person claiming under the forged endorsement even if he is purchaser for value and in good faith. The true owner many sue in tort the person who had received. but it is not so in the case of a holder whole acquires the instrument after dishonour. The holder of a forged instrument can neither enforce payment thereon nor give a valid discharge therefore. he cannot retain the money. only the rights thereon of his transferor. This principle is universal in character. In the former case. cannot acquire the rights of a purchaser for value and in good faith cannot acquire the rights of a holder in due course. Y too would not acquire any title to the bill. but if he endorses it to Y who receives the bill for value without notice of the fraud. he cannot receive the amount of it. ordinarily entitled to receive the amount due thereon from such maker. he could collect the amount of the bill from X but from no other party. or after maturity. who has acquired it after dishonour. 30 Bom L. The holder of instrument. But what would be the effect of a forged endorsement? The answer to this question is wholly dependent upon whether the instrument had been endorsed in full or in blank. Instrument acquired after maturity (Section 59): The holder of . acceptor or holder or form any party prior to such holder. acceptor or holder for an unlawful consideration no possessor is. Instrument acquired after dishonour (Section 59) It has already been pointed out that the holder in due course is not affected by the defect in the title of his transferor. The consideration may be unlawful either because it is immoral and contrary to public policy or because it is specially interdicted or prohibited by the stature if the possessor endorses it to say. In the event of the holder being able to obtain payment in spite of forgery. Similarly if X obtains a bill from the acceptor by fraud. it becomes a nullity: the property in the instrument remains vested in the person who is the holder at the time when the forged signature was put on it. He acquires no title to the bill or not (Mercantile Bank vs. For example.transferee. (b) Right and obligations of a person who has obtained an instrument for unlawful consideration: When an instrument has been obtained from any maker. 1225). It forgery is not capable of being ratified. has as against the other parties. P would be regarded as a holder in the course. even P would not be entitled to claim payment. P. D Silva. by reasons whereof even a holder in due course is not exempt from. receive the amount of it from the other parties because the endorsee too could not do so.

C. New Delhi. Sultan Chand and Sons.indialawinfo.an overdue instrument too is affected by the defect in title of his transferor.com/bareacts/soga. N. New Delhi Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Delhi. Rohini (2003). Taxmann s. Tulsian (2002). References Kapoor. The bill. Delhi. Kucchal (2002).555 121 . but in breach of faith endorses the bill to R. having only the right of P. he could relies the amount from Q.R. Elements of Mercantile Law. Pvt. not having been paid at maturity. P sells the goods and retains the proceeds. Business Law . But if R were bona fide endorsee before maturity. Graw Hill Aggarwal.html M. Business Law . Vikas Publishing House Pvt. Tata Mc.C. accepts a bill drawn by P and deposits with P certain goods as collateral security for the payment of bill. P. http://www. Ltd. Q. For example. cannot realize the amount of the bill from Q. Student s Guide to Mercantile and Commercial Laws. Ltd.D. (2003).

(i) Importance of delivery (Section 46): Delivery is an incident of the utmost importance in the case of an instrument. however. Under the Act. is the only mode of transfer recognized by the Act. drawee or acceptor cannot negotiate the instrument after maturity. endorsement and assign ability and the important rules related to it. Duration of negotiation (Section 60): An instrument may be negotiated until payment thereof by the maker. 46). (1) by negotiation under the Negotiable Instruments Act (Section 14. Transfer by negotiation. drawee or acceptor at or after maturity. and (ii) by assignment of the instrument as an ordinary chosen in action under the Transfer of Property Act (Chapter VII. but not after such payment. Section 130). ASSIGN ABILITY Learning Outcomes After reading the lesson. to .LESSON 23: THE NEGOTIABLE INSTRUMENT ACT 1881 NEGOTIATION. complete in form. An instrument may be satisfied even without payment. even if it remains unpaid. the instrument is deemed to have been negotiated (Section 14). But the maker. we will discuss about the meaning of negotiation. A negotiable instrument may be transferred in either of the two ways viz. ENDORSEMENT.. Negotiation When a negotiable instrument is transferred to many person with a view to constituting that person the holder thereof. It is essential to the issue of an instrument for issue means the delivery of the instrument. you should be able to know: The meaning of negotiation. 48. and such satisfaction is equivalent to payment. negotiable instruments may be negotiated either by delivery when these are payable to bearer or by endorsement and delivery when these are payable to order. 47. endorsement and assign ability The rules of negotiation. endorsement and assign ability The provisions relating to dishonored cheque The meaning of noting and protesting The presentment of negotiable instrument The international law related to negotiable instruments Introduction Today.

as a case may be. endorsement is incomplete without delivery. An instrument may be delivered conditionally or only for a special purpose. actual or constructive (ii) How to deliver: As between parties standing in immediate relations. Similarly. The distinction between delivery and negotiation should be noticed. (vi) Different types of endorsements (a) Blank ( or general): No endorsee is specified in an endorsement in blank it . acceptor or endorser. he should not suffer for suppression of fact by X. (v) Negotiation by endorsement: In order to negotiate. when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. Thus a promissory note must be handed over to the payee by the maker himself or by some one authorized by the maker. acceptance or endorsement of promissory note. Although a conditional delivery is valid. however. a bill of exchange must be delivered to the transferee by the maker. it is not negotiable (except in the hands of a holder for value without notice of the condition ) unless such event happens. Section 46 of the Act provides as follows: The making. or by a person authorized by him in this behalf. For the payee cannot claim payment. and not for the purpose of transferring absolutely the property in the instrument. it is at first to be endorsed and then delivered by the holder thereof. a negotiable instrument is nothing but a contract. A bill delivered conditionally is called an escrow . The reason is obvious Y is bonafide transferee for value without notice of the condition and. But when such instrument is delivered on condition that it is not to take effect except in certain event. he transfers an instrument delivered conditionally to X for value to Y without notice of the condition. must be made by the party making. bill of exchange or cheque is completed by delivery. the property in the instrument does not pass on to the transferee until the condition is fulfilled and the transferee holds such instrument in law as trustee or agent of the transferor. which is incomplete and revocable until the delivery of the instrument is made. It is equally essential to the negotiation of an instrument. as such. the condition attaches exclusively to the delivery and not to the making or drawing of an instrument. Y can claim payment even if the condition is not complied with. delivery to be effectual. (iv) Negotiation by delivery (Section 47): An instrument payable to bearer is negotiable by delivery thereof. must be transferred by delivery and in the case of any other instrument. (iii) Conditional and unconditional delivery. In fact.a person who takes is as a holder. accepting or endorsing the instrument. A bill must be drawn and a note made unconditionally When an instrument is delivered conditional or for special purpose. An instrument is said to be negotiated. for a bearer instrument. that is to transfer title to an instrument payable to order. If.

555 .contains only the bare signature of the endorser. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 122 11. A bill so endorsed becomes payable to bearer.

Chopra (e) Sanse Recourse: By adding these words after the endorsement. without recourse. in case B. (2) If the holder of a negotiable instrument. Specimen: Pay to A on safe receipt of goods.. (3) The rule is not applicable also in the case of circuitry of action e. without the consent of the endorser destroys the instrument or in any way prejudices the holder (Section 40 ). Similarly.e.. who endorses it to D who endorses it to E..e. e.Specimen Kishan Lal (b) Special ( or in full) : In such an endorsement. dishonours the bill. D. if a bill is drawn by A upon B and is payable to C or order.C.g. D has right against C and A.e.g. then. Specimen (1) Pay to A only ] M. Every endorser of a negotiable instrument is liable. and A.Kumar (d) Conditional : Such an endorsement combines an order to pay with condition. the holder. in addition to the signature of the endorser the person to whom or to whose order the instrument is payable is specified. indicate that no expenses should be incurred on account of the bill.Lal P. E has the right of action against all the parties i. and C endorses the bill to D.. the endorser declines to accept and liability on the instrument of any subsequent party. (f) Sans Frais: These words when added at the end of the endorsement. i.g. who in turn endorses it to E. (g) Facultative: When it is desired to waive certain right. under Section 35. there are a few exceptions which are enumerated below: (1) Any endorser can exclude personal liability by endorsing sans recourse i. a bill is drawn by A upon B payable to C or order. Specimen Pay to Hari Ram. notice of dishonour dispensed with . the appropriate words are added to indicate the fact. Kishan Lal (c) Restrictive: Such an endorsement has the effect of restricting further negotiation and transfer.. who . to every subsequent party to it provided due notice of dishonour is given to or received by him e. To this rule that every prior party of a bill is liable to every subsequent party. V.

be a holder thereof. (ix) Who may negotiate (Section 51): The following persons may negotiate an instrument: . When the endorsee is the holder under a restrictive endorsement. a person who steals or endorses or finds a lost instrument. by express words in the . cannot negotiate. (vii) Conversion of endorsement in blank into endorsement in full (Section 49): The holder of a negotiable instrument endorsed in blank may.e. A maker or drawer only when the instrument is drawn to his own order. he must exercise his power of negotiability is excluded by the respective endorsement. D s first endorsement was sans recourse . or (3) to entitle the endorsee to receive the contents of the instrument for the endorser or for some other specified person. (3) payee. Further. who endorses it to G and who again. he must before he can negotiate the instrument. both a subsequent party and a prior party. and the parties in between ( i. (2) the same rights of action against any other party to the instrument as the endorser had. i. without signing his own name by writing above the endorsers. That is. the endorsee. and the holder does not thereby insure the responsibility of an endorser . Consequently. E. insofar as t he payee or an endorsee is concerned. as he is not a holder within the meanings of the Act. (x) Exclusion of liability of endorser (Section 52): The endorser of an instrument may. (3) power. E. only in accordance with the express terms of his authority. Endorses it back to D. (1) sole maker.. (c) A restrictive endorsement gives the endorsee: (1) the right to receive payment of the instrument. however. The effect of restrictive endorsement is (1) to prohibit or exclude the right of further negotiation. The explanation to Section 51 provides that though a maker or a drawer may endorse or negotiate an instrument. so unless the instrument fall into his possession in a lawful manner or unless he is the holder thereof. or (2) to constitute the endorsee an agent to endorse the instrument. it will be observed that a circle is complete between the first and second holdings of D. (2) drawer.e. he cannot do. If. the endorsee may endorse it to some other person. (b) The endorsement may also contain express terms making it restrictive. In that case. (4) endorsee. as against them. (viii)Effect of endorsement (Section 50): (a) The endorsement of an instrument. covert the endorsement in blank into an endorsement in full..F and G) are absolved from liability to D because D is. signature a direction to pay to any other person as endorsee. to transfer the instruments and his right thereon to another. cannot endorse or negotiate. transfers to the endorsee the property in the instrument with right of further negotiation.F and G would not be absolved from liability to him.endorses it to F. as holder. the intermediate parties. followed by delivery.

exclude his own liability on the instrument. (2) make the right of the endorsee to receive the amount mentioned in the instrument depend upon a specified uncertain event. acceptor or maker. But for the words without recourse . The holder cannot claim compensation from him in case of dishonoured by the drawee. The endorser. adding the words without recourse . Suppose that the endorser signs his name. instead of excluding his liability altogether. he may either (1) make his liability depend upon the happening of a specified uncertain event.endorsement. may restrict his liability by endorsement. he would have been liable. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. the incurs no liability.555 123 . Thus.

Z endorses the bill to F who knows of the fraud. X is the payee holder of a bill of exchange X endorsee it in blasnk and delivers it to Y who endorses it in full to Z or order Z. can claim the amount from the endorser in full. all intermediate endorsers are liable to him. X endorses it to Z who takes it as a holder in due course. Let us first try to understand the difference between it. For example. If an instrument after having been endorsed in blank is endorsed in full. or any one who derives title through him.For example. (xii) Effect of endorsement in full after a blank one (Section 54 and 55): An instrument endorsed in blank is payable to the bearer. without endorsement. a holder deriving title from a holder in due course can claim the amount of a bill drawn and accepted without consideration. The person to whom it has been endorsed in full. the endorsee in full does not incur the liability of an endorser. In view of Section 55. (xi) Holder deriving title from holder in due course (Section 53): A holder of an instrument deriving title from a holder in due course has rights thereon of the holder in due course. although originally it was payable to order. B and C are liable to A as intermediate endorsers. Since F derives the title from Z who is a holder in due course and F is not party to fraud. For example A the payee and holder of an instrument endorses it to B with the words without recourse and B endorses it to C who in his turn endorses it to A. the instrument still remains payable to bearer and negotiable by delivery as against all parties prior to the endorse in full. But when the amount due has been paid in part. There is an important difference between negotiation and assignment. so the amount of it cannot be claimed from him. It has been held that title which has been cleansed of defects by passing through the hands of a holder in due course remains immune from those defects inspite of the fact that a subsequent holder may have noticed that the defects once existed provided he was not a party to them. In other words if an endorsement in blank is followed by an endorsement in full. But there is an exception to this rule. . F as the bearer of the instrument can receive payment or sue the drawer. X obtains Y s acceptance to a bill by fraud. Therefore.But when such endorser afterwards becomes the holder. acceptor or X but not Y or Z who is a subsequent but not a prior party. a note to that effect may be endorsed on instrument and the instrument may then be negotiated from the balance. F gets a good title to the bill. (xiii)Effect of endorsement for part of sum due (Section 56): An endorsement purposing to transfer only a part of the amount of instrument is invalid. and the endorsee. though the endorser in full is only liable to a holder who made title directly through his endorsement and the persons deriving title through such holder. therefore cannot negotiate it. transfers the bill to F.

He negotiated it to B. (ii) In the case of negotiable instrument. 654). suppose that that the endorsements on a negotiable instrument are as under. notice of transfer is not necessary while in the case of an assignment of chose in action. X to Y and Y again to this very A. Section 130 of the Transfer of Property Act requires a document be reduced into writing and signed by the transferor. every subsequent party may sue every prior party. On account of this last endorsement. As a result of the prior party (i. in original endorsement. If however A.Negotiability VS. rights from equities (Mohammad Khunerali vs. Ranga Rao. For example. X or B then Y. A should have right to claim money from X. To prevent this. Thus A. B to X. X or B. Thus.e. X or B in his turn can sue A because of A s prior endorsement. X or B. (iii) Again.. X or B. by reason of the last endorsement mentioned above. Y and B. (iv) Negotiation requires either delivery only in the case of bearer instrument or endorsement and delivery only in the case of order instrument . But of in the case an assignment. Therefore A.. 24 M. Assignability (i) The essential distinction between transfer by negotiation and transfer by assignment is that in the latter case. the assignee does not acquire the right of a holder in due course but has only the right. This will lead to a circuitry of action. conversely. Pabxya Here A is person who is a prior party to the instrument. on the other hand in the former case he acquires all the rights of a holder in due course i. in the case of transfer of negotiable instrument. a) becomes a subsequent party.e. notice of assignment must be served by the assignee on his debtor. come to have the rights to claim money Y. Negotiation Back An instrument is said to have been negotiated back to him and he is said to have taken up or taken back the negotiable instrument when a person who has been a party to the negotiable instrument takes it again. had signed sans recourse there could be no circuitry of action and A could sue Y. The rule is that every prior party is liable to every subsequent party. (b) Capacity to incur liability under instrument Section 26: Every person competent to contract has capacity to . Section 52 of the Negotiable Instruments Act enacts an exception to the general rule to provide that the holder in due course of a negotiable instrument may sue all prior parties thereto. title and interest of his assignor.A is permitted by law to use Y. consideration must be proved as in the case in any other contract. he (i. a) having taken back the instrument subsequent. in the above case cannot sue Y. consideration is presumed but in the case of transfer by assignment. (v) Endorsements do not require payment of stamp duty whereas negotiation requires payment of stamp duty. But A can sue P since the latter is prior to A s original endorsement.e.

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 124 11. endorsing . delivering and negotiating an instrument.555 .incur liability by making drawing accepting.

Bills and Cheque Distinction between discharge of a party and discharge of instrument: An instrument is said to be discharged only when the party who is ultimately liable thereon is discharged from liability. does not. with the word agent added. but endorse them. does not exempt him from personal liability. imply an authority to endorse. An authority to draw does not. discharge of a party to an instrument does . prosecution can take place. The offence will be punishable with imprisonment for a term up to two years [as prescribed by the Negotiable Instruments. but where the instrument is drawn or endorsed by him. a person issuing a Cheque will be committing an offence if the cheque is dishonoured for insufficiency of funds. It is special protection given to the collecting banker which is available to him only if he acts in good faith but without negligence. (Amendment and Miscellaneous and Provisions Act. A general authority to transact business given to an agent does not empower him to accept or endorse bill of exchange so as to bind the principal. in the event of the title of the customer to the cheque providing to be defective. The payee or holder in due course should give notice demanding payment within 15 days of the receipt of the notice and only if he fails to do so. acceptor or endorser. is personally liable. The cheque in question should be issued in discharge of a liability and therefore a cheque given as gift will not fall in this category. An agent may have authority to draw bills of exchange.A party having such capacity may himself put his signature or authorize some other person to do so. The mere signature of an agent in his own name. Given below are a few illustrations of circumstances in which a banker has been deemed to have complied with these conditions: Discharge from Liability on Notes. necessarily. A minor cannot make himself liable as drawer. Authority to sign (Section 27 & 28): Every person. but this rule does not apply where any one induces him to sign upon the belief that principal only would be held liable. within one month. Therefore. Dishonoured cheque to be treated as an offence: From 1st April 1989. the holder can receive payment from any other party thereto. incur any liability to the true owner of the cheque for having received payment therefore (Section 131). The complaint can be made only by the payee/holder in due course. may bind himself or be bound by a duly authorized agent acting in the name. The cheque should be presented within six months or its specific validity period whichever is earlier. An agent who signs his name on an instrument without indicating that he signs as agent. capable of incurring liability. You also need to understand the following in regard to the dishonoured cheque. A banker who in good faith but without negligence receives payment for a customer of a cheque crossed generally or specially to himself. 2002] or with a fine twice the amount of the cheque or both.

Thus. In other words. acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon to a holder thereof who has renounced his right in respect of the instrument. On the other hand. (v) Dissenting parties discharged by qualified or a limited acceptance: If the holder of a bill who is entitled to an absolute and unqualified acceptance elects to take a qualified acceptance. For example. when the payment has been made to the holder of the instrument at or after maturity in good faith and without notice of any defect in the title to the instrument (Section 82). or has been endorsed in blank and such maker. all rights there under are extinguished. (ii) By cancellations of acceptor s endorser s name: The maker. he does so at his own peril and discharges all parties prior to himself unless he obtains their consent to such an acceptance.not discharge the instrument itself. It is because if the drawee fails to signify his acceptance within forty-eight hours. acceptor or endorser makes payment in due course of the amount due thereon i. The waiver of the right may be express or implied [Clause (b) of Section 82. exclusive of public holiday. all prior parties not consenting to such an allowance are discharged from liability to such holder. the previous parties are . The right of action on a negotiable instrument is extinguished by the following method: (i) By payment in due course: The maker. to decide whether he will accept the bill. Consequently. the holder must treat the instrument as dishonoured and he must at once give notice to the drawer and to all prior. when a bill has been discharged by payment. acceptor or endorser respectively of a negotiable ins trument is discharged from liability thereon to all parties thereto if the instrument is payable to bearer.] (iv) By default of the holder: If the holder of a bill of exchange allows the drawee more than forty-eight hours. and must not allow time unless they give their consent that more time should be allowed (Section 83).} (iii) By release: The maker. acceptor and endorser respectively of a negotiable instrument is discharged from liability thereon to a holder there of who has cancelled such acceptor s or endorser s name with the intent to discharge him and to all parties claiming under such holder. the holder in due course may proceed against the other parties liable for the instrument. if the holder ( Payee) of a bill cancels the signature of acceptor ( drawee ) with an intention to discharge him both maker (drawer) and the acceptor of such negotiable instrument are discharged from the liability to the holder and to all parties claiming under such a holder [Clause (a) Section 82. but even then acceptor may be proceeded against.e. even a holder in due course cannot claim any amount under the bill.. parties. (b) Different modes of discharge from liability: Parties to negotiable instrument are discharged from liabilities when the right of action on the instrument is extinguished. the endorser of a bill may be discharged from his liability.

(iii) when acceptance substitutes a different place or time of payment.discharged in the following cases namely (i) when acceptance is qualified. (iv) when acceptance is not signed by the drawees not being partners. (ii) when acceptance is for a part of the sum. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 125 .

that is to say. if A draws a cheque for Rs. (viii) By acceptor becoming holder of a bill at or after maturity in his own right: If a bill of exchange which has been negotiated is at or after maturity held by the acceptor in his own right all rights to action thereon are extinguished (section90) (ix) By default in presenting the cheque within a reasonable time: In the case of a cheque if it is not presented for payment within a reasonable time of its issue and the drawer or person on whose account. bill or cheque. 80 to B will not be liable to make good to the drawer the amount paid in excess. It is necessary to show that the alteration has been improperly and intentionally. unless it was made in order to carry out the common intention of the original parties and any such alteration. Lee shi (1928)A. (b) when it undertakes the payment of part only of the sum ordered to be paid. if such acceptance is acquiesced in by the holder without obtaining their previous consent. the banker. to have the cheque paid and suffers actual damage through the delay he is discharged to the extent of such damage. however render the instrument void. (vii) By payment. provided the alteration is not apparent and payment is made in due course by person or a banker who is liable to pay the amount he is protected (section 89. or alteration of the time and the alteration on the place of payment of the instrument are regarded as material alterations of the instrument. alteration of the date. namely: (a) where it is conditional. if they subsequently approve of such acceptance by the holder . They are discharged as against the holder and those claiming under him.They are discharged. (d) where it undertakes the payment at a time other than that at which under the order it would be legally due (vi) By material alteration of the instrument without assent of all parties liable: Any material alteration of a negotiable instrument renders the same void as against any one who is party there to at the time of making such alteration and does not consent there to. however a person pays an altered note. An acceptance is qualified in the following cases. But. it has been held that an accidental alteration will not. they will not be discharged. alteration of the amount payable. For example. discharges his endorser from all liability to him in respect of the consideration there of (section87). declaring the payment to be dependent on the happening of an event stated therein. paying Rs.(c) where no place of payment being specified on the order.C 181. and not otherwise or elsewhere or where a place of payment being specified in the order it undertakes the payment at some other place and otherwise or elsewhere. in hongkong and Shangai Bank vs. . alteration not being apparent: if. 8 in favour of B who fraudulently converts eight into eighty. it is drawn had the right at the time when presentment ought to have been made as between himself and the banker. if made by an endorsee. and the alteration is not apparent. it undertakes the payment at a specified place. The alteration must be so material that it alters the character of the instrument to a great extent.

after taking proper care to ascertain the genuineness of the endorsement. under the law of insolvency. if X draws 10 cheques of Rs. 1. A cheque is said to have been paid in due course. for the banker is presumed to know the signature of his customer (i. X will be released from liability to the extent of Rs. the drawee who always is a banker is discharged by payment in due course. but when the cheque ought to be presented. when the acceptor. the following matters would be considered: (i) nature of instrument: (ii) usage of the trade and bankers and (iii) facts of the case. is discharged by an order of the court made in the insolvency proceedings. when it has been paid in good faith. (b) By merger.to the extent to which such drawer or person is creditor of the banker to a larger amount that he would have been if such cheque had been paid(section84) for example.e. A dishonour by non .e. i. (a) By lapse of time i. If he had the full amount of Rs. Note In the above case liability of the drawer will be transferred to the banker.000 at the bank. i. But if the drawer s signature is forged. (xi) By payment by the drawee of a cheque payable to order or to bearer: where a cheque payable to order purports to be endorsed by or on behalf of the payee. under no circumstance. whether in full or in part and whether or not such endorsement purports to restrict or exclude further negotiation. The endorsee under an endorsement in full cannot recover the amount from the banker who has paid it to the bearer (section 85) The rule of the discharge applicable to a cheque payable to order also applies. 100 each. Even if the endorsement of the payee is forged the banker is discharged from the payment in good faith and with negligence.e. maker. under the instrument is merged in the judgment debt obtained against the acceptor maker or endorse. when the debt. the drawer) The bank is discharged by payment in due course to the bearer not with standing any endorsement thereon. or endorser. to a draft drawn by one of the bank upon another payable to order or demand (section 85 A) 4.10 Notice of Dishonour (a) Dishonour by non . 600 but will remain liable for the balance. Payment in due course discharge the bank from liability even if the payment is made to a wrong person.acceptance may take place in any one . who has been adjudicated an insolvent. 600 at the bank and subsequently the bank fails before the cheques are presented. For determining what is reasonable time for presentation.e. claim discharge on payment. (x) By operation of Law: it should be noted that a negotiable instrument is also discharged by operation of law. which may occur in any of the following circumstances. has only Rs. he will be discharged in full.acceptance (section 91): A bill may be dishonored either by non acceptance or by non payment. when the claim under the instrument become barred by the limitation act on the expiry of the period prescribed for the recovery of the amount due on the instrument. the banker can.

555 .of the following circumstances: (i) when the drawee either does not accept the bill within forty eight hours of LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 126 11.

(ii) when one of several drawees. Note that presentment is not necessary where the drawee after diligent. not being partners. it gives the holder an immediate right to have recourse against the drawer or the endorser. The holder of the bill can proceed only against the drawer or endorser. e.acceptance. (iii) Effect of non-service of notice : if a notice is not sent to any prior party who is entitled to such notice within a reasonable time. (d) Notice of Dishonour (sections 93 and 94) : (i) by whom notice to be given: when an instrument is dishonored either by non-acceptance or by nonpayment. (v) Mode of service of notice. (iii) when the drawee gives a qualified acceptance. if written. or to his legal representative on his death. prulhaddas 20 Bom. and (v) when the drawee is incompetent to contract.. The notice. the drawer and the endorsers. Notices may be given either to the party himself or to his agent. make default in payment. It is a condition precedent to the continuation of the liability of the drawer under section 30 and of the endorsee under section 35 of the Act that they should be notified of the dishonour. the holder thereof or some party thereto who remains liable thereon must give notice of dishounour. he is discharged form liability. It is not necessary to give notice to the maker of a note or the drawee or acceptor of a bill or cheque. when overdue. the acceptor of a bill. (iv) when presented for acceptance is excused and the bill remains unaccepted.. (b) Dishonour by non-payment (section 92) : An instrument is dishonored by non-payment when the party primarily liable e. he need not wait till the maturity of the bill for it to be dishonored on presentment for payment (Ram Ravij Jambekar vs. (c) Distinction between dishounour by non-acceptance and by non-payment. (ii) To whom notice is to be given : Notice must be given to such parties whom the holder proposes to charge with liability severally or jointly. on Dishonour by non-payment the drawee can be sued. An instrument is also dishonored for non-payment when presentment for payment excused and the instrument. When a bill has been dishonoured by non. under section 76 of the Act.presentment or refuse to accept it. If a bill is dishonored by nonacceptance. search cannot be discovered. remains unpaid.g. or to the official assignee on his insolvency. if any.g. makes default in acceptance. or where the drawee is incompetent to contract or here the drawee is a fictitious person. there is no right of action against the drawee as he is not a party to the bill. may be . Since a dishonour by non -acceptance constitutes a material ground entitling the holder to take action against the drawer. the maker of a not or the drawee of a cheque. 133).

.E must transmit the notice to them as well. the holder. C and B. (e) Transmission of notice of dishonour by party receiving it (section 95) : any party receiving notice of dishounour should communicate the same within a reasonable time to any prior party whom he intends to hold liable in respect of the instrument. but if the prior party receives otherwise . having put an impediment in the way of the holder obtaining payment is not entitled to the notice of dishonour. In such a case neither presentment nor notice of dishonour is necessary is necessary. (iii) When the party charged would not suffer damage for want of a notice. Suppose X refuses to accept the bill and F. When the holder of the instrument and the party to whom notice of dishonour must be posted by the next post if the parties carry on business or live in the same place. e. For example. death or dangerous malady of the holder or his agent. B endorses it to C. (f) When notice of dishonour is unnecessary (section 98): in a suit against the drawer or endorser on an instrument being dishonored. sitaram 2 Bom L. provided the omission has been caused by an unavoidable circumstances. (v) where there has been accidental omission to give notice. he. provided it is shown that at the time of drawing the instrument there were no funds belonging to the drawer in the hands of the drawee [ subrao vs. (i) when the necessity of the notice has been dispended with by an express waiver by the party entitled to it. 891] (iv) When the party entitled to notice after due search. in that case F shall have the right of action against E or A. E endorses it to F. C endorses it to D.no such communication is necessary. D endorses it to E. A drawn a bill in favour of B on X. in the following cases the notice of dishonour is not necessary. gives notice of dishonour only to E and A. but E does not transmit the notice to D.g. However. the notice of dishonour is said to have been dispensed with [ Bertt vs.given by post at the place of business or at the residence of party for whom it is intended. it is sufficient if the notice is so dispatched that it reaches its destination on the day next after the day of dishonour. (ii) when the drawer has countermanded payment. cannot be found. notice of dishonour is a material part of the cause of action. E also has right of action against D. Levett (18]1) 13 East 213]. and even if it is miscarried the notice is not rendered invalid by such miscarriage. when the drawer of a bill informs the holder that the bill will be dishonored on presentment. let us consider the following case. C and B. or . or other inevitable accident. To illustrate the necessity of transmission of notices. R.

555 127 . it is also possible to deduce a further rule that notice of dishonour LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. misconduct or negligence of the party tendering notice.overwhelming catastrophe not attributable to the default. (vi) when one of the drawers is acceptor. Form this.

e. 4. When an instrument. which is attached to the instrument. Thus. Noting is a minute recorded by a notary public on the dishonored instrument. Sundraraja chetti 29 mad 239]. When a note or a bill has been dishonored by non. is to be noted for dishonour. But it may of may not recognise noting. say a bill of exchange. Such a certificate is called a protest for better security. But under Section 104 every foreign bill of exchange must be protested for dishonour when such a pretest is required by the law of the country where the bill was drawn. etc. as the case may be.. [jambu Ramaswamy vs. (vii) in the case of promissory note which is not negotiable. The advantage of both noting and protesting is that this constitutes prim facie good evidence in the Court of the fact that instrument has been dishonoured. promises unconditionally to pay the amount due on the instrument. Such a certificate is referred to as a protest. Neither noting nor protesting is compulsory in the case of inland bi is. where a document has been noted within the time required by law. i. and the facts are noted on the instrument.noting is a convenient mode of authenticating the fact that a bill or note has been dishonored. the Court is bound to recognise a protest. If the creed it or an acceptor of a bill is shaken by insolvency or otherwise before the date of maturity of the bill. but also to be certified by a Notary Public that the bill has been dishonolired. it is taken to Notary public who presents it once again for acceptance or payment.acceptance or nonpayment.. (viii) when the party entitled to notice. (b) Protest . The contents of a protest are given in Section. It c1ai-ifies the position that any bill or document which has been noted can be protested any time thereafter for taking legal action against the parties. it is noted. and if the drawee or acceptor still refuses to accept or pay the bill. a minute is prepared containing the date of dishonour.11 Noting and Protesting (a) Noting. 101 of the Act. the holder may cause the fact not on by to be noted. the holder causes such dishounour to be noted by a Notary public. knowing the facts. the holder may cause such a fact also to be noted and certified. To make good this lacuna. Section 104 A has been introduced. legal proceeding cannot be vitiated on account of protest not having been made. so as to dispense with notice. Such a case does not fall under purview of the rule mentioned above.is not necessary for charging the drawer where the drawer and drawee of a bill are partners does not give rise to the presumption that they are partners in respect of the drawing of the bill. It is necessary to note that under Section 119. or that the bill was drawn by one of them on behalf of both.When an instrument is dishonored. . reason for such dishonour.

with the consent of the holder of the bill. and to prevent legal proceeding being taken against him. and (v) that the acceptance is by writing on the bill. He enjoys the confidence of the business world. The condition essential for . (iii) that the acceptor for honour is not already liable on the bill. Moreover. before it is overdue. (iv) that the acceptance is for the honour of any party already liable on the bill. notice of such protest in lieu of notice of dishonour must be given in the same manner as notice of dishonour (Section 102). But an acceptor for honour is not liable to the holder of the bill unless it is presented or (in case the address given by such acceptor on the bill is a place other then the place where the bill is made payable) forwarded for presentment not later than the day next after the day of its maturity. by writing on the bill. Conditions for valid acceptance for honour: These are: (i) that the bill has been noted or protested for non-acceptance or better security: (ii) that such an acceptance has been made with the consent of the holder. contracts and other instruments that are to be used abroad and to give a certificate of due execution of such documents. The object of such an acceptance for honour is to protect the credit of the party liable on the bill. and any certificate given by him is presumed to be true by a court of law. 1952. Section 111 further provides that the party for whose honour the acceptor accepts to pay and all prior parties become liable in their respective capacities to compensate the acceptor for honour for all loss or damage sustained by him. His functions are to attest deeds. any person. who is not a partly already liable under the bill may.(c) Notary Public: A Notary public is appointed by the Central State Government . in consequence of sad acceptance: Payment for honour: It is a payment which is made by any person for the honour of any party liable on the bill after it has been protested for non-payment. 4. accept the bill for the honour of any of the parties liable on it.12 Acceptance and Payment for Honour and reference in Case of Need Acceptance for honour If a bill has been dishonoured by non-acceptance and has been duly noted or protested for such dishonour. an acceptor for honour cannot be charged unless the bill has been presented at its maturity to the drawee for payment and has been dishonoured by him and noted or protested for such dishonour (Section 112). Rights and Liabilities of such acceptor: Section 111 of the Act states that an acceptor for honour binds h himself all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee does not. (d) Notice of Protest: When a promissory note or a bill of exchange is required by law to be protested. The profession of notaries is regulated by the Notaries Act.

555 . protested for non-payment (ii) that the person paying or his agent declares before Notary Public the pal}:y for whose honour he pays. ( 2) The LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 128 11.such payment are. (iii) that such declaration has been recorded by such Notary Public. The effects of such a payment are : All parties subseq1.Jent to the party for whose honour it is paid are is charged. (i) that the bill must have been noted or. (iv) that the payment must be made for the honour of an y party liable to pay the bill and ( v) that the payment may be made by any person whether he is already liable on the bill or not.

presentment is unnecessary to render any prior party liable. (3) The payer can recover all sums paid by him together with the interest and expenses properly incurred in making such payment (Section 114). the drawee in case of need. Kanchiwalla & co. and it is generally the holder of the bill who is entitled to demand acceptance. 907]. 40 Bom LR 473]. payable on a certain day. Again according to the Bombay High Court if a bill of exchange has been duly accepted by dishonoured when presented to drawee in the first instance for payment. etc. prudent for the holder of such bill to present it for acceptance. he obtains the security of the acceptor s signature and if it is not accepted he is relieved of the necessary presentment for payment. such an acceptance is not absolutely essential to the bill being a negotiable instrument.T. a bill payable on demand.A bill of exchange is not necessarily required to be presented for acceptance. 4. a person to whom a bill has been negotiated before acceptance may sue thereon as a holder in due course. however. it is obligatory for the holder to present the instrument to him i. The bill must be presented by the holder within a reasonable time after it is drawn. need not be presented for acceptance. How.. The failure to present the bill to the drawee in case of need absolves the drawer from liability (Bahadur Chand v.payer for honour acquires for the rights of a holder whom he pays and becomes entitled to all the remedies of the holder on the instrument. and in business hours on a business day either at the . namely: (i) Where a bill is payable after sight presentment for acceptance is with a view to fixing the maturity of the instrument: (ii) Where a bill expressly stipulates that it shall be presented for acceptance. before its being presented for payment. It should. and it will not be considered to have been dishonoured. unless it has been dishonoured by such drawee. Gulab Rai AIR Lah 557). when and by whom bill is to be presented: A bill payable after sight is to be presented to the drawee by a person entitled to demand acceptance. But when a bill is not payable after sight. For example. for if it is accepted. however. . Although it is a matter of common practice to obtain acceptance of the bill by the drawee at the earliest opportunity after it is drawn. It is. it cannot be validly presented for payment to the drawee in case of need if it was not first presented to him for acceptance [Dore vs. Berggren & (1914) 110 L.e.13 Presentment Of Instruments (a) Presentment of bills for acceptance (Section 61) . [National Park Bank of New York vs. payable certain number of days after date. According to Section 115 where a drawee in case of need is motioned in a bill or nay endorsement thereon. be noted that in two cases presented for acceptance would be necessary. For example.

If the drawee cannot. Against even if presentment is made irregularly. In default of such presentment. In default of presentment. In default of the bill is paid. If registered letter if such a mode of presentment is authorized by agreement or usage. the holder would have to hand it over to the payer. The presentment is to be made by a person entitled to demand payment who is usually the holder. the maker is not liable to pay anything to the holder. after reasonable search. (b) Presentment of promissory note for sight (Section 64): When and why a note is to be presented for sight? Like a bill of exchange payable after sight. If the bill is paid. The necessity for presentment. is obvious. Presentment may be made through post by means of a registered letter if such a mode of presentment is authorized by agreement or usage. the drawer and the endorser would be discharged form their liability to the holder. Drawee s time for deliberation: Under Section 63. the bill is to be regarded as dishonoured for non acceptance. a note payable at a certain period after sight. (ii) Time of presentment for payment: (a) Presentment should be made during the usual business hours (Section 65( (b) If the bill is made payable a specified period after date or sight. and cheque are to be presented to the drawee. such an irregularity is excused if the bill has been dishonoured by non-acceptance on some other ground. the holder would have to hand it over to the payer. a present ment through the post office by a registered letter is sufficient.residence or at the place of business of the drawee. in the case of such a note. without such presentment the maturity of the note cannot be fixed. it must be presented for payment at its maturity . it must be presented at the place. Against. the drawee is entitled to a respite of forty eight hours ( exclusive of public holidays ) top consider whether he should accept a bill presented to him for acceptance.. bills of exchange are to be presented to the acceptor. be found (Section 61). after reasonable search. (i) By whom and to whom presentment is to be made: Presentment is to be made either by the holder or by somebody on behalf of the holder. Promissory notes are to be presented to the maker. (c) Presentment of instrument for payment: Presentment of a bill of exchange means it exhibition to drawee or acceptor by holder with a request for payment in Accordance With Its Apparent Tenor (section 64). be found. But if the bill itself indicates a place of presentment. viz. When authorized by agreement of usage. When presentment is excused: Presentment for acceptance is excused if the drawee is a fictitious person (Section 91) or if he cannot. the note must be presented within a reasonable time after it is made and in business hours on a business day. a promissory note payable at a certain period after sight must be presented to the maker for sight.

it must be presented for payment within a reasonable time after its receipt by the holder (Section 74). (iii) Place of presentment for payment: (a) If the bill is drawn or accepted payable at a specified place and not elsewhere. it must be presented for payment at such a place in order to charge any party to the bill (Section 68) (b). If.(Section 66) (C). If the bill is payable on demand. however the bill is accepted payable at a special place (the word and not LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 129 .

the drawer will remain bound after presentment and refusal. (vii) Presentment of cheque to charge any other person (Section 73) : It may be recalled that in order to charge the drawer. A drawes a cheque in favour of B. or where he has been declared an insolvent. (iv) Presentment of promissory note payable by installment (Section 67) A promissory note payable by instalments must be presented for payment on the third day after the date fixed for payment of each instalment. If the holder does not present the cheque at the bank in time. (vi) Distinction between drawer of bills and drawer of cheque: If a bill is not presented in time. in case of delay in presentment. who endorses it to C. although months ( short of the period of limitation ) have elapsed since the drawing. but in order to charge any person other than the drawer the cheque must be presented within a reasonable time. The rule is that the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer. otherwise B will be discharged from liability. to the extent of such loss only. the drawer is not liable if the bank refuses payment on presentment. although solvent. For example. presentment should be made at the place specified (Section 69) (C) If no place of payment is specified then the bill should be presented for payment at the place of business ( if any ) or the residence of the drawee or acceptor or (if he has no fixed place of business or residence) to him in person wherever he can be found (Section 70 and 71). Therefore. (viii)Presentment of instrument to agents. (v) Presentment of cheque to drawer (Section 72): It is the duty of the holder of cheque to present it at the bank upon which it is drawn.elsewhere being omitted) then to charge the drawer ( but not he acceptor). the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer. the position of the bank may become unsound and it may not be possible for the banker to honour the cheque. the suit will be dismissed. the drawer will remain bound after presentment and refusal. When presentment is unnecessary (Section 76): (a) No presentment . the drawer is absolutely discharged. if the bank remains solvent. (Section 75): Presentment for acceptance or payment may be made not only to the drawer maker or acceptor acceptance or payment may be made not only to the drawer maker or acceptor but also to his duly authorized agent or where he is dead to his legal representative. but the drawer of a cheque. the holder may sue the drawer. If the holder sues the drawer without first presenting the cheque at the bank. etc. is discharged only if he has suffered some loss or injury and that too. to his assignee. in this case. C must present it at the bank within a reasonable time. If payment is refused by the bank.

day during the usual business hours. When we say that no presentment for payment is necessary. drawer or acceptor ) closes such place on a business.. be made to the holder.14 Payment and Interest (a) To whom payment should be made (Section 78): Payment of the amount due on promissory note. maker.e. 4. interest on the amount due shall be calculated at the rate of 18% per annum from the date at which the instrument ought to have been paid until tender or realization of the amount. The result is that the holder any sue the party liable without presentment and the plea that the instrument was not presented for payment is no defence to the claim of the holder. if he has engaged to pay notwithstanding non-presentment. 4. (b) Payment of interest when rate is specified (Section 49): Where interest at a specified rate is expressly made payable on a promissory note or a bill of exchange. (3) if the instrument being payable at some other specified place. or until such date as the Court directs. the liability of the maker or drawer a foreign promissory note. (1) if the maker. etc. he (i..15 International Law Regarding Negotiable Instrument In the absence of a contract the contrary (i. (c) Payment of interest when no rate is specified (Section 80): When no rate interest is specified in the instrument .. (2) if the instrument being payable at his place of business. (c) No presentment for payment is necessary as against any party if. we mean thereby the instrument is taken as dishonoured at the due date for presentment even though it has not been presented. bill of exchange or cheque must. maker. of acceptor intentionally prevents the presentment of the instrument. If payment is made to any person other than the holder. bill of exchange or cheque is governed in all . unless the parties otherwise agree ). (b) Not presentment for payment is necessary as against any party sought to be charged with payment. or (2) he promises to pay the amount due thereon in whole or in part. after maturity and with the knowledge that instrument has not been presented: (d) He makes a part-payment on account of the amount due on the instrument. the holder can claim payment over again from the maker or acceptor. (i) from the date of the instrument until tender or realization of such amount (ii) from the date of the instrument until such a date after the institution of a suit to recover the principal amount as the Court directs. interest shall be calculated at the rate specified. on the amount of the principal money due thereon.e. or (3) he otherwise waives his right to take advantage of any default in presentment for payment.for payment is necessary in any of the following cases.e. he ( i. in order to discharge that maker or acceptor. ) cannot after due search be found. neither he nor any person authorized to pay it attends at such place during the usual business hours: (4) if the instrument not being payable at any specified place.

will be governed by the law of the place where the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 130 11.555 . in such cases.essential matters by the law of the place where he made instrument. The respective liability of the acceptor and endorser.

If the instrument is made. B would be liable to pay interest @6% only. if a bill of change was drawn by A in California where the rate of interest was 25% it was accepted by B. except when the instrument has been obtained from its lawful owner or its lawful custodian. the law of the place where the instrument is made payable would determine what constitutes dishonour and what notice of dishonour is sufficient (Section 135). For example. where the rate of interest was 6% and the bill was endorsed in Indian and was dishonoured. (b) That the negotiable instrument was drawn on the date shown on the face of it. he is not allowed to give evidence in support of his denial. (f) That an instrument which has been lost was properly stamped.instrument is made payable (Section 1 34). There are certain rules of estoppel applicable to negotiable instruments. (e) That the endorsements appearing upon a negotiable instrument were made in the order in which they appear. payable in Washington. accepted or endorsed abroad. the Court is entitled to make certain presumptions. Special Rules of Evidence (a) Presumption as to negotiable instrument (Section 118): For deciding cases in respect of rights of parties on the basis of a bill of exchange. because the agreement as evidenced by such an instrument is invalid according to the law of such foreign country (Section 136). by which evidence is excluded. to deny the truth of that thing. When the foreign instrument made is payable in a place different from that at which it is made or endorsed. it is for the holder to prove that he is the holder in due course. (b) Certain rules of estoppel applicable to instruments: When one person causes another person to believe a thing to be true and to act upon such belief he is not allowed in a suit between him and such person. A would be liable to pay interest @25%.. That is. if it has been obtained from a maker or and acceptor by means of an offence or fraud. (g) That the holder of a negotiable instrument is the holder in due course. (c) That the bill of exchange was accepted before its maturity. but if A was charged as drawer.e. On an action on the bill being brought against B in India. before it became overdue. These are . but it is in accordance with the law of India. any subsequent acceptance or endorsement thereon India will not be regarded as invalid. i. These are briefly stated as follow: (a) That the negotiable instrument was made or drawn for consideration and every party who made itself bound in respect thereof did so for consideration. This rule is called the rule of estoppel. (d) That the negotiable instrument was transferred before its maturity. Likewise. drawn.

contained in Section 120 of the Act. Hundis : Bills of exchange drawn up in the vernacular are generally known as Hundis.555 131 . (ii) that the maker of a promissory note or an acceptor of a bill may not deny the right of the payee to receive the payment therefore. the parties to the Hundis may agree to be the Negotiable instrument Act. Notes LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. and (iii) that an endorser of a negotiable instrument may not disown the signature or capacity to contract of any prior party to the instrument. The objective of these provisions are: (i) that the original parties to the instrument may not deny the validity of the instrument. The negotiable instruments Act ordinarily is not applicable to Hundis but.

The answer to these questions are not required to be written out or submitted for evaluation. or drawn upon any person resident therein. but not made payable In India. 400 and deliver to him may black horse on Ist July next.? 6. A draws a bill on B and negotiates it away. A bill is made payable to Saroj Sehgal . (c) Bills drawn outside India made payable in India. (e) A bill is drawn in Madras upon a merchant in Brussels and accepted payable in Bombay. 800 . (f) I promise to pay X Rs. Rs. (d) I promise to pay X Rs.LESSON 24: THE NEGOTIABLE INSTRUMENT ACT 1881 TUTORIAL These questions are intended to enable the student to test his knowledge before proceeding to answer the test paper. (a) Bills drawn outside India and made payable in or drawn upon any person resident in any country outside India. 500 to B only . Is the bill payable to bearer? 5. 400 and all other sums which shall be due to him . (a) I promise to pay X or order Rs. I promise to pay Rs. Can the holder of the bill teat it as note made by A? 7. Can it be called a negotiable instrument? 4. I. Saroj Sehgal endorses it in blank and negotiates it. Which of the aforesaid instruments are not promissory notes? 2. or drawn upon a person resident outside India. (h) I promise to pay Rs. 400 first deducting thereout any money which he may owe me . X. X Rs. (The Answers are given at the end). (b) A bill drawn in Calcutta on a merchant in Bombay but endorsed in Paris. B is fictitious drawee. When a note is drawn in this from . 400 seven days after my marriage with Z (g) I promise to pay. . 400 to be paid on demand for value received . 400 . A bill is drawn by an agent acting with the scope of his authority upon his principal.U. (e) I promise to pay X Rs. (c) Mr. State whether the following bills are inland bills. (d) Bills drawn in India and made payable outside India. 400 on P s death provided P leaves me enough to pay that sum. 1. (b) I acknowledge myself to be indebted to X in the sums of Rs. X signs a negotiable instrument in the following terms.O. Can the holder thereof treat it at his option as a note or bill. 3.

Can B deemed to be a holder in due course? 18.000 drawn by A. B sues A on the bill. A owes to B Rs. B draws a bill on A for Rs. Where there are several drawees of a bill. Is B bound to pay Rs. Can he recover Rs. 500 only. accept it. Can Anil Banerjee bind himself by such acceptance? 10. B transfers it to C without consideration. (a) Can E recover the amount of the bill from A? (b) Has E any right against D? Say Yes or No. The paper is delivered to B but it turns out to be of a quality different from the stipulated one. 100. deemed to be at maturity? 9. Y sues X on the bill. What is the amount of the bill for? 8. B accept a bill for Rs.000 to A? 14. the holder of a negotiable instrument payable to bearer. The paper. In the margin the amount stated is Rs. who are not partners. X accepts a bill for Rs. C transfers it to D for value. being the price of the paper. A sues B on the bill.000? 13. Can Y sue on the note even if it was later on delivered to him? 16. Y delivers only one bale to X.A bill is drawn Pay to X or order the sum of one thousand rupees. Can the instrument be deemed to have been negotiated?.000. 1. 1. which is in the hands of A s banker who is at the time the banker to transfer the instrument to B s credit in the banker s account with B. B retains the paper. 2. D transfers it without consideration to E. A is holder of a bill endorsed by B in bank. 1. When is a negotiable instrument. A agrees to supply a quantity of paper to B. (a) is the writing of A operates as an endorsement in full from B to C ? (b) Is A liable an endorser? 19 B signs the following endorsement on different negotiable . 1. 17. A to accommodate B and at his request. The banker does so and according now possesses the instrument as B s agent. A writes over B s signature the words Pay to C or order . Can Y recover Rs. A who is the holder of a bill transfers it to B without consideration. 500. X owes to Y Rs.500 from X? 15. A is the holder of a bill payable to A or order . can any one of such drawees accept it for another without that other s authority? 11. A. A by simple delivery transfers the bill without endorsing it to B. 1.000 and makes a promissory note for the amount payable to Y. Anil Benerjee writes an acceptance on it. 12. A bill of exchange is addressed to Swapan Ganguli. dated 30th August ( in a year ) and made payable three months after date. 1. This is the agreed price of two bales of cotton to be supplied by Y to X. and worth Rs.500. X dies and the note is subsequently found amongst his papers.

instruments payable to bearer.555 . Do these endorsements LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 132 11.

555 133 . (d) The within must be credited to C . (e) Pay C (f) Pay C value in account with the State Bank . (b) Pay C for my use (c) Pay C or order for the account of B .exclude the right of further negotiation by C? Say yes or no: (a) Pay the contents to C only . (g) Pay the contents to C. A endorses it to B but the endorsement doe4s not contain the words or order or any equivalent words. A bill is drawn payable to A or order. Can B negotiate the instrument? Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. being part of the consideration in a certain deed of assignment executed by the endorser and other 19.

Breaking the above definition. Let us now discuss about the legal aspects of partnership. you will able to know: The Meaning and nature of partnership The true test of partnership The types of partnership The formation of partnership The registration of partnership Introduction Have you ever heard of partnership? Try to answer what do you mean by partnership in general. This act contains 74 sections and it came into force on Ist December 1932 except Section 69 (relating to the effect of non registration of the firms ) which came into force on Ist October 1933.TEST AND REGISTRATION OF PARTNERSHIP Learning Objectives At the end of this chapter. With the object of sharing profit 5. Yes. . Between two or more persons 3. It extends to whole of India except to the state of Jammu and Kashmir Definition Section 4 Indian Partnership Act 1932 defines the following terms: Partnership in Partnership is the relation between persons who have agreed to share the profit of business carried on by all or any of them acting for all. 2. following essential elements of partnership are revealed: 1. partnership is an association between two or more persons.LESSON 25: INDIAN PARTNERSHIP ACT. Who agree to carry on business 4. 1932 PARTNERSHIP .FORMATION . The Rules and regulations relating to partnership are governed by the Indian Partnership Act 1932. There must be an agreement.

occupation or profession. and C entered into a contract to carry on business of manufacturing of toys. A and B agrees to open a shop of fancy items and agree to carrying on of the business for sharing of profit. Carrying on of the business means continuity of business activities is required to consider it as partnership business. This agreement may be oral or written. although there is single adventure but the same requires a series of transaction a and continuing relationship. It is a partnership. As to the maximum number of partners. there is loss in the partnership. Example A & B enters into a contract to carry on business of manufacturing of tin plates. An agreement :-The relationship of partnership arises from an agreement between the persons concerned not from status. a partnership is exacted between A&B. Only persons competent to contract can enter into partnerships. would result in profit. the limit is 20 partners. however. The partners may however. agree to share profits in any ratio they like. It is also mentioned that in case. Thus there can be a partnership for production of a film. there is no limitation in the partnership Act 1932 but is no limitation in the partnership Act 1932 but the Joint Stock companies Act 1956 provides that in a firm carrying banking business. Agreement as made between the persons must be valid and enforceable by law. It is obvious that a single person cannot constitute partnership. the partnership will be treated as illegal. . All the above elements must coexist in order to constitute partnership. Sharing of profit:-The essential element of partnership is to carry on business with the object of sharing profit amongst the partners. B. in case. 4. Two or more persons:-There must be at least two persons to form a partnership. 3. If the purpose is to carry on charitable work.The business must be carried by all or any of them acting for all or Mutual Agency. Ex. agreement in writing must be preferred. Sec. if successful. A brief explanation of these elements is as follows: 1. provides that there can be a particular partnership between partners whereby they engage in a particular adventure or undertaking. Carrying on of business There can be partnership if there is some business is carried under it. 2. the number of partners in the above business are more than the prescribed limit. ABC decided the ratio as 40:30:30. Besides sharing of profit. which. the number of partners should not be more than 10 whereas in other type of business. To avoid future complications and dispute amongst the persons constituting partnership. 8. it will not be partnership. Sec 2(b) of the Act reads as under business includes every trade. construction of a building etc. A.

A partner can bind the firm by has act provided: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 134 11. Thus the fundament of a partnership is that partners carrying on the business of the firm are agents as well as principals of each other. provides that the partners are entitled to share equally in profits earned and shall contribute equally to the loss sustained by the firm. It means that the partners may make a contract contrary to this provision.555 . 5. unless otherwise. Sec 13(b) however. There may be an agreement vide when only one artner may bear the whole loss. Mutual Agency Business must be carried by all or any of them acting for all It means all the partners should be able to represent each other and should be represented by each other with respect to the business of partnership.it is not essential that the partners should agree to share the losses. agreed.

The facts of the case are as follows:S and S was iron merchant in partnership. The rules laid in Cox v/s Hickman (1860) are an authority in this behalf. regard shall be had to the real relation between the parties. ABC inters into an agreement to form partnership for carrying on business of rice. Let us now elaborate further over it. It was holding that Cox was not liable to pay Hickman for Coke. The other trustee purchased coal from Hickman and failed to pay the price. Yes. The creditors were empowered to carry on business as trustee. as shown by all relevant facts taken together Thus all incidents of relations of the partnership are to be examined as shown in written agreement. Test of Partnership The all elements as discussed above must co-exist in order to constitute partnership Sec 6 of Indian Partnership Act provides that in determining whether a group of persons is or is not a firm or whether a person is or in not a partner in a firm. We can explain be position by the following examples. Hickman sued all the trustees including Cox. In this case A&B are having understanding that they are partners but in the eyes of low it is not partnership. ] Do you know how you would identify the partnership? What is the true test to identify the partnership? Let me now know first your views on it. D. to proportionately divide the income amongst the creditors and return the business after discharge of debt. Example (i) A&B jointly buy a mine and lease it out. Cox was of the trustee who never acted. It is the mutual agency. They became financially embarrassed and made a compromise with their creditors. although dividing the profit of the business in a ratable proportion were not partners because they were not empowered to represent each other. which makes a true partnership. D can file a suit against ABC in case of default. The court observed that the creditors working as trustee. verbal agreement or conduct. B has acted as agent of the firm. They make a partnership agreement that they will divide the lease rent in a ratio of 50:50 between themselves.He act within the scope of his authority His acts are done in the name of he firm · They are done for the purpose of the business of the firm Example. an outsider makes a deal with B. How many types of partnership are there? .

We have discussed the distinction of partnership vide which the important elements for the formation ware discussed in detail. What legal formalities are there in the formation of partnership? .Type of Partnership Sec 4 of the Act provides that persons who have entered into a partnership with one another are called individually partners and collectively a firm and the name under which their business is carried is called the firm name The formation of the partnership of type of partnership means. Every partner has a right to take part in the management of the affairs of the firm Now. Any partner may dissolve such a partnerships by giving a notice to that effect to all the other partners. A&B have formed a partnership for manufacture of a particular film.g. we give below the important points for execution of partnership. However to make it more clear.Sec 7 Where no provision is made by a contract between the partners for duration of their partnership or for the determination of their partnership. Carrying on business is necessary for existence of partnership 5. the partnership is automatically dissolved on completion of the venture provided they don t enter into a contract to continue this partnership for future. Partnership at will:. there is an agreement between parties to form the firm that too as per provision of Partnership Act. It has no separate entity apart from its members. Particular Partnership:-When a partnership is to formed for a particular period or for a particular venture. The Partnership can be classified as under: 1. 1. 6. It is executed by a agreement between the partners 2. the partnership is. Maximum number of person allowed 10 in banking firm and 20 in non banking firm 4. we will discuss how the partnership comes into formation. 2. in a such a case the partnership is automatically dissolved at expiry of fixed term or on the completion of the venture e. It is simply a collection of members 3. It means the partnership is made without specifying any period and is at the sweet will of the partners. partnership at will . The liability of partnership is unlimited an the partners are jointly/personally liable. Every partner is agent of the other partner as well as the firm 7.

Name and address of the firm and nature of business to be carried on. Partnership Deed A partnership agreement put to writing and is termed as partnership deed.555 135 . To avoid future dispute it is always advisable to have partnership expressed in writing. it depends on the circumstances but generally the partnership deed must contain the following clauses 1. The rights and obligations of the partners towards each other and towards the firm can be determined by an oral or written agreement. Name and address of the partners 3. What should be the exact contents. Date of commencement and duration of partnership 4.Formation of Partnership A partnership is formed by an agreement between the partners. The capital and any other contribution made by partners LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Before starting of the business the partners are drafting the deed in proper manner so that the business may run smoothly by and if there is any dispute the same may be settled according to the terms of partnership deed. 2.

Power to exempt from application of this Chapter The 3[State Government of any State]. expulsion / retirement or death of a partner. The ratio to share profit and losses amongst the partners. Section 57.Appointment of Registrars (1) The State Government may appoint Registrars of Firms for the purposes of this Act. in the Register of the firms. and may define the areas within which they shall exercise their powers and perform their duties.5. . direct that the provisions of this Chapter shall not apply to 4[that State] or to any part thereof specified in the notification.Application for registration (1) The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated. may. Rules to be followed in case of admission. 6. 11. arbitrations etc. 7. The registration provides a reliable evidence and conclusive proof of the existence of a partnership firm. Division of task and obligation of partners 9. a statement in the prescribed form and accompanied by the prescribed fee. Court. In case of dispute which course of action shall be followed e. Section 56. 12. The circumstances under which the partnership will stand dissolved. their salary. Whether a partner is allowed to carry competing business. Rules as to interest on loans and capital. by notification in the Official Gazette. etc. kept.g. Registration of Partnership Registration of firm means the recording of the firm name along with the prescribed particulars. in the office of the Registrar of Firms. 10. commission. (c) The names of any other places where the firm carries on business. (d) The date when each partner joined the firm. (b) The place or principal place of business of the firm. stating( a) The firm name. Section-58. Method and arrangement of keeping accounts 8. (2) Every Registrar shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code (45 of 1860).

(e) The names in full and permanent addresses of the partners. Section 61. . and shall file the intimation along with the statement relating to the firm filed under section 59. who shall deal with it in the manner provided in section 61.Recording of alterations in firm name and principal place of business (1) When an alteration is made in the firm name or in the location of the principal place of business of a registered firm. who shall make a note of such intimation in the entry relating to the firm in the Register of Firms. Royal . Empress . 5[Government]. Section 62. specifying the alteration and signed and verified in the manner required under section 58. (3) A firm name shall not contain any of the following words. a statement may be sent to the Registrar accompanied by the prescribed fee. he shall record an entry of the statement in a register called the Register of Firms. approval or patronage of. Empire .Noting of changes in names and addresses of partners When any partner in a registered firm alters his name or permanent address. Queen . Emperor . any partner or agent of the firm may send intimation thereof to the Registrar. such place not being its principal place of business. (2) Each person signing the statement shall also verify it in the manner prescribed. he shall amend the entry relating to the firm in the Register of Firms is accordance with the statement. and shall file it along with the statement relating to the firm filed under section 59.Registration When the Registrar is satisfied that the provisions of section 58 have been duly complied with. King . Imperial . or words expressing or implying the sanction. namely Crown .Noting of closing and opening of branches When a registered firm discontinued business at any place or begins to carry on business at any place. Section 60. or by their agents specially authorized in this behalf. any partner or agent of the firm may send an intimation of the alteration to the Registrar. (2) When the Registrar is satisfied that the provisions of subsection (1) have been duly complied with.. and (f) The duration of the firm.. and shall file the statement. except 6[when the State Government] signified 7[its] consent to t he use of such words as part of the firm name by order in writing Section 59. The statement shall be signed by all the partners.

and LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 136 11. (2) Recording of withdrawal of a minor-When a minor who has been admitted to the benefits of partnership in a firm attains majority and elects to become or not to become a partner.Section 63. or his agent specially authorised in this behalf. and the Registrar shall make a record of the notice in the entry relating to the firm in the Register of Firms. he. may give notice to the Registrar that he has or has not become a partner. continuing or outgoing partner. may give notice to the Registrar of such change or dissolution. or the agent of any such partner or person specially authorized in this behalf.Recording of changes in and dissolution of a firm (1) When a change occurs in the constitution of a registered firm any incoming. and shall file the notice along with the statement relating to the firm filed under section 59. specifying the date thereof. and when a registered firm is dissolved any person who was a partner immediately before the dissolution.555 . and the firm is then a registered firm.

Section 67. it is not mandatory. But there would be some serious effects if the firm is not registered as covered under Section 69. intimation or notice was signed.Grant of Copies The Registrar shall on application furnish to any person. (2) All statements. Section 64. . (2) A certified copy of an entry relating to a firm in the Register of Firms may be produced in proof of the fact of the registration of such firm. Section 65. and of the contents of any statement. and the Registrar entry accordingly. subject to such conditions and on payment of such fee as may be prescribed.the Registrar shall deal with the notice in the manner provided in sub-section (1). What is the effect of non-registration? Is it mandatory? No. notices and intimations filed under this Chapter shall be open to inspection. to a registered firm may any amendment in the entry such firm which is consequential shall amend the Section 66-Inspection of Register and filed Documents (1) The Register of Firms shall be open to inspection by any person on payment of such fee as may be prescribed.Rules of Evidence (1) Any statement. an payment of such fee as may be prescribed.Rectification of mistakes (1) The Registrar shall have power at all times to rectify any mistake in order to bring the entry in the Register of Firms relating to any firm into conformity with the documents relating to that firm filed under this Chapter. certified under his hand. be conclusive proof of any fact therein stated. intimation or notice recorded or noted in the Register of Firms shall. (2) On application made by all the parties who have signed any document relating to a firm filed under this Chapter.Amendment of Register by order of Court A court deciding any matter relating direct that the Registrar shall make in the Register of Firms relating to upon its decision. intimation or notice recorded or noted therein. the Registrar may rectify any mistake in such document or in the record or note thereof made in the Register of Firms. of any entry or portion thereof in the Register of Firms. a copy. as against any person by whom or on whose behalf such statement. Section 68.

is not of a kind specified in section 19 of the Presidency Small Cause Courts Act. or containing particulars which he knows to be incomplete or does not believe to be complete. shall be punishable with imprisonment which may extend to three months. (2) No suit to enforce a right a rising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm. or whose places of business in 11[the said territories]. or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim. or any right or power to realise the property of a dissolved firm. receiver or court under the Presidency-towns Insolvency Act. by notification under 12[section 56]. or. are situated in areas to which. or with . 1920 (5 of 1920) to realise the property of an insolvent partner. or (b) To any suit or claim of set-off not exceeding one hundred rupees in value which.Effect of non-registration (1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the register of firms as a partner in the firm. in the Presidency-towns. outside the Presidency-towns. 1909 (3 of 1909) or the Provincial Insolvency Act.Section 69. or (b) The powers of an official assignee. (4) This section shall not apply( a) To firms or to partners in firms which have no place of business in 10[the territories to which this Act extends]. is not of a kind specified in Schedule II to the Provincial Small Cause Courts Act. notice or intimation under this Chapter containing any particular which he knows to be false or does not believe to be true. 1887 (9 of 1887). 1882 (5 of 1882). this Chapter does not apply. (3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract. amending statement. Section 70.Penalty for furnishing false particulars Section 70 lays down that if any person who signs any statement. but shall not affect( a) The enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm.

Power to make rules Section 71 states that The State Government may by notification in the Official Gazette make rules describing the fees which shall accompany documents sent to the Registrar of Firms.fine. or which shall be payable for the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. or with both.555 137 . Section 71.

as the number of members exceeds 20] 3. each having twelve partners join hands and make a partnership form having twenty-four partners. 61. (3) All rules made under this section shall be subject to the condition of previous publication. Attempt the following problems for a better understanding: 1. intimations and notices under sections 60. before the State Legislature. Every rule made by the State Government under this section shall be laid. X. Is there a partnership between X and Y? [Hint. (c) Prescribing the form of the Register of Firms. and of the verification thereof. a publisher. (g) Regulating the grant of copies. A and B separately tender for a contract to cut and remove bamboos form a certain jungle. to carry out the purposes of this Chapter. (d) Regulating the procedure of the Registrar when disputes arise. and the mode in which such entries are to be amended or notes made therein. They mutually agree that each one of them shall be entitled to a certain share of . Is it a valid entity? [Hint. and prescribing the form thereof. No. a book written by Y and to pay Y half the net profits. as soon as it is made. and the mode in which entries relating to firms are to be made therein. (f) Prescribing conditions for the inspection of original documents.inspection of documents in the custody of the Registrar of Firms or for copies from the Register of Firms: It is also provided that such fees shall not exceed the maximum fees specified in Schedule I. mere profit-sharing is not conclusive test of partnership.] 2. agrees to publish at his own expense. (h) Regulating the elimination of registers and documents. 62 and 63 to be in prescribed form. it s an illegal association as per section 11 of the companies Act. (b) Requiring statements. (i) Providing for the maintenance and form of an index to the Register of Firms. Two trading firms. and (j) Generally. (e) Regulating the filing of documents received by the Registrar. The State Government may make rules (a) Prescribing the form of statement submitted under section 58. No partnership.

Is it a partnership agreement? [Hint. the firm can file a fresh suit.] 6. Can the firm get its . to buy and deliver gold to B. registration must have been effected . The suit is dismissed for non-registration of the firm. No] 4.Yes. The firm filed a suit against D.] 5. The provision is . When A. 500.No.bamboos. 1986] [Hint . 1. not his partner . The Court of Wards [1872] LR 2 CP 419. where B will make ornaments out of it and sell them. He appointed H-to manage the work. Is it a partnership agreement? [Hint.] ) 6. The merchants agreed to carryon the business subject to the control of A in several respects. Yes. B is an agent of A. a contractor. An unregistered firm filed a suit against a debtor to recover Rs. v.before a suit is filed in the court. A advanced some money to B and C. 1982] [Hint .B will succeed in his claim because partner of an unregistered firm can sue for his share on dissolution of the firm. The firm is registered later on. Is it a partnership agreement? [B. Will B succeed in his claim? [B.] 7. A and B purchased a taxi to ply it in partnership. Com. 1999] [Hint. and they shall share the resulting profit and losses. Com. a goldsmith. Is it a partnership agreement between A. Can the firm now successfully bring the suit against D? [B. two merchants. A.Mallow March & Co. A agreed with B. if any.000 on a con-tract. without the consent of B. after registration. They plied the taxi for a year. no matter whosoever is granted the contract. A was to receive a commission of 20% on all the profits. (H). It was agreed that B would receive 75%of the profits as his remuneration and would bear all the losses. Gopeshwar Chattoraj AIR 1933 Calcutta 204. A. (H). D owes this firm Rs. The court dismissed firm s application on the ground of non-registration. B brought an action to recover his share in sale proceeds. The object of the agreement is to give maximum security to A for the returns on his money . (H). A resisted B s claim on the ground that the firn1 was not registered.Munshi Abdul Latif v. Com.] 8. disposed of the taxi. Band C? [Hint: A is not a partner. B and C are partners of an unregistered firm. undertook a contract of loading and unloading railway wagons.

made a deal with the firm.No. A. A died. A partner by holding out who is an insolvent.555 . Com. Z sued upon A s estate.] 9. cannot be held liable for the claims on the firm. 2000] [Hint: Yes. B and C for compensation of his damages. The firm committed a default in meeting out the deal. the partners can get the firm registered and then file a fresh suit against the debtor. who did know about the death of A. The firm caused heavy losses to Z by breaching a contract.).registration now and file a fresh suit against the debtor to recover the amount? [B. Is A liable to share such damages? [Hint .No. B and C were partners in a firm. Z. Z sued X. A s estate is not liable for the dealings of the firm after A death. (H.] LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 138 11. a holding out partner in the firm of X & Y is adjudicated as insolvent. Y and A for the damages. A.] 10. Is A s estate liable for the damages? [Hint .

References Kapoor. Tulsian (2002). Ltd. Sultan Chand and Sons. (2003). http://www. Graw Hill Aggarwal. Taxmann s.D.C. Ltd.indialawinfo. Tata Mc. N. P. Kucchal ( 2002). Business Law .555 139 .C. Elements of Mercantile Law. New Delhi. Business Law . Delhi.com/bareacts/soga. Vikas Publishing House Pvt. Student s Guide to Mercantile and Commercial Laws. Delhi. Pvt.html M. New Delhi Notes LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Rohini (2003).

Dormant of Sleeping Partner: Some times. They are full fledged partners in the real sense. Such partners are liable to third parties as actual partner Such partners can retire from the firm without giving notice but they have assess to the books of the accounts of the firm and can have a copy of the same. Partner in profit only 5.LESSON 26: INDIAN PARTNERSHIP ACT. . Nominal partner 4. you will able to know: The types of partners The rights of partners The obligations of partners The minor s status in the partnership Introduction We are now well versed what we mean by partnership. Dormant or sleeping partner 3. If such partner wants to retire from the firm he must give public notice of his retirement from the firm in order to get himself absolved from the responsibly of the firm. 1. 1932 TYPES OF PARTNERS AND THEIR RIGHTS AND OBLIGATIONS Learning Objectives At the end of this chapter. there are persons who merely become partners in a firm by contributing capital or even without capital and donot take active pact in the conduct of the partnership business. Kinds of Partners in a partnership terms The partners of partnership firm may be classified in following categories: 1. Actual/Active partner 2. 2. Its nature and formation and registration formalities. Partner by estoppels or partner by holding out. Today we will discuss about the kinds of partners and their rights and obligations as provided under the Act. Actual/Active Partner Partners actively engaged in the conduct on business are known as active partners . Sub Partner 6.

These type of partners have no say in the management of the firm. If transactions are taking place treating the retired partner as active partner of the firm. Holding out means a partner retires from the firm and does not give notice of retirement. is liable as a partner in that firm to anyone who has on the faith of any such representation gives credits to the firm. the liability of such partner towards third party is similar to active partner . 6. Example:-A is a renowned businessman. D does not c cant contradict his statement: XYZ gets a loan from Y and later on become insolvent. he shall not be liable for the loss. His son B starts the 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 help his son. A tells in the market that D is partners of the firm.Example:-A&B start a partnership firm wherein A is active partners and B is dormant partner. In the instant case D is partner in the firm and is estopped from the fact that he is partner of XYZ. A is only a nominal partner. They donot invest or participate in the business of the firm but give their name as partner of the firm. However. Nominal Partner:. 4. Let us now talk about the rights and liabilities of partners Rights and liabilities/ obligations of partners We would be discussing the rights and liabilities/ obligations of the partners in term of Indian Partnership Act 1932 as . The outsider cannot interfere business of the firm nor he is liable to third party as an active partner.These are the partners who have no real interest in the firm . Partner in profits only:-Some times the partnership firm is formed to carryon business wherein a partner becomes partner of the firm only for profits. Partner by estoppel or holding all :-Section 28 Anyone who by words spoken or written or by conduct represent himself or knowingly permit himself to be represented himself to be a partner in a firm. In case the firm suffers loss. he shall be estopped from denying the fact. shall be called partner by estoppels. 5. Later on such a person is estopped from denying the fact that he is a partner in that particular firm. whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit Thus if the behavior of such person cause misunderstanding to third parties that he is partner of a particular firm. Example:-ABC are partners in a partnership firm named XYZ. This is valid partnership 3. Sub Partner:-When a partner agrees to share his profit in a partnerships firm with an outsider such a outsider in called sub partner.

555 .Duty to indemnify for loss caused by fraud Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 140 11. Section 9-12 deals with the mutual relation pf partners. to be just and faithful to each other. Section 9-General duties of partners Partners are bound to carry on the business of the firm to the greatest common advantage. and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. Section 10.amended up to date.

for the purposes of the business. Section 13. (b) The partners are entitled to share equally in the profits earned. in an emergency. (e) The firm shall indemnify a partner in respect of payments made and liabilities incurred by him( i) In the ordinary and proper conduct of the business. such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner.Determination of rights and duties of partners by contract between the partners (1) Subject to the provisions of this Act. Section 12. (b) Every partner is bound to attend diligently to his duties in the conduct of the business. the mutual rights. and shall contribute equally to the losses sustained by the firm. is entitled to interest thereon at the rate of six per cent per annum. any payment or advance beyond the amount of capital he has agreed to subscribe.Section 11. (c) Where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits. and duties of the partners of a firm may be determined by contract between the partners. Such contract may be varied by consent of all the partners. for the purpose of protecting the firm from loss. (2) Agreements in restraints of trade-Notwithstanding anything contained in section 27 of the Indian Contract Act. but no change may be made in the nature of the business without the consent of all the partners. as would be done . 1872 (9 of 1872). (d) Partner making. before the matter is decided. (a) Every partner has a right to take part in the conduct of the business.Mutual rights and liabilities Subject to contract between the partners (a) Partner is not entitled to receive remuneration for taking part in the conduct of the business. (c) Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners. and (d) Every partner has a right to have access to and to inspect and copy any of the books of the firm. and such contract may be expressed or may be implied by a course of dealing. and every partner shall have the right to express his opinion. and (ii) In doing such act.The conduct of the business Subject to contract between the partners. and such consent may be expressed or may be implied by a course of dealing.

the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change. or from the use of the property or business connection of the firm or the firm name. he shall account for that profit and pay it to the firm.where a firm constituted for a fixed term continues to carry on business after the expiry of that term. (b) If a partner carries on any business of the same nature as and competing with that of the firm. property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm. Section 14.Application of the property of the firm Section 15 states that the property of the firm shall be held and used by the partners exclusively for the purposes of the business subject to contract between the partners Section 16. and (c) Where additional undertakings are carried out-where a firm constituted to carry out one or more adventures or undertakings. so far as they may be consistent with the incidents of partnership at will. by or for the firm. and includes also the goodwill of the business subject to contract between the partners.by a person of ordinary prudence. the mutual rights and duties of the partners remain the same as they were before the expiry. the mental rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the . (b) After the expiry of the term of the firm.-Personal profits earned by partners As is subject to contract between the partners (a) If a partner derives any profit for himself from any 0 transaction of the firm. Section 15. and (f) A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm. by purchase or otherwise. as far as may be. he shall account for and pay to the firm all profits made by him in that business. or acquired.. Section 17. Unless the contrary intention appears.The property of the firm The property of the firm includes all property and rights and interests in property originally brought into the stock of the firm.Rights and duties of partners Subject to contract between the partners (a) After a change in the firm-where a change occurs in the constitution of a firm. under similar circumstances. or for the purposes and in the course of business of the firm. and . in his own case.

Liability of a partner for acts of the firm Every partner is liable. for all acts of the firm done while he is a partner.Liability of the firm for wrongful acts of a partner Where. Section 25. by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm. Section 26.original adventures or undertakings.555 141 . jointly with all the other partners and also severally. or with the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.

to an account as from the date of the dissolution. or to inspect the books of the firm. Section 28. Section 29.Liability of firm for misapplication by partners Where (a) A partner acting within his apparent authority receives money or property from a third party and misapplies it. the firm is liable to make good the loss. and the money or property is misapplied by any of the partners while it is in the custody of the firm. or any penalty is incurred. and. during the continuance of the firm. or to require accounts.authority of his partners. whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. the firm is liable therefor to the same extent as the partner. either absolute or by mortgage. and the transferee shall accept the account of profits agreed to by the partners. Do you think that minor can be a partner in the partnership firm? Minor s status in partnership firm Partnership is based on mutual contract and only those who are . the continued use of that name or of the deceased partner s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death. does not entitle the transferee. for the purpose of ascertaining that share. or (b) A firm in the course of its business receives money or property from a third party. to interfere in the conduct of the business. loss or injury is caused to any third party. (2) Where after a partner s death the business is continued in the old firm name.Holding out (1) Anyone who by words spoken or written or by conduct represents himself or knowingly permits himself to be represented.Rights of transferee or a partner s interest (1) A transfer by a partner of his interest in the firm. the transferee is entitled as against the remaining partners to receive the share of the assets of the firm to which the transferring partner is entitled. This was all about the rights and obligations of partners. is liable as a partner in that firm to any one who has on the faith of any such representation given credit to the firm. Section 27. (2) If the firm is dissolved or if the transferring partner ceases to be a partner. but entitles the transferee only to receive the share of profits of the transferring partner. or by the creation by him of a charge on such interest. to be a partner in a firm.

and such notice shall determine his position as regards the firm: It is provided that. and thereupon the court shall proceed with the suit as one for dissolution and for settling accounts between the partners. (7) Where such person becomes a partner( a) His rights and liabilities as a minor continue up to the date on which he becomes a partner. with the consent of all the partners for the time being. but. As per Indian Contract Act. he may be admitted to the benefits of partnership. the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the persons asserting that fact. and . if he fails to give such notice. and the amount of the share of the minor shall be determined along with the shares of the partners. (4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm. or of his obtaining knowledge that he had been admitted to the benefits of partnership. and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48: It is provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm. (3) Such minor s share is liable for the acts of the firm.competent to contract can become partners of a firm. (5) At any time within six months of his attaining majority. but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership. Section 30 lays down certain condition which are discussed as under: Section 30. save when severing his connection with the firm. such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm. a minor can be admitted to the partnership for his benefit. any agreement with a minor is void ab intio but he can derive benefit under it. (6) Where any person has been admitted as a minor to the benefits of partnership in a firm. Under section 30 of the Partnership Act.Minors Admitted to the Benefits of Partnership (1) A person who is a minor according to the law to which he is subject may not be a partner in a firm. whichever date is later. he shall become a partner in the firm on the expiry of the said six months. and he may have access to and inspect and copy any of the accounts of the firm. but the minor is not personally liable for any such act. (2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon.

555 .LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 142 11. (8) Where such person elects not to become a partner.(b) His share in the property and profits of the firm shall be the share to which he was entitled as a minor.

the minor son of B is admitted to the benefits of the partnership. [Hint: A cannot charge Rs.No. He charges this amount to the firm. A speculates and loses heavily. Is C liable for subsequent debts incurred by A and B? [B. X. 10 lac to the firm. C is a sleeping partner who is not known to the creditors. He being a sleeping partner is not supposed to be known to the outsiders dealing with the firm.] 4. A and B are partners in a firm. Soon after the admission of C . B dies. C . Y and Z are partners in a firm. B and C are partners in a firm. Com (H). A gives continuing guarantee to B for due fulfillment of business obligations by firm X& Y in its dealings with B. 1981. 10 lac. A manages to get a contract from Indian Railways after paying a bribe of Rs. Attempt the Following Problems for a Better Understanding 1.] 2. B. when B died. (b) His share shall not be liable for any acts of the firm done after the date of the notice. See Section 13 (e). 1976.] 5. The creditors of the firm demand the losses from A and C. A . What effect the change has on A s guarantee? [Hint: Guarantee is revoked.] . they have been acquired using firm s money. though shares stand in the name of X. During this period. C retires without giving public notice of his retirement. And the business of the firm is carried on. Is C liable to creditors? [Hint. C is not liable. C being a minor cannot be sole part-x with A. Advise.(a) His rights and liabilities shall continue to be those of a minor under this section up to the date on which he gives public notice. A. Thus C is not liable for any losses incurred after B s death. partnership came to an end. X. Yes.] 3. Com (Pass). because a partner has a right to be reimbursed for the payments made by him in the ordinary and proper conduct of the business This is not the manner in which business should ordinarily be conducted. It is provided that nothing in sub-sections (7) and (8) shall affect the provisions of section 28. 1 crore. The contract is worth Rs. Band C are partners. and (c) He shall be entitled to sue the partners for his share of the property and profits in accordance with subsection (4). but B and C object to it. Will shares constitute partnership property? [Hint. A partner in the firm retires and another partner admitted. 1995. without the authority of Y and Z buys certain shares in his name out of partnership money. 1994] [Hint .

a customer deals with the firm after this change and the firm become indebted to P. Business Law .Yes. (2003). P. Y. Z retires and A is admitted as a new partner. Delhi. Tata Mc. P sues X. What will be the implication? Will he succeed? [Hint . http://www. Tulsian (2002).e. i.html M. Elements of Mercantile Law. Y. X.D. Ltd.C. Vikas Publishing House Pvt. New Delhi. he will succeed. and A. Ltd. Y and Z are partners in a firm. Mr. No public notice of this change is given but the firm continues its business in the old name.com/bareacts/soga. Kucchal ( 2002). and Z on the ground of estoppel. or the new partners. X.] References Kapoor. X. Y and A for his dues.C. Graw Hill Student s Guide to Mercantile Aggarwal. i.555 143 . Rohini (2003). Business Law . and Commercial Laws.6.. Sultan Chand and Sons. N.indialawinfo. Delhi. P. New Delhi Notes LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Pvt. Taxmann s.. He can sue at his option either the old partners.e.

or (b) By the happening of any event which makes it unlawful for the business of the firm to be carried on . Section 39 of the Act provides that there is a difference between the dissolution of partnership and the dissolution of the firm. when partners close down the business. whenever a partner leaves the firm. Modes of Dissolution of the Firm Section 40. Thus . Let us now concentrate on the modes of dissolution of the firm. But before going ahead you need to understand that there is a difference between the dissolution of partnership and dissolution of firm. When a partner close down the firm. partners may feel like closing the business. Section 41. may be because the business is not lucrative or it is not going the way they predicted or for any other reason. dissolution of the partnership firm takes place.LESSON 27: INDIAN PARTNERSHIP ACT. The dissolution of partnership between all the partners of the firms occurs is called dissolution of the firm. dissolution of the partnership firm takes place. After starting the business. we will be discussing dissolution of partnership business. partnership is dissolved but the firm continues until the partnership firm is dissolved.Dissolution by Agreement A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. you will able to know: The modes of dissolution of partnership The consequences of dissolution of partnership The settlement of accounts on dissolution of partnership Introduction Today. Thus. 1932 DISSOLUTION OF PARTNERSHIP Learning Objectives At the end of this chapter.Compulsory dissolution A firm is dissolved (a) By the adjudication of all the partners or of all the partners but one as insolvent. Partnership is a relation between the partners and the partnership firm is an entity which exists because of partnership relations.

Dissolution by notice of partnership at will (1) Where the partnership is at will. and (d) By the adjudication of a partner as an insolvent. other than the partner suing. other than the partner suing. if no date is so mentioned. in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner. the court may dissolve a firm on any of the following grounds. willfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of its business. where more than one separate adventure or undertaking is carried on by the firm the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings. Section 42. has become in any way permanently incapable of performing his duties as partner. other than the partner suing.or for the partners to carry it on in partnership: It is further provided that. (b) That a partner. is guilty of conduct which is likely to affect prejudicially the carrying on of the business. Section 44. regard being had to the nature of the business. has in any way transferred the whole of his interest in the firm to a third party. by the expiry of that term. (c) That a partner. as from the date of the communication of the notice.Dissolution on the Happening of Certain Contingencies Subject to contract between the partners a firm is dissolved (a) If constituted for a fixed term. (d) That a partner. or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure. by the completion thereof. (b) If constituted to carry out one or more adventures or undertakings. (c) By the death of a partner. any partner giving notice in writing to all the other partners of his intention to dissolve the firm may dissolve the firm. other than the partner suing. Section 43. (2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or.Dissolution by the court At the suit of a partner. (e) That a partner. namely (a) That a partner has become of unsound mind. or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him. 1908 (5 of 1908) or has allowed it to be sold in the recovery of .

arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner; (f) That the business of the firm cannot be carried on save at a loss; or (g) On any other ground which renders it just and equitable that the firm should be dissolved. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 144 11.555

What are the consequences of dissolution ? Consequences of Dissolution Since dissolution initiates the process of winding up the affairs of the firm some rights are inferred and some obligation are imposed upon the partners to do the needful in this regard . Such consequences are covered under the Indian Partnership Act 1932 vide Vide Sec 45 to Sec 55 Section 45- Liability for acts of Partners done after Dissolution (10 Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them, which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution: It is further provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner. Notices under sub-section (1) may be given by any partner. Section 46- Rights of Partners to have Business Wound up after Dissolution On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. Section 47- Continuing authority of Partners for Purposes of Winding up After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, so far as may be necessary to wind up the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise: It is provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent. Settlement of accounts is very important in the partnership business. Section 48 deals with it. Section 48- Mode of Settlement of accounts between Partners In settling the accounts of a firm after dissolution, the following

rules shall, subject to agreement by the partners, be observed (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits; (b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order( i) In paying the debts of the firm to third parties; (ii) In paying to each partner ratably what is due to him from the firm for advances as distinguished from capital; (iii) In paying to each partner ratably what is due to him on account of capital; and (iv) The residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits. Section 49- Payment of firm debts and of separate debts Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm. Section 50- Personal profits Earned after Dissolution Subject to contract between the partners, the provisions of clause (a) of section 16 shall apply to transactions by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up: It is provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name. Section 51- Return of Premium on Premature Dissolution Where a partner has paid a premium on entering into partnership of a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he was a partner, unless

(a) The dissolution is mainly due to his own misconduct, or (b) The dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it. Section 52- Rights where Partnership Contract is Rescinded for Fraud or Misrepresentation Where a contract creating partnership is rescinded on the ground of the fraud or misrepresentation of any of the parties thereto the party entitled to rescind is, without prejudice to any other right, entitled (a) To a lien on, or a right of retention of, the surplus or the assets of the firm remaining after the debts of the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 145

firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed to him; (b) To rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm; and (c) To be indemnified by the partner or partners guilty of the fraud or misrepresentation against all the debts of the firm. Section 53- Right to Restrain from use of Firm name or firm Property After a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up: It is provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name. Section 54- Agreements in Restraint of Trade Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable. Section 55- Sale of Goodwill after Dissolution In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm. Rights of buyer and seller of goodwill-Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not (a) Use the firm name, (b Represent himself as carrying on the business of the firm, or (c) Solicit the custom of persons who were dealing with the firm before its dissolution.

Agreement in restraint of trade -Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable. 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 arrangement only. A alone wants to terminate the partnership. Can he do so? [Hint. No, however, under Section 44, the court may, at the suit of A, dissolve the firm on certain grounds.] 2. X and Y started business in partnership. After a couple of years they found that the firm is incurring continues losses. Can it be a ground for dissolution of a firm? [Hint- Yes, the dissolution can be applied for on the ground that business cannot be carried on except losses. See section 44(f)] 3. X, Y and Z are partners in a firm. X and Y always behave arrogantly with each other and do not also co-operate in business matters. Z applies to court for dissolution of the firm. Will he succeed? [Hint- Yes, on Just and Equitable grounds .] 4. X and Y form a partnership firm. After 5 years, Delhi police for trading in narcotics detains Y. He is later convicted for the same. Will the court dissolve the firm on the application of X before the expiry of the term? Advice. [Hint Yes. It is possible on the ground Conduct prejudicial to partnership business . See Section 44] 5. X and Y were carrying on a printing business as partners. They decided to dissolve the firm, and it was provided in the dissolution deed that even after the sale of goodwill of the firm to one of them, nothing should prevent the other partner from carrying on the similar business in the neighborhood. X purchased the goodwill of the firm, and Y opened another printing house nearby and started soliciting the customers of the old firm. X objects. Advice. [Hint- Y is legally justified in opening a printing house in the neighborhood, but after the sale of goodwill, Y has no right to solicit the customers of the firm. X can take an injunction order from the court to stop Y from soliciting the firm s customers.] 6. A, B and C were partners in a firm sharing profits in the ratio of 4:3:2. After 15 years they agree to dissolve the firm.

After paying outside liabilities and the capital of partners, there is a surplus of Rs. 40,000. What will be the share of A, B and C? [Hint. They will share the surplus in the ratio of 4:3:2.] 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), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Aggarwal, Rohini (2003), Student s Guide to Mercantile and Commercial Laws, Taxmann s, New Delhi LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 146 11.555

LESSON 29: THE COMPANIES ACT, 1956 DEFINITION AND NATURE OF A COMPANY Learning Objectives At the end of this chapter, you will be able to · Identify the meaning and nature of a company · Identify the important characteristics of a company Introduction Today, we will begin with the Companies Act that was passed in 1956. In the lecture of today we will discuss the meaning and nature of a company. Do you know what do we mean by company? In simple words, a company can be defined as a group of persons associated together for the purpose of carrying on a business, with a view to earn profits. The word Company is an amalgamation of the Latin word Com meaning with or together and Pains meaning bread . Thus, a company is nothing but a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose. Section 3(1)(i) of the Act provides that, a company means a company formed and registered under this Act or an existing company. Section 3(1)(ii) lays down that, An existing company means a company formed and registered under any of the previous companies laws specified below. (a) any Act or Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1886), and repealed by that Act; (b) The Indian Companies Act, 1866 (10 of 1866); (c) The Indian Companies Act, 1882 (6 of 1882); (d) The Indian Companies Act, 1913 (7 of 1913); (e) The Registration of Transferred Companies Ordinance, 1942 (54 of 1942); and 40[ (f) An law corresponding to any of the Acts or the Ordinance aforesaid and in force( 1) In the merged territories or in a Part B State (other than the State of Jammu and Kashmir), or any part thereof, before the extension thereto of the Indian Companies Act, 1913 (7 of 1913); or (2) In the State of Jammu and Kashmir, or any part thereof before the commencement of the Jammu and Kashmir (Extension of Laws) Act, 1956 41[ in so far as banking, insurance and financial corporations are concerned, and before the commencement of the Central Laws (Extension to Jammu & Kashmir)

There is very good definition by Lord Justice Lindey, A company is an association of many persons who contribute money or money s worth to a common stock and employ it in some trade or business and who share the profit and loss arising there from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is more or less restricted. The Supreme Court of India has held in the case of State Trading Corporation of India v/s CTO that a company cannot have the status of a citizen under the Constitution of India. Let us learn about its important characteristics. Characteristics of a Company A company as an entity has several distinct features, which together make it a unique organization. The following are the defining characteristics of a company: Separate Legal Entity On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. The importance of the separate entity of the company was however firmly established in the following case. Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his boots business to a newly formed company for £ 30,000. His wife, one daughter and four sons took up one share of £ 1 each. S took 23,000 shares of £1 each and £ 10,000 debentures in the company. The debentures gave S a charge over the assets of the company as the consideration for the transfer of the business. Subsequently when the company was wound up, its assets were found to the worth £ 6,000 and its liabilities amounted to £ 17,000 of which £ 10,000 were due to S (secured by debentures) and £ 7,000 due to unsecured creditors, the unsecured creditors claimed that S and the company were one and the same person and that the company was a mere agent for S and was hence they should be paid in priority to S. Held, the company was, in the eyes of the law, a separate person independent from S and was not his agent. S, though virtually the holder of all the shares in the company, was also a secured creditor and was entitled to repayment in priority to the unsecured creditors. Limited Liability The liability of the members of the company is limited to

contribution to the assets of the company up to the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 148 11.555

pay and nothing more, even if liabilities of the company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in case of a company once the members have paid all their dues towards the shares held by them in the company. For example, if the face value of the share in a company is Rs. 10 and a member has already paid Rs. 5 per share, he can be called upon to pay not more than Rs. 5 per share during the lifetime of the company. Perpetual Succession A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company. There is a very good saying. Even where during war all the members of a private company, while in general meeting was killed by a bomb, the company survived; not even a hydrogen bomb could have destroyed it. [ Meat Supplies( Guildford) Ltd; Re( 1966) 3 All E.R.320] Separate Property A company is a distinct legal entity. The company s property is its own. A member cannot claim to be owner of the company s property during the existence of the company. Transferability of Shares Shares in a company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. Common Seal A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force. Capacity to sue and Being Sued A company can sue or be sued in its own name as distinct from its members.

in absence of provision to contrary in articles of association of the company. 3. Let us try to differentiate between company and partnership. the number of members must not exceed 20 in case of banking business and 10 in other businesses. It does not have a separate legal entity. This is in direct contrast to the voting principle of a co-operative society where the One Member . The company has a separate legal entity as soon as it is incorporated under law. irrespective of the number of shares held. the Board of Directors. the property belongs to the company and not to its members. In case of a company.e. 5. In case of a company.Separate Management A company is administered and managed by its managerial personnel i. 6. You have learnt about partnership. In case of partnership. I. shares may be transferred without the permission of the other members. A Company is association of persons who have come together for a specific purpose. A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. There must be at least 2 members in order to form a partnership firm. Distinction between Company and Partnership 1. one member has only one vote. Now you also know about company. A Public company may have as many members as it desires subject to a minimum of 7 members. if a person has 10 shares. Property of the firm belongs to the partners and they are collectively entitled to it.e. 4. the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder. A partner cannot transfer his shares in the partnership firm without the consent of all other partners. However.One Vote principle applies i. . The minimum number of members necessary for a public limited company is seven and two for a private limited company. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company. One Share-One Vote: The principle of voting in a company is one share-one vote.e. A Private company cannot have more than 50 members. Liability of the partners is unlimited. he has 10 votes in the company. 2.

the partnership is dissolved unless there is provision to the contrary. 1956. as the case may be. Any association. Therefore. you cannot apply this provision in the following cases LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. 8. However. is an illegal association unless the registered under the Companies Act or any other Indian law. On the death of the shareholder the company existence does not get terminated. I must tell you about the meaning of illegal association. a partnership of more 10 or 20 members. Illegal Association Under the Companies Act. In case of a company. which does not comply with the above norms. decision of the majority prevails. In case of a partnership.7. 100 % consensus is required for any decision. is an illegal association. unless the association is registered under the Companies Act or any other Indian law. On the death of any partner.555 149 . not more than 10 persons can come together for carrying on any banking business and not more than 20 persons can come together for carrying on any other of business.

N. Minimum Number of Members A public company must have at least 7 members whereas a private company may have only 2 members. and cannot be sued by any members or outsiders for any of its debts. What would be the effect if 22 members were carrying on a business without registration? 4.D. LEGAL ASPECTS OF BUSINESS . The members of the illegal association are personally for the obligations of the illegal association. They are all holding fully paid shares in a company. the total number of members cannot exceed 10 or 20 as the case may be. 2. Does the company also come to an end? 2. But where two or more Joint Hindu families come together for business through partnership. There are five members in a company. An illegal association cannot enter into any contract. Consequences of non-Registration Law does not recognize an illegal association. cannot sue any members or any outsider. (2003). New Delhi. scientific trust or organisation which is not formed with a profit motive 3. religious. A husband and wife who were the only two members of a private company died in an accident. When the number of members exceeds the prescribed maximum. Any member of an illegal association cannot sue another member in respect of any matter connected with the association. 1000. Elements of Mercantile Law. but in computing the number of persons. Foreign companies.1. A member may be liable to a fine of Rs. minor members of such family will be excluded. Sultan Chand and Sons. Practical Problems 1. members must register it under Companies Act or any other Indian law. Any association of charitable. How would you differentiate between a company and partnership? References Kapoor. A Joint Hindu Family business comprising of family members only. the reduction of number of members below the legal minimum is a ground for the winding up of the company. If the number of members falls below the statutory minimum and the company carries on its business beyond a period of six months after the number has so fallen. What is their liability? 3.

saarclawnet.html Notes: © Copy Right: Rai University 150 11.555 .vakilno1.com/saarclawnet/ osca20.http://www.com http://www.

Private Company means a company which by its articles of association: a. Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply. Prohibits an invitation to the public to subscribe to shares in or the debentures of the company.LESSON 30: THE COMPANIES ACT. Restriction contained in Section 81 related to the rights . On the basis of the number of the members. c. In determining this number of 50. If a private company contravenes any of the aforesaid provisions. Minimum number is members is 2 (7 in case of public companies) 2. 3. Limits the number of its members to fifty. you will be able to Identify the different types of company Introduction Today we will learn about the important types of company. There are various basis to classify companies. companies can be divided in two: A Private Company A Public Company Public Company means a company which not a private company. employee-members and ex-employee members are not to be considered. which a private company is any three all the entitled. 1956 TYPES OF COMPANIES Learning Objectives At the end of this chapter. it ceases to be private company and loses exemptions and privileges. Restricts the right of members to transfer its shares b. Following are some of the privileges and exemptions of a private limited company: 1.

6. A special resolution to issue shares to non-members is not required in case of a private company. 3. Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs 25 crores. Minimum number of directors is only two. In case of a private company which not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporate incorporated outside India. 7. it merely ceases to be entitled to the privileges and exemptions available to a private company. Restriction contained in Section 149 on commencement of business by a company does not apply. the private company shall be. 5.issues of share capital does not apply. it just an equitable to grant relief. 8. may grant relief to the company from the consequences of such infringement. become a deemed public company. One (if 7 or less members are present) or two members (if more than 7 members are present) present in person at a meeting of the company can demand a poll. Where not less than 25% of the paid up capital of a public company limited is held by the private company. (3 in case of a public company) The Company Law Board on being satisfied that the infringement of the aforesaid 3 conditions was accidental or due to inadvertence or that on other grounds. The infringement of the aforesaid 3 conditions does not automatically convert a private company into a public company. 4. Where at least 25% of the paid up share capital of a private company is held by one or more bodies corporate. It continues to remain a private company. then the private company shall become a public company on and from the date on which the aforesaid percentage is so held. Provisions of Section 165 relating to statutory meeting and submission of statutory report do not apply. Companies Deemed to be Public limited Company A private company will be treated as a deemed public limited company in any of the following circumstances : 1. no person other than the member of the company concerned shall be entitled to inspect or obtain the copies of profit and loss account of that company. the private company shall automatically become the public company on and from the date on which the aforesaid percentage is so held. irrespective of its paid up share capital. A private company does not need a separate certificate of commencement of business. . 2.

4. a. the liability of members is limited to the amount of uncalled share LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives). a company can be classified in Limited Companies Unlimited Companies Limited Companies Companies may be limited or unlimited companies.555 151 . On the basis of the liability of the members. such companies shall become public company on and from date such acceptance or renewal is first made. Company limited by shares In this case. Company may be limited by shares or limited by guarantee.

Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. Unlimited Company: The liability of members of an unlimited company is unlimited. It may or may not have a share capital. religion. That other company controls the composition of its board of directors. The control of the composition of the Board of Directors of . A guarantee company may be a company with share capital or without share capital. under Section 25. The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects. On the basis of the control. art. therefore Company C is subsidiary of Company A.capital. the Central Government may allow companies to remove the word Limited / Private Limited from the name if the following conditions are satisfied : 1. No member of company limited by the shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. b. Therefore their liability is similar to that of the liability of the partners of a partnership firm. 1956. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B. which that other s subsidiary. charity or other socially useful objects 2. That other company holds more than half in face value of its equity share capital 3. The company is formed for promoting commerce. science. Under the Companies Act. the name of a public limited company must end with the word Limited and the name of a private limited company must end with the word Private Limited . we can classify company as Holding and Subsidiary companies Holding and Subsidiary companies (Sec 4) A company shall be deemed to be subsidiary of another company if: 1. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. Members have no liability in case of fully paid up shares. However. or 2. Where the first mentioned company is subsidiary company of any company.

However. On the basis of the ownership. 2. Practical Problems Attempt the following problems. hold just 1or 2 shares each. carried on business under the name of A& Co. There is another important type of company which is called as One Man Company One man company is a company in which one man holds practically the whole of the share capital of the company. A. Now attempt the following problems.the company means that the holding company has the power at its discretion to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person. It is like any other company is a legal entity distinct from its members. Without being registered as a company with limited liability. modifications and adaptions as may be specified to such government companies. some dummy members who are mostly his friends or relations. Ltd. . we mean a company incorporated in a country outside India under the law of that other country and has established the place of business in India. Non Government Companies It is controlled and operated by a private capital Foreign Companies By this. giving reasons : 1. Government Companies are also governed by the provisions of the Companies Act. a trader. The dummy members are usually nominees of the principal shareholder who is the virtual owner of the business and who carries it on with limited liability. the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions. a company can be classified as Government Companies Non Government Companies Foreign Companies Government Companies It means any company in which not less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company. and in order to meet the statutory requirement of minimum number of members. Discuss the consequences of the act of A.

An association of 12 members starts a banking business without being registered. require registration and.Nagarmal)] 4. No] 3. 4 members retire and thereafter a suit is instituted by one of the continuing members for the partitions of assets of the business. under what provisions of the companies act? [Hint. The firms desire to carry on business jointly as partners under the name XY & co. are 2 firms roistered under the Indian partnership act. if so. and Y & co. Is the suit valid? [Hint. [Hint. Yes] LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 152 11.555 . each consisting of 12 partners. Yes(Badri Prasad v. 35 percent of the paid up capita of a private company is held by a public company. Does the private company become a public company? Give reasons for your answer. 1932. Does XY & co. X & Co.

5. http://www. Elements of Mercantile Law.D. Sultan Chand and Sons. New Delhi. N. Yes ] References Kapoor. Does the organization require registration under the companies act. A joint Hindu family consisting of a father and 5 major sons and another family consisting of a father. (2003).com http://www. As owners thereof. 1956? [Hint.saarclawnet. 5 major sons and 1minor son carried on banking business.com/saarclawnet/osca20.555 153 .html Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.vakilno1.

Promotion This is the first stage in the formation of a company. whether it should be a private company or a public company.etc. But Public Company has to go through all of the four stages. As regards a private company. it needs to go through the first two stages only. certain preliminary steps are to be taken. you will be able to Identify the process of forming a company Identify the process of registration of a company Introduction We have learnt about the meaning. Before a company is formed. it can commence business. As soon it receives the certificate of incorporation. We shall now discuss each of these four stages. 1956 PROMOTION AND FORMATION OF A COMPANY Learning Objectives At the end of this chapter. e. nature and types of company. Today we will learn about how the company is formed. It refers to the entire process by which a company is brought into existence. Do you know what we mean by promoters? Promoters The persons who conceive the company and invest the initial . what should be its capital. This is so because it cannot invite the public to subscribe to its shares and must arrange to raise the capital privately.LESSON 31: THE COMPANIES ACT. It starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed.g. The process of forming a company can be divided into four distinct stages: a) Promotion b) Registration or incorporation c) Capital Subscription d) Commencement of Business.

The promoter can make profits in his dealings with the company provided he discloses these profits to the . He did this on the instruction of certain persons who later became directors of the company. Held. Pauline colliery & Development syndicate ltd. Pre-Incorporation or Preliminary Contracts The promoters of a company usually enter into contract to acquire some property or right for the company. 1866. Held.g.funds are known as the promoters of the company. etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and whom the promoter pays is not a promoter. However. (1866) L. 1866. V. 2 C. · Promoters are personally liable Kelner v. 435. The company refused to grant the lease.P. The syndicate was registered and discovered a seam of coal. advertisement and the circulation of prospectus and placement of capital. He must not make any secret profit out of the promotion of the company. Such contracts are called Pre-Incorporation or Preliminary Contracts. 174. · Company can not enforce pre-incorporation contract Natal land & colonization co. Baxter. The persons signing the agreement were sued on the contract. which is yet to be incorporated. Secret profit is made by entering into a transaction on his own behalf and then sell to concerned property to the company at a profit without making disclosure of the profit to the company or its members. the goods were consumed in the business and the company went into liquidation before the debt was paid. payment to be made on 28th January. The persons signing were promoters and personally liable on their signatures. The promoters have certain basic duties towards the company formed : 1. A solicitor prepared the memorandum and Articles of association of a company and paid the necessary registration fees and other incidental expenses to obtain of the company. (1904) A. lawyer.A hotel company was about to be formed and persons responsible for the new company signed an agreement on 27th January. ltd Re (1906) 2 ch. Ltd. The company was incorporated on 20th February 1866. The promoters enter into preliminary contracts with vendors and make arrangements for the preparation. 120.. Held. for the purchase of stock on behalf of the proposed company.R. a person who merely acts in his professional capacity on behalf of the promoter (e. The N company agreed with an agent of the P syndicate Ltd before its formation to grant a mining lease to the syndicate. there was no binding contract between the company and the syndicate. the company was not liable of his work. CA. Position of promoters as regards Pre-Incorporation or Preliminary Contracts · Company not bound by pre-incorporation contract English & colonial produce co.C.

2. In case of default on the part of the promoter in fulfilling the above duties. What is not permitted is making secret profits i. that profit also may be recovered LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 154 11. the company may: 1. making profits without disclosing them to the company and its members.company and its members.555 . Rescind or cancel the contract made and if he has made profit on any related transaction.e. He must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

2. Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit. 3. If these are not appropriate (e.g. cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach of trust. Damages up to the difference between the market value of the property and the contract price can be recovered from him. A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are : 1. The company may to pay some remuneration for the services rendered. 2. The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members. 3. The promoter may sell his property for fully paid shares in the company after making full disclosures. 4. The promoter may be given an option to buy further shares in the company. 5. The promoter may be given commission on shares sold. 6. The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back. If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement. Let us learn about the incorporation of the company. Incorporation by Registration The promoters must make a decision regarding the type of company i.e. a public company or a private company or an unlimited company, etc and accordingly prepare the documents for incorporation of the company. In this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

Mode of forming incorporated company (Sec. 12) Any 7 or more persons (2 or more in case of a private company) associated for any lawful purpose may form an incorporated company, with or without limited liability. They shall subscribe their names to a Memorandum of Association and also comply other formalities in respect of registration. A company so formed may be : a) A company limited by shares, or b) A company limited by guarantee, or c) Unlimited company Registration of the Company Once the documents have been prepared, vetted, stamped and signed, they must be filed with the Registrar of Companies for incorporating the Company. The following documents must be filed in this connection: 1. The Memorandum of Association duly signed by subscribers and the Articles of Association, if any signed by subscribers to the Memorandum of Association 3. An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager. 5. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole - time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto. 4. In addition to the above, in case of a public company, the following documents must also be filed: 1. 2. Written consent of directors in Form 29 to agree to act as directors and their written consent to act as directors and take up qualification shares. 3. 4. The complete address of the registered office of the company in Form 18. 5. 6. Details of the directors, managing director and manager of the company in Form 32.

Certificate of Incorporation Once all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation of the Company. This document is the birth certificate of the company and is proof of the existence of the company. Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by order of the Court. Conclusiveness of Certificate of Incorporation The certificate of incorporation given by registrar in respect of a company is conclusive evidence that all the requirements of the Companies Act have been complied in respect of registration. This is known as Rule In Peel s Case. Note the following Case Jubilee cotton mills Ltd. V. Lewis, (1924) A.C. 958, On 6th January, the necessary documents were delivered to the registrar for registration. Two days after, the registrar issued the certificate of incorporation but dated it 6th January instead of 8th, i.e.. the day on which the certificate was issued. On 6th January some shares were allotted to L, i.e.. before the certificate of incorporation was issued. The question arose whether the allotment was LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 155

void. Held, the certificate of incorporation is conclusive evidence of all that it contains, in law the company was formed on 6th January and, therefore, the allotment of shares was valid. Commencement of Business A private company or a company having no share capital can commence its business immediately after it has been incorporated. However, other companies can commence their activities only after they have obtained Certificate of Commencement of Business. For this purpose, the following additional formalities have to be complied with: 1. If a company has share capital and has issued a prospectus, then: 2. If a company has share capital but has not issued a prospectus, then: a. b. It must file a statement in lieu of prospectus with the Registrar of Companies c. d. Every director has paid to the company on each of the shares, which he has taken the same amount as the other members have paid on such shares e. f. A statutory declaration in Form 20 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed. Once the above provisions have been complied with, the Registrar of Companies grants Certificate of Commencement of Business after which the company can commence its activities. Now attempt the following problems Practical Problems Attempt the following problems, giving reasons: 1. The promoters of a company, before its incorporation, enter into an agreement with P to buy A Plot of land on behalf of the company, after incorporation the company refuses to buy the said plot of land. Has P any remedy either against the promoters or against the company? [Hint. P has no remedy against the company. The promoters are personally liable on the contract], 2. 6 of the 7 signatures to the memorandum of association of a company were forged. The memorandum was duly presented, registered and a certificated of incorporation was issued. Can the existence of the of the company be subsequently attacked on the ground that the registration

was void. Decide. [Hint. No (see.35 Rule in peel s case)] 3. The memorandum of association of a company was presented to the registrar of companies for registration and the registrar issued the certificate of incorporation. The company after complying with all the prescribed legal formalities started a business. The company contends that the nature of business cannot be one into as the certificate of incorporation is conclusive. Discuss. [Hint. The company s contention is untenable and the nature of the business can be gone into.] 4. The memorandum of association of a company was signed by 2 adult members and by a guardian of the other 5 minor members. The guardian signing separately for each minor member. The registrar registered the company and issued under his hand a certificate of incorporation, the plaintiff contended that (a) Conditions of registration were not duly complied with, and (b) There were no 7 subscribes to the memorandum. Will the court uphold his contention? [Hint. No (peel s case)] 5. The express newspapers (Pvt.) Ltd., leading publishers of newspapers and weeklies, sold its undertaking to a new company. Andhra Prabha (Pvt). Ltd; consequent upon the Government adopting certain recommendations of the wage board for improvement in the terms of service and salaries of the working journalists. Shall the registration of the company be declared void on the plea that new company was formed for the purpose of evading the new obligations imposed by the wage board? Hint. No (T.V. Krishna v. Andhra Prabha [Pvt.] Ltd; (1902) 2 Ch 809)] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html a. b. Shares up to the amount of minimum subscription must be allotted. c. d. Every director has paid to the company on each of the shares, which he has taken the same amount as the public has paid on such shares. e. f. No money is or may become payable to the applicants of shares or debentures for failure to apply for or to

obtain permission to deal in those shares or debentures in any recognized stock exchange. g. h. A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 156 11.555

LESSON 32: THE COMPANIES ACT, 1956 MEMORANDUM AND ARTICLES OF ASSOCIATION Learning Objectives At the end of this chapter, you will be able to know about: The memorandum of association The articles of association The doctrine of ultra virus Introduction Memorandum and Articles of Association are the two important documents of the company. Let us learn about them. Memorandum of Association of a Company It is the constitution or charter of the company and contains the powers of the company. No company can be registered under the Companies Act, 1956 without the memorandum of association. Under Section 2(28) of the Companies Act, 1956 the memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law or the Companies Act, 1956. The memorandum of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares, form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies. Contents of Memorandum: The memorandum of association of every company must contain the following clauses Name Clause The name of the company is mentioned in the name clause. A public limited company must end with the word Limited and a private limited company must end with the words Private Limited . The company cannot have a name which in the opinion of the Central Government is undesirable. A name which is identical with or the nearly resembles the name of another company in existence will not be allowed. A company cannot use a name which is prohibited under the Names and Emblems (Prevntion of Misuse Act, 1950 or use a name

suggestive of connection to government or State patronage. Domicile clause The state in which the registered office of company is to be situated is mentioned in this clause. If it is not possible to state the exact location of the registered office, the company must state it provide the exact address either on the day on which commences to carry on its business or within 30 days from the date of incorporation of the company, whichever is earlier. Notice in form no 18 must be given to the Registrar of Comapnies within 30 days of the date of incorporation of the company. Similarly, any change in the registered office must also be intimated in form no 18 to the Registrar of Companies within 30 days. The registered office of the company is the official address of the company where the statutory books and records must be normally be kept. Every company must affix or paint its name and address of its registered office on the outside of the every office or place at which its activities are carried on in. The name must be written in one of the local languages and in English. Objects Clause This clause is the most important clause of the company. It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on any activity, which is not authorised by its MA. This clause must specify: i. Main objects of the company to be pursued by the company on its incorporation ii. Objects incidental or ancillary to the attainment of the main objects iii. Other objects of the company not included in (i) and (ii) above. In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified. Doctrine of the ultra-vires Any transaction which is outside the scope of the powers specified in the objects clause of the MA and are not reasonable incidentally or necessary to the attainment of objects is ultra-vires the company and therefore void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it. Consequences of an Ultra vires transaction : 1. The company cannot sue any person for enforcement of any of its rights. 2.

No person can sue the company for enforcement of its rights. 3. The directors of the company may be held personally liable to outsiders for an ultra vires. Note the following case Ashbury Rly. Carriage & Iron Co. Ltd. V. Riche. (1875) l. R. 7 H.L 653. A company was incorporated with the following objects. (a) To make, sell, or lend on hire, railway carriages and wagons. (b) To carry on the business of mechanical engineers and general contractors. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 157

(c) To purchase, lease, work, and sell mines, minerals, land and buildings. The company entered into a contract with Riche for the financing of the construction of a railway line in Belgium. The question raised was whether that contract was covered within the meaning of general contractors. The house of lords held that the contract was ultra virus the company and void so that not even the subsequent assent of the whole body of shareholders could ratify it. However, the doctrine of ultra-vires does not apply in the following cases : 1. If an act is ultra-vires of powers the directors but intravires of company, the company is liable. 2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error. 3. If an act is within the powers of the company but is irregualarly done, consent of the shareholders will validate it. 4. Where there is ultra-vires borrowing by the company or it obtains deliver of the property under an ultra-vires contract, then the third party has no claim against the company on the basis of the loan but he has right to follow his money or property if it exist as it is and obtain an injunction from the Court restraining the company from parting with it provided that he intervenes before is money spent on or the identity of the property is lost. 5. The lender of the money to a company under the ultra-vires contract has a right to make director personally liable. Liability clause A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. The MA of a company limited by guarantee must also state that each member undertakes to contribute to the assets of the company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. A declaration that the liability of the members is unlimited in case of the unlimted companies must be given. The effect of this clause is that in a company limited by shares, no member can be called upon to pay more than the uncalled amount on his shares. If his shares are already fully paid up, he has no liabilty towards the company. The following are exceptions to the rule of limited liability of members : 1. If a member agrees in writing to be bound by the

alteration of MA / AA requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him. 2. If every member agrees in writing to re-register the company as an unlimited company and the company is reregistered as such, such members will have unlimited liability. 3. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private limited company ) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being constituting the company would be personally liable for the debts of the company contracted during that time. Capital clause The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum. A company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorized by the articles of association of the company: 1. Increase in share capital by such amount as it thinks expedient by issuing new shares. 2. Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. eg, if the company has 100 shares of Rs.10 each ( aggregating to Rs. 1000/-) it may consolidate those shares into 10 shares of Rs100 each. 3. Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination. 4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived. 5. Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the court. Reduction of the share capital can be effected only in the manners specified in Section 100-104 of the Act or by way of buy back under Section 77A and 77B of the Act. Notice of alteration to share capital is required to be filed with the registrar of the company in Form no 5 within 30 days of the alteration of the capital clause of the MA. The Registrar shall record the notice and make necessary alteration in Memorandum and Articles of Association of the company. Any default in giving notice to the registrar renders company and its officers in default liable to punishment with fine which may extend to the Rs50 for each day of default. Association clause A declaration by the persons for subscribing to the Memorandum that they desire to form into a company and agree to take the shares place against their respective name must be given by the promoters. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 158 11.555

Articles of Association The Articles of Association (AA) contain the rules and regulations of the internal management of the company. The AA is nothing but a contract between the company and its members and also between the members themselves that they shall abide by the rules and regulations of internal management of the company specified in the AA. It specifies the rights and duties of the members and directors. The provisions of the AA must not be in conflict with the provisions of the MA. In case such a conflict arises, the MA will prevail. Normally, every company has its own AA. However, if a company does not have its own AA, the model AA specified in Schedule I - Table A will apply. A company may adopt any of the model forms of AA, with or without modifications. The articles of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies. However, a private company must have its own AA. The important items covered by the AA include : 1. Powers, duties, rights and liabilities of Directors 2. Powers, duties, rights and liabilities of members 3. Rules for Meetings of the Company 4. Dividends 5. Borrowing powers of the company 6. Calls on shares 7. Transfer & transmission of shares 8. Forfeiture of shares 9. Voting powers of members, etc Alteration of articles of association : A company can alter any of the provisions of its AA, subject to provisions of the Companies Act and subject to the conditions contained in the Memorandum of association of the company. A company, by special resolution at a general meeting of members, alter its articles provided that such alteration does not have the effect of converting a public limited company into a private company unless it has been approved by the Central Government. The articles must be printed, divided into paragraphs and numbered consequently and must be signed by each subscriber to the Memorandum of Association who shall add his address,

description and occupation in presence of at least one witness who must attest the signature and likewise add his address, description and occupation. The articles of association of the company when registered bind the company and the members thereof to the same extent as if it was signed by the company and by each member. Practical Problems Attempt the following problems, giving reasons 1. 1. X Ltd. A cotton textile company enters into a contract with A Ltd. an adjacent cotton textile mil, to supply electricity form their power generation plant. After supplies have been made fro 3 months it is discovered that this activity is beyond the scope of the objective clause of the memorandum of association of X Ltd. Shareholders of X Ltd. Ratify the contract in their general body meeting can A Ltd, which refuses to make payment on the ground that the contract is wholly null and void be legally compelled to make payment? Hint. No, as the transaction in ultra virus X Ltd] 2. A company altered the objects clause of its memorandum of association according to the procedure laid down by law by passing a special resolution. A copy of the resolution was filed with the registrar 4 months after the passing of the resolution. Can the registrar register the alteration? [Hint. No. Sec. 18] 3. A company carrying on business in jute is empowered by the objects clause of its memorandum of association to do any other business connected with jute. By a resolution passed unanimously the company resolved to alter the objects clause to include the power to carry on additional business in rubber. Is this alteration valid? [Hint. No]. 4. A company put up telephone wires in a certain area. There was no power in the memorandum to put up wires there. The defendants cut them down. Can the company sue for the damage done to the wire? [Hint. Yes (National Telephone Co v. St. Peter Port Constables)] 5. The memorandum of association of a company formed to improve and encourage the breeding of poultry contained a provision that no remuneration should be paid to the members of the governing body of the company. But the company owing to its increase in the business passed a special resolution providing for equitable remuneration to such members for

services rendered. Is this alteration of the memorandum valid? [Hint. Yes (Scientific Poultry Breeders Assn. Ltd., Re)] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 159

Standard Land Co [1910] 2CH. Every other company must have at least two directors. and the company can and does act only through them. observed in Bath v. 1956 THE MANAGEMENT OF A COMPANY DIRECTORS AND MANAGING DIRECTORS Learning Objectives At the end of this chapter. They occupy a pivotal position in the structure of the company. the articles of a company may fix the minimum and maximum number of directors for its board of directors. Right of company to increase or reduce the number of directors A company. Subject to this minimum number of directors. As such it cannot act by itself and acts instead through human agency. at a general meeting may. The directors are the brain of a company. It is only when the brain functions that the corporation is said to function. The directors of a company are collectively known as the board of directors or the board First of all. you will be able to know about: The meaning of directors and managing director The position of directors and managing director The appointment and removal of directors and managing director Introduction A company in the eyes of the law is an artificial person. Number of Directors Every public company (other than a deemed public company) must have at least three directors. It is the directors who exercise the powers of a company on the behalf of the company.LESSON 33: THE COMPANIES ACT. No body corporate. The persons through whom it acts and by whom the business of the company is conducted are known as directors. Nevile J. Increase in number of directors to require Government . by ordinary resolution. 408 that the Board of directors are the brain and the only brain of the company which is the body. by whatever name he is called. association or firm shall be appointed as director of a company. Speaking about the importance of directors. They are in fact the mainsprings of the company. Only individuals can be appointed as the directors of the company. increase or reduce the number of its directors within the limits fixed in that behalf by its articles. It has no physical existence. you must know what do we mean by director? Section 2(13) defines a director as any person occupying the position of a director.

sanction (Sec. at least 2/3rds of the total number of directors shall be liable to retire by rotation. They shall hold office until directors are duly appointed in the first annual general meeting. 256) At the annual general meeting of a public company or a private company which is a subsidiary of a public company. 263 and 264). Appointment of Directors by the Company (Secs 255 to 257. Shareholders in general meeting must appoint directors. First Directors The articles of a company usually name the first directors by their respective names or prescribe the method of appointing them. beyond the maximum number of directors permitted by the Articles of the Company as first registered. Let us now learn about the appointment of directors. where such permissible maximum is 12 or less. the meeting may resolve not to fill the vacancy. If the first directors are not appointed in the above manner. Appointment of Directors 1. 2. However. subscribers of the memorandum who are individuals. 259) In the case of a public company. If there is no such resolution. In the case of a public company or a private company. Ascertainment of Directors retiring by Rotation and Filling of Vacancies (Sec. until the directors are duly appointed. the company may fill up the vacancy (thus created) by appointing the retiring director or some other person. At the annual general meeting at which a director retires by rotation. which is a subsidiary of a public company. it is disapproved by that Government. If the place of the retiring director is not filled up. the meeting shall stand adjourned . or a private company which is a subsidiary of a public company. any increase in the number of its directors. In case the promoters of a company do not appoint the first directors. Such directors are called rotational directors and shall be appointed by the shareholders in general meeting. shall not have any effect unless approved by the Central Government and shall become void if. 1 /3rd (or the number nearest to 1/3rd) of the rotational directors shall retire form office. shall be deemed to be the directors of the company. the subscribers of the memorandum who are individuals become directors of the company. The directors to retire by rotation at every annual general meeting shall be those who have been longest in the office since their last appointment. and in so far as. no approval of the Central Government is required provided the increase does not increase the number of directors beyond 12.

Appointment of Directors by Directors (Secs. 3.555 . 262 and 313). the retiring director shall be deemed to have been reappointed at the adjourned meeting. The directors of a company may appoint directorsLEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 160 11. 260. If at the adjourned meeting also.till the same day in the next week. the place of retiring director is not filled up. nor is there a resolution not to fill the vacancy.

A vacancy caused by the retirement of a director by rotation is not a casual vacancy.. By casual vacancy is meant any vacancy. 265] The Articles of a company may provide for the appointment of not less than 2/3rds of the total number of directors of a public company or of a private company which is a subsidiary of a public company according to the principle of proportional representation. The Articles under certain circumstances give power to the debenture holders or other creditors. the moment he ceases to be an additional director. In a casual vacancy (Sec. and they are not liable to retire by rotation.As Additional Directors (Sec. a banking company or financial corporation. he will cease to be the managing director. or a private company which is a subsidiary of a public company. As alternate director (Sec. Such a vacancy has to be filled by the annual general meeting. 5. If an additional director has been appointed as managing director also. resignation. 406] If the annual general meeting of a company is not held or cannot be held. who have advanced loans to the company to appoint their nominees to the board. the resulting casual vacancy may be filled by the board of directors subject to any regulations in the Articles of the Company. The number of directors so appointed shall not exceed 1/3 of the total number of directors. 260) Any additional directors appointed by the directors shall hold office only up to the date of the next annual general meeting of the company. if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course. the additional director shall vacate his office on the day on which the annual general meeting should have been held. or (ii) a resolution passed by the company in the general meeting.R. A. Appointment of directors by third parties. or failure of an elected director to accept the office for any reason other than retirement. e. Appointment by Proportional Representation [Sec. by rotation.I. 4. The proportional representation may be by a single transferable vote or by a system of cumulative voting or otherwise. The number of directors and additional directors must not exceed the maximum strength fixed for the Board by the Articles [Patrakola Tea Co. 262) In the case of a public company.g.313) An alternate director can be appointed by the board if it is so authorized by (i) the articles of the company. The appointment shall be made once in 3 years and . He shall act for a director called the original director during his absence for a period of at least 3 months form the state in which board meetings are ordinarily held. Re. disqualification. which occurs by reason of death.(1967) Cal.

sometimes as agents.Any such director may be removed by the central government from his office and another person may be appointed in his place. be considered. specify as necessary to effectively safeguard the interests of the company or its shareholders or the public interest. Which is oppressive to any members of the company or Which is prejudicial to the interests of the company or to public interest. . and sometimes as managing partners of the company. 408) Sec 408 empowers the central government to appoint such number of directors on the Board as the Tribunal may. 6. signed and filed with the Registrar.Appointment of directors by the central government (Sec. The Tribunal may pass the above order on a reference made to it by the central government or on the application. As already discussed. Consent of candidate for directorship to be filled with Registrar A person shall not act as director of a company unless he has. Any director appointed by the central government shall not be required to hold any qualification shares nor shall his period of office be liable to termination by retirement of directors by rotation . for the moment and for the particular purpose. directors hold very important position in the Company. The purpose of the appointment is to prevent the affairs of the company from being conducted either in the manner. But such expressions are not used as exhaustive of the powers and responsibilities of such persons but only as indicating useful points of view from which they may. by order in writing. Let us now discuss their position Position of Directors It is very difficult to pinpoint the exact legal position of the directors of a company. They have been described by various names. consent in writing to act as such director within 30 days of his appointment.interim casual vacancies shall be filled in the manner as provided in the articles. The appointment will be for a period not exceeding 3 years on any one occasion. by himself or by his agent authorized in writing. This provision shall not apply to a private company unless it is a subsidiary of a public company. sometimes as trustees. (i) of not less than 100 members of the company or (ii) of members of the company holding not less than 1/ 10th of the total voting power there in .

and the general principle of the law of principal and agent regulate in most respects the relationship between the company and its directors. agents of the company for which they act. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 161 . A company as an artificial person acts through directors who are elected representatives of the shareholders.We may now consider the position of the director s form all these points of view. Directors as Agents. in the eyes of the law. They are.

and · Of the powers entrusted to them. S. They however made all the other shareholders pay 3s. Automatic Telephone Co. Directors as trustees Directors are treated as trustees Of the company s money and property. But there is nothing to prevent a director form being a servant of the company under a special contract of service. They did not tell the other shareholders of the difference. Directors are trustees of the company s money and property in the sense that they must account for all the company s money and property over which they exercise control. The company was in no need of further capital but the directors made a fresh issue to themselves and their supporters with a view to maintaining control of the company Held. The Companies Act itself indicates many situations where a director may be in the employment of a company. As such they are liable to certain penalties if the provisions of the Companies Act are not strictly complied with. and the directors were bound to pay to the company 3s. Alexander v. They have also to refund to the company any of its money or property. Although the directors of a company are its agents they are not employees or servants of the company for being entitled to privileges and benefits. which he may enter into with the company. this was a breach of trust. which are granted under the Companies Act to the employees. not trustees in the real sense of the word because they are not vested with the ownership of the company s property. 6d. however. which they have improperly paid away or transferred. Held. 56 The directors of a company paid up nothing on their own shares. 6d. Directors are trustees of the power entrusted to them in the sense that they must exercise their powers honestly and in the interest of the company and the shareholders and not in their own interest. Trustees for the company Directors are trustees for the company and not for third persons who have made . Mills & Co. Directors are. Directors as officers For certain matters under the Companies Act. Piercy v. the allotment was invalid and void. Ltd (1920) Ch 77 The directors of a company had the power to issue the unissued shares of the company.Directors as Employees. the directors are treated as officers of the company [Sec 2 (30)]. It is only as regards some of their obligations to the company and certain powers that they are regarded as trustees of the company. on each share. (1900) 2 CH. on each of their shares.

it does not matter much what you call them so long as you understand what their real position is. the sale was binding. Quasi. unless before the registration of the articles.. must also be appointed by the company in general meeting. by himself or by his agent authorized in writing (a) Signed and filed with the Registrar a consent in writing to act as such director. The shareholder sued to have the sale set aside. Let us learn about them. while they were negotiating for the sale of the company to another at a very high price and they did not disclose this fact to the shareholder. which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. 407] or for the individual shareholders. Their duties of care are not as onerous as those of trustees. and sometimes they have been called managing partners. unless otherwise provided in any regulations in the articles of the company. Restrictions on Appointment or Advertisement of Director (Sec. the publication of the prospectus.trustees. To sum up we can say: Directors have sometimes been called as trustees or commercial trustees. and (b) . 421 The directors of a company bought shares from a shareholder. he has. Held. Their functions are not the same as those of trustees. (1902 )2 Ch. Directors are really only quasi trustees because They are not vested with ownership of the company s property. Co. or the filing of the statement in lieu of prospectus. There are some important restrictions on the appointment of director. Re (1925) Ch. as the case may be . They stand in a fiduciary position towards the company in respect of their powers and capital under their control. as the directors were under no obligation to disclose the negotiations to the shareholder. Ltd. The remaining directors in the case of any such company. and the directors generally in the case of a private company which is not a subsidiary of a public company.contracts with the company (City Equitable Fire Ins. 266) A person shall not be capable of being appointed director of a company by the articles. The leading case on the point is : Percival v. Wright.

and pay for them. The articles cannot require a director to acquire LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 162 11. or ii. Qualification shares are the minimum number of shares a person must own. Signed the memorandum for shares not being less in number or value than that of his qualification shares. not being less in number or value than that of his qualification shares. A director must acquire qualification shares within 2 months of his appointment.Either i. if any. as provided in the articles of the company. from the company and paid or agreed to pay for them. are registered in his name. if any. or iii. or iv. if any. Signed and filed with the Registrar and undertaking in writing to take from the company his qualification shares. Made and filed with the Registrar an affidavit to the effect that shares.555 . in order to qualify to become a director of the company. if any. Taken his qualification shares.

The Central Government may. the . If. provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified above. by the Central or a State Government. after the expiry of the said period of two months. or d. then the qualification share will be one qualification share. A company which was a private company before becoming a public company. any person acts as a director of the company when he does not hold the qualification shares. by its articles. No Person to be a Director of More than Twenty Companies Do you know that no person could. Every director. The face value of the qualification shares cannot exceed five thousand rupees. shall within two months after his appointment file with the company a declaration specifying the qualification shares held by him. The above provisions do not apply toa. Disqualifications of directors (Sec. or ii. A prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company was entitled to commence business. as a director of any other company. or if the face value of one share is more than five thousand rupees. remove : i. The disqualification incurred by any person in virtue of clause (d) either generally or in relation to any company or companies specified in the notification.qualification shares within a shorter period. A private company. by notification in the Official Gazette. he shall be punishable with the fine which may extend to fifty rupees for every day between such expiry and the last day on which he acted as a director. hold office at the same time as director in more than twenty companies? Where a person already holding the office of director in twenty companies is appointed. 274) A person shall not be capable of being appointed director of a company. A company not having a share capital. if. c. not being a technical director of a director appointed. The disqualification incurred by any person in virtue of clause (e) A private company which is not a subsidiary of a public company may. b.

Shall become void immediately on the expiry of the fifteen days if he has not. None of the new appointments of director shall take effect until such choice. and all the new appointments shall become void if the choice is not made within fifteen days of the day on which the last of them was made. that is to say. within fifteen days thereof. He fails to obtain within the time specified ( 2 months) or at any time thereafter ceases to hold. before such expiry effectively vacated his office as director in any of the other companies aforesaid. as a director of other companies. the following companies shall be excluded: a. Any person who holds office. if any. Vacation of office by directors The office of a director shall become vacant if: a. effectively vacated his office as director in any of the companies in which he was already a director. A private company which is neither a subsidiary nor a holding company of a public company b. Where a person already holding the office of director in nineteen companies or less is appointed. as a director of more than twenty companies in contravention of the foregoing provisions shall be punishable with fine which may extend to five thousand rupees in respect of each of those companies after the first twenty. held by him shall not exceed twenty. is made. the share qualification. a director who is only qualified to act as such during the absence or incapacity of some other director. or acts. old and new.appointment: a. An association not carrying on business for profit or which prohibits the payment of dividend d. . and b. required of him by the articles of the company b. Shall not take effect unless such person has. In calculating the number of companies of which a person may be a director. An unlimited company c. A company in which such person is only an alternate director. he shall choose the directorships which he wishes to continue to hold or to accept so however that the total number of the directorships. making the total number of his directorships more than twenty.

He is adjudged an insolvent LEGAL ASPECTS OF BUSINESS a. An order disqualifying him for appointment as director has been passed by a court and is in force unless the leave of the court has been obtained for his appointment in pursuance of that section. He has applied to be adjudicated as an insolvent and his application is pending d.555 163 . whether alone or jointly with others. and six months have elapsed from the last day fixed for the payment of the call f. He has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months. © Copy Right: Rai University 11. and a period of five years has not elapsed from the date of expiry of the sentence e. He is an undischarged insolvent c. He applies to be adjudicated an insolvent d. He has not paid any call in respect of shares of the company held by him.He is found to be of unsound mind by a Court of competent jurisdiction c. He has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force b.

For thirty days from the date of the adjudication sentence or order b. On receipt of notice of a resolution to remove a director under this section. (e) and (j) shall not take effect. Where notice the director company (not notification is given of a resolution to remove a director and concerned makes representations in writing to the exceeding a reasonable length) and requests their to members of the company. that the office of director shall be vacated on any grounds in addition to those specified in above. knowing that his office has vacated on account of the above provisions. conviction. by its articles. where within the seven days aforesaid. until such further appeal or petition is disposed of.The disqualification referred to in clauses (d). and the director (whether or not he is a member of the company) shall be entitled to be heard on the resolution at the meeting. This provision shall not apply where the company has availed itself of the option given to it of proportional representation on the Board of Directors to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation. or order. the company shall forthwith send a copy thereof to the director concerned. where any appeal or petition is preferred within the thirty days aforesaid against the adjudication. sentence or conviction resulting in the sentence. Now we will discuss how it is made possible? Removal of Directors A company may. or order until the expiry of seven days from the date on which such appeal or petition is disposed of c. provide. would result in the removal of the disqualification. the company shall. A private company which is not a subsidiary of a public company may. shall be liable to a fine upto Rs. and the appeal or petition. if allowed. remove a director (not being a director appointed by the Central Government in pursuance of section 408) before the expiry of his period of office. Special notice shall be required of any resolution to remove a director. by ordinary resolution. a. . If a person functions as a director. or to appoint somebody instead of a director so removed at the meeting at which he is removed. sentence. he could be removed. If the director fails to function in a proper way.per day of default. 500/. any further appeal or petition is preferred in respect of the adjudication.

Send a copy of the representations to every member of the company to whom notice of the meeting is sent If a copy of the representations is not sent as aforesaid because they were received too late or because of the company s default. the director may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting. provided special notice of the intended appointment has been given. with in six months from the last date fixed for the payment of the call unless the Central Government has. or any guarantee or security for . on the application either of the company or of any other person who claims to be aggrieved. for a continuous period of three months. A director so appointed shall hold office until the date up to which his predecessor would have held office if he had not been removed as aforesaid. or from all meetings of the Board. A vacancy created by the removal of a director if he had been appointed by the company in general meeting or by the board in on a casual vacancy. He is convicted by a Court of any offence involving moral turpitude and is sentenced in respect thereof to imprisonment for not less than six months f. copies of the representations need not be sent out and the representations need not be read out at the meeting if. whether alone or jointly with others. without obtaining leave of absence from the Board h. it may be filled as a causal vacancy in accordance with the provisions. If the vacancy is not filled. In any notice of the resolution given to members of the company state the fact of the representations having been made. He fails to pay any call in respect of shares of the company held by him. However. and b. the Company Law Board is satisfied that the rights conferred by this provision are being abused to secure needless publicity for defamatory matter and the Company Law Board may order the company s costs on the application to be paid in whole or in part by the director. g. The above provisions of removal of a director shall not affect : e. by notification in the Official Gazette removed such disqualification. whichever is longer. whether by himself or by any person for his benefit or on his account or any firm in which he is a partner or any private company of which he is a director. be filled by the appointment of another director in his stead by the meeting at which he is removed.unless the representations are received by it too late for it to do so : a. accepts a loan. He absents himself from three consecutive meetings of the Board of directors. He.

he ceases to hold such office or other employment in the company.555 . LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 164 11.a loan. Having been appointed a director by virtue of his holding any office or other employment in the company. He acts in contravention of section 299 ( failure to disclose interest in any transaction with the company ) j. from the company in contravention of section 295 ( without due authorization of the Central Government ) i.resolution at a general meeting l. He is removed by the members by. He becomes disqualified by an order of Court under section 203 k.

convicted by a Court in India of an offence involving moral turpitude. or has at any time suspended. Any other power to remove a director which may exist apart from this provision. a composition with them c. or has at any time made. by whatever name called. is entrusted with substantial powers of management which could not otherwise be exercisable by him and includes a director occupying the position of a managing director. We will also discuss in brief about the managing director as he holds very important position in the company. or has at any time been adjudged an insolvent b. Any compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director b. The power merely to do administrative acts of a routine nature. Every public company or a private company which is a subsidiary of a public company. payment to his creditors or makes. Managing Director Managing Director means a person who. appoint or employ. Is an undischarged insolvent. Certain Persons not to be Appointed Managing Directors No company can. having a paid up share capital of Rs.a. when so authorised by the Board such as the power to affix the common seal of the company on any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any share certificate or to direct registration of share transfers will not be deemed to be included within substantial powers of management. Appointment of managing director or wholetime director or manager of a public company or a private company which is a subsidiary of a public company requires the approval of the Central Government unless the appointment is in accordance with the conditions specified in Schedule XIII of the Companies . Suspends. any person as its managing or whole time director who a. Is. The managing director must exercise his powers subject to the superintendence. control and direction of the Board. or continue the appointment or employment of. or has at any time been. by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its Board of directors or by virtue of its memorandum or articles of association. 5 crores or more must have a managing director or wholetime director or manager.

Such appointment is not against public interest c. The Central Government shall grant its approval if it is satisfied that a. Managing Director not to be Appointed for more than five Years at a Time . and of the resolution to be moved thereat. The Central Government may grant approval for a period less that the period for which approval is sought. it or suo without conditions the On receipt of the order of the Company Law Board against the company. appoint or employ any person as managing director. he shall be liable to a fine of Rs. of he is either the managing director or the manager of any other company. function as a single unit and have a common managing director. on information received by moto. the appointed person shall vacate his office on the date of communication of the decision of the Central Government to the company and if he omits to do so. The terms and conditions of the appointment are fair and reasonable. for their proper working. The managing director or wholetime director or manager is in its opinion.Act. 500/. is of the opinion that such appointment made approval of the Central Government contravenes the given in Schedule XIII. a fit and proper person b. it may refer the matter to Company Law Board for decision. The Central Government. permit any person to be appointed as a managing direct of more than two companies if the Central Government is satisfied that it is necessary that the companies should.for each day of default. other company provided that such appointment or employment is made or approved by a unanimous resolution passed at a meeting of the Board and of which meeting. except as provided below. by order. A public company or a private company which is the subsidiary of a public company may appoint or employ a person as its managing director. In addition to the above provision. Application for approval must be made to the Central Government if Form 25 A within 90 days of appointment. and of not more than one. the Central Government may. if he is the managing director or manager of one. 1956 and a returm in Form 25 C is filed within 30 days of appointment. specific notice has been given to all the directors then in India.: Number of Companies of which one Person may be Appointed Managing director No public company or private company which is a subsidiary of a public company can. In case the approval of the Central Government is refused.

or his term of office extended by further periods not exceeding five years on each occasion. Every officer of the company in default shall be liable to a fine of Rs. The appointment shall be deemed to have come to an end and the appointed person shall in addition to being liable to pay a fine of Rs.No company can. Such re-appointment. re-employed. refund to the company the entire amount of remuneration received by him from such appointment. 5000/b. The company shall be liable to fine of upto Rs. a person may be re-appointed. © Copy Right: Rai University 11. re-employment or extension cannot be sanctioned earlier than two years from the date on which it is to come into force.555 165 . 10000/c. LEGAL ASPECTS OF BUSINESS a. appoint or employ any individual as its managing director for a term exceeding five years at a time. However. 10000/-.

Is the contract binding on the company? [Hint.html Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 166 11. 288)]. At the meeting. one of its directors is referred to a general meeting for its approval. 252)]. Does this constitute a violation of sec. Ltd. B voted for the resolution and all others against it.com/saarclawnet/osca20. No (sec. 300)]. A fourth meeting was adjourned twice for lack of quorum. But as B held majority of shares and was entitled to majority of votes. giving reasons 1.W. http://www.com http://www. Sultan Chand and Sons. 43 A is it obligatory for the company to appoint a third director? [Hint. Elements of Mercantile Law. Met only 3 times in the previous year. No (Sec. Yes (sec.D. 255)]. No (Sec.vakilno1. A public limited company has 15 directors.This provision does not apply to a private company unless it is a subsidiary of a public company. is it a validly constituted Board? [Hint. A private company having 2 directors has just become a public company by virtue of sec. 4. N. The resolution was passed. 4 of whom are not subject to retire by rotation. 2. New Delhi. 285 of the companies Act. References Kapoor. Practical Problems Attempt the following problems.1956? [Hint. 3. A contract between N.saarclawnet. (2003). And B. The Board of directors of X Ltd.555 .

These provisions have to be understood and followed. you will be able to know about the: The kinds of meeting of a company The requisites of a valid meeting of a company The kinds of resolutions The other important terms related to meeting.LESSON 34: THE COMPANIES ACT. postponement. In a statutory meeting. The Companies Act 1956 contains several provisions regarding meetings. the importance of meetings cannot be under-emphasized in case of companies. These discussions take place at the various meetings. 1956 MEETINGS AND PROCEEDINGS Learning Objectives After reading the lesson. Needless to say. Decisions are made according to the view of the majority. Such a statutory meeting is held only once in the lifetime of the company. dissolution and minutes of meeting Introduction A company is an association of several persons. Kinds of Company Meetings Broadly. One member cannot constitute a company meeting even if he holds proxies for other members. there must be at least 2 persons attending the meeting. Member s meetings are of the following types : Statutory Meeting (Sec 165) A public company limited by shares or a guarantee company having share capital is required to hold a statutory meeting. For a meeting. Various matters have to be discussed and decided upon. it obtains certificate of commencement of business. meetings in a company are of the following types : I Meetings of Members These are meetings where the members / shareholders of the company meet and discuss various matters. viz. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i. which take place between members and between the directors. adjournment.e. the following matters only can be discussed: .

where there is one. what contracts have been entered into. addresses and occupations together with the number shares held by each member must be kept in readiness and produced at the commencement of the meeting and kept open for inspection during the meeting. A list of members showing their names. and must also be certified as correct by the auditors of the company with respect to the shares allotted by the company. etc. The report should be certified as correct by at least two directors. The Board of Directors must prepare and send to every member a report called the Statutory Report at least 21 days before the day on which the meeting is to be held. every director or other officer of the company who is in default shall be punishable with fine upto Rs. the report could be forwarded later also. Floatation of shares / debentures by the company b. The members of the company present at the meeting may discuss any other matter relating to the formation of the Company or arising out of the statutory report also. what money has been received. A certified copy of the report must be sent to the Registrar for registration immediately after copies have been sent to the members of the company. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members. the cash received in respect of such shares and the receipts and payments of the company. If default is made in complying with the above provisions. Modification to contracts mentioned in the prospectus The purpose of the meeting is to enable members to know allimportant matters pertaining to the formation of the company and its initial life history. A statutory meeting may be adjourned from time to time by the members present at the meeting. But if all the members entitled to attend and vote at the meeting agree. The Registrar or a contributory may file a petition for the winding up of the company if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held. 500. what sums have been spent on preliminary expenses. holding not less than 95% of voting rights in the company. one of whom must be the managing director. even if no prior notice has been given for such other discussions but no resolution can be passed of which notice have not been given in accordance with the provisions of the Act.a. Contents of Statutory Report Must provide the following Particulars (a) . The matters discussed include which shares have been taken up.

(b) The total amount of cash received by the company in respect of all shares allotted. distinguishing those fully or partly paid-up.The total number of shares allotted. manager LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.(c) An abstract of the receipts and payments upto a date within 7 days of the date of the report and the balance of cash and bank accounts in hand. the extent to which partly paid shares are paid-up. distinguishing as aforesaid.(e) The names. and an account of preliminary expenses. and in both cases the consideration for which they were allotted.555 167 .(d) Any commission or discount paid or to be paid on the issue or sale of shares or debentures must be separately shown in the aforesaid abstract. otherwise than in cash. addresses and occupations of directors. auditors.

(1938) Mad 640. All other resolutions are passed and the meeting is adjourned to a later date for discussing the final accounts of the company. if any. all matters other than the accounts are discussed. In the case there is any difficulty in holding any annual general meeting (except the first annual meeting). However. public or private. due on calls from every director and from the manager. However.(g) If the company has entered into any underwriting contracts. The time. it need not hold any annual general meeting in the year of its incorporation as well as in the following year only.I. the extent. B. with or without share capital or unlimited company. date and place of the meeting must be .(h) The arrears. The auditors have to certify that all information regarding calls and allotment of shares are correct. A. 1936. the company contended that it did hold a meeting in the year 1935. Annual General Meeting (Secs. if any. no other meeting being held in 1935. generally delay in the completion of the audit of the annual accounts of the company is not treated as special reason for granting extension of time for holding its annual general meeting.(f) Particulars of any contracts to be submitted to the meeting for approval and modifications done or proposed.and secretary.R. the Registrar may. in such circumstances. in connection with the issue or sale of shares or debentures to any director or to the manager. Not more than 15 months must elapse between two annual general meetings.(i) The particulars of any commission or brokerage paid or to be paid. Assistant Registrar of Companies. if any. Generally. The notice must state that the meeting is an annual general meeting. limited by shares or by guarantee. In such a case. Ltd. the next meeting was held in January. a company may hold its first annual general meeting within 18 months from the date of its incorporation. once a year. grant an extension of time for holding the meeting by a period not exceeding 3 months provided the application for the purpose is made before the due date of the annual general meeting. However. holding not less than 95% of voting rights in the company. The annual general meeting of a company called in December 1934 was adjourned and held in march 1935. the adjourned meeting must be held before the last day of holding the AGM. accord consent to a shorter notice. A notice of at least 21 days before the meeting must be given to members unless members. for any special reasons shown. 166 and 167) It must be held by every type of company. Every company must in each year hold an annual general meeting. V. of the company and the changes which have taken place in the names. an AGM is convened and held at the proper time . but it was held by the court that the meeting of march 1935 was the adjourned meeting of 1934. addresses and occupations of the above since the date of incorporation. Note the following case: Sree Meenakshi Mills Co. to which they have not been carried out and the reasons for the failure.

The proxy forms are required to be submitted to the company at least 48 hours before the meeting. given in this regard by the company in general meeting. The Company Law Board may call. A meeting held in pursuance of this order will be deemed to be an annual general meeting of the company. town or village in which the registered office of the company is situated.000 on the company and every officer of the company who is in default may be levied and for continuing default. if any. A proxy form should be enclosed with the notice. 5. Business to be Transacted at Annual General Meeting . The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city. a further fine of Rs. date and place of each annual general meeting are decided upon beforehand by the Board of Directors having regard to the directions. Any member of the company may apply to the Company Law Board. Companies licensed under Section 25 are exempt from the above provisions provided that the time. by appropriate provisions in its articles. The Company Law Board may direct that one member present in person or by proxy shall be deemed to constitute the meeting. Fine which may extend to Rs. If any day is declared by the Central government to be a public holiday after the issue of the notice convening such meeting. holding and conducting of the meeting. or direct the calling of the meeting. 250 per day during which the default continues may be levied. exempt any class of companies from the above provisions. A company may. the following are the consequences: 1.mentioned in the notice. director s report on the position of the company for the year and auditor s report on the accounts. An application by a member of the company for this purpose must be made to the concerned Regional Bench of the Company Law Board by way of petition in Form No. however. The Central Government may. In case of default in holding an annual general meeting. A proxy need not be a member of that company. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition. fix the time for its annual general meeting and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings. such a day will be treated as a working day. Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. 2. (ii) bank draft for payment of application fee. The notice of the meeting must be accompanied by a copy of the annual accounts of the company. and give such ancillary or consequential directions as it may consider expedient in relation to the calling.

the following decided.At every AGM. be discussed at the AGM are matters must be discussed and are discussed at every AGM. The following matters constitute ordinary business at an AGM a.555 . they are All other matters and business to specila business. Consideration of annual accounts. director s report and the auditor s report LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 168 11. Since such matters known as ordinary business.

Extraordinary General Meeting on Requisition : The members of a company have the right to require the calling of an extraordinary general meeting by the directors. 169) Every general meeting (i. call an extraordinary general meeting or it may provide that if at any time there are not within India. In case approval of any document has to be done by the members at the meeting. as also the extent of the shareholding interest in the company of every such person. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof. The notice must should also give the nature and extent of the interest of the directors or manager in the special business. the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. directors capable of acting who are sufficient in number to form a quorum. In case approval of any document has to be done by the members at the meeting. whenever it thinks fit. the notice mus also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. as also the extent of the shareholding interest in the company of every such person. is an extraordinary general meeting. an explanatory statement of the special business must also accompany the notice calling the meeting. any director or any two members of the company may call an extraordinary general meeting . In case any other business ( special business ) has to be discussed and decided upon. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Appointment of directors in the place of those retiring d. Every business transacted at such a meeting is special business. Declaration of dividend c. The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting.e. Extraordinary General Meeting( Sec.b. Members of the company holding at the date of making the demand for an EGM not less than onetenth of such of the voting rights in regard to the . The notice must should also give the nature and extent of the interest of the directors or manager in the special business. An explanatory statement of the special business must also accompany the notice calling the meeting. C. It may provide that the board may. Appointment of and the fixing of the remuneration of the statutory auditors. The board of directors of a company must call an extraordinary general meeting if required to do so by the following number of members : a.

who would be entitled to vote at the meeting. it is impracticable to call a meeting of a company. b. Such meetings are normally called when it is proposed to vary the . Power of Company Law Board to Order Calling of Extraordinary General Meeting : If for any reason. the requisitionists or any of them meeting the requirements at (a) or (b) above. move to call a meeting and the meeting should be actually be held within 45 days from the date of the lodgement of the requisition. At such an EGM. or to hold or conduct the meeting of the company. or b. Affidavit verifying the petition. the directors should within 21 days. Procedure for Application under Section 186 : An application by a director or a member of a company for this purpose is required to be made to the Regional Bench of the Company Law Board before whom the petition is to be made in Form No 1 specified in Annexure II to the CLB Regulations with a fee of Rs200. If the directors fail to call and hold the meeting as aforesaid. When the requisition is deposited at the registered office of the company. preference shareholders.g. and may also give such other ancillary and consequential directions as it thinks fit expedient. if the company has no share capital. order a meeting to be called and conducted as the Company Law Board thinks fit. The petition must e accompanied with the following documents a. A meeting so called and conducted shall be deemed to be a meeting of the company duly called and conducted.matter to be discussed at the meeting . as the case may be. may themselves proceed to call meeting within 3 months from the date of the requisition. or of any member of the company. D. any business which is not covered by the agenda mentioned in the notice of the meeting cannot be voted upon. d. Memorandum of appearance with copy of the Board s resolution or executed vakalat nama. Evidence in proof of status of the applicant. as the case may be. either i) on its own motion.. other than an annual general meeting. Class Meeting Class meetings are meetings which are held by holders of a particular class of shares. e. and claim the necessary expenses from the company. Bank draft evidencing payment of application fee. The requisition must state the objects of the meetings and must be signed by the requisitioning members. or ii) on the application of any director of the company. The company can make good this sum from the directors in default. The requisition must be deposited at the company s registered office. the members representing not less than one-tenth of the total voting rights at that date in regard to the said matter. c. the Company Law Board may.

rights of that particular class of shares. all provisions pertaining to calling of a general meeting and its conduct apply to class meetings in like manner as they apply with respect to general meetings of the company. Class meetings are held to pass resolution which will bind only the members of the class concerned.555 169 . At such meetings. these members dicuss the pros and cons of the proposal and vote accordingly. Unless the articles of the company or a contract binding on the persons concerned otherwise provides. and only members of that class can attend and vote. (See provisions on variations of shareholder s rights). LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.

a meeting of creditors and of contributories is held to ascertain the total amount due by the company and also to appoint a liquidator to wind up the affairs of the company. Meeting of Creditors Sometimes. At such meetings. Notice of General Meeting . There must be a chairperson. either as a running concern or in the event of winding up. Similarly. generally nmmatters pertaining to the variation in terms of security or to alteration of their rights are discussed. in case of winding up of a company. Proper and adequate notice must have been given to all those entitled to attend. the court may sanction the scheme. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority. conduct and proceedings of the meetings of the debentureholders are normally specified in the Debenture Trust Deed. The persons calling the meeting must be authorized to do so. A certified copy of the court s order is then filed with the Registrar and it is binding on all the creditors and the company only after it is filed with Registrar. 2. a company. It must be properly convened. B. 4. a company may enter into arrangements with creditors with the sanction of the Court for reconstruction or any arrangement with its creditors. 3.II. Meeting of debenture holders A company issuing debentures may provide for the holding of meetings of the debentureholders. The rules of quorum must be maintained and the provisions of the Companies Act. Other Meetings A. Meetings of the Board of Directors -Meeting of the Board of Directors -Meeting of a Committee of the Board III. Eg U/s 393. The business at the meeting must be validly transacted. The meeting must be legally constituted. Meetings of creditors may be called for this purpose. All matters connected with the holding. may order the holding of a creditors s meeting. The meeting must be conducted in accordance with the regulations governing the meetings. 1956 and the articles must be complied with. The court. If the scheme of arrangement is agreed to by majority in number of holding debts to value of the three-fourth of the total value of the debts. has to make certain arrangements with its creditors. Requisites of a Valid Meetings It is necessary for you to understand that the following conditions must be satisfied for a meeting to be called a valid meeting: 1. on application.

Where notice is sent by post. However. Proxy In case of a company having a share capital and in the case of any other company. A notice of meeting may also be given by advertising the same in a newspaper circulating in the neighborhood of the registered office of the company and it shall be deemed to be served on every member who has to registered address in India for the giving of notices to him. it may be called and held with a shorter notice. if at least members holding 95 percent of the total voting power of the Company consent to a shorter notice. if any. if it is consented to by all the members entitled to vote at the meeting. be sent less than 21 days before of the date of the meeting if agreed to by all members entitled to vote at the meeting. must be annexed to the notice. Accidental omission to give notice to. A notice convening an AGM must be accompanied by the annual accounts of the company. The copies of these documents could. such intention should be specified. A notice may be given to joint holders by giving it to the joint holder first named in the register of members. A notice convening a general meeting must be given at least 21 clear days prior to the date of meeting. Where any items of special business are to be transacted at the meeting. The notice may be given to any member either personally or by sending it by post to him at his registered address. Notice of every meeting of company must be sent to all members entitled to attend and vote at the meeting.You must know that a meeting cannot be held unless a proper notice has been given to all persons entitled to attend the meeting at the proper time. any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a . properly addressing. You must have heard about proxy. therein of every director and manager. A notice calling a meeting must state the place. If the meeting is a statutory or annual general meeting. to any address within India supplied by him for the purpose. however. Let us learn what we mean by it in respect of a company. the director s report and the auditor s report. containing the necessary information. notice must describe it as such. an explanatory statement setting out all materials facts concerning each item of the special business including the concern or interest. day and hour of the meeting and must contain the agenda of the meeting. or if there is none in India. if the articles so authorize. Notice of the AGM must be given to the statutory auditor of the company. In respect of any other meeting. is any. any member or any other person on whom it should be given will not invalidate the proceedings of the meeting. If it is intended to propose any resolution as a special resolution. or the non-receipt of notice by. an annual general meeting may be called and held with a shorter notice. pre-paying and posting the notice affect service.

A member may appoint one or more proxies to vote in respect of the different shares held by him. Every notice calling a meeting of the company must contain a statement that a member entitled to attend and vote is entitled to appoint one proxy in the case of a private company and one or more proxies in the case of a public company and that the proxy need not be member of the company. A member may appoint another person to attend and vote at a meeting on his behalf. or he may appoint one or LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 170 11.member or not) as his proxy to attend and vote instead of himself.555 . Such other person is known as Proxy .

form must be in writing and be signed by the member or his authorised attorney duly authorised in writing or if the appointer is a company. Where two proxy forms by the same shareholder are lodged in respect of the same votes. the proxy form must be under its seal or be signed by an officer or an attorney duly authorised by it. and so on. The proxy can be revoked by the member at any time. a proxy cannot vote on show of hands. The member appointing a proxy must deposit with the company a proxy form at the time of the meeting or prior to it giving details of the proxy appointed. the second one may do so. A proxy is not entitled to vote except on a poll. so that if the first named proxy fails to vote. shall have the effect as if a period of 48 hours had been specified in such provision. The articles of a company may provide for a quorum without which a meeting will be construed to be invalid. 5 members personally present (not by proxy) in the case of a public company and 2 members personally present (not by proxy) in the case of a private company shall be the quorum for a general meeting of a company. A meeting without the minimum quorum is invalid and decisions taken at such a meeting are not binding. A company cannot issue an invitation at its expense asking any member to appoint a particular person as proxy. unless the articles . but once the proxy has exercised the vote. the officer shall not be liable. Further. If the company does so. during the period beginning 24 hours before the date fixed for the meeting and ending with the conclusion of the meeting may inspect proxy forms at any time during business hours by giving 3 days notice to the company of his intention to do so. the last proxy form will be treated as the correct proxy form. The member may revoke the proxy by voting himself before the proxy has voted. It has been held by Courts that unless the articles otherwise provide.000.more proxies in the alternative. But if a proxy form is sent at the request of a member. every officer in default shall be liable to fine up to Rs1. Another requirement is in respect of a Quorum Quorum Quorum refers to the minimum number of members who must be present at a meeting in order to constitute a valid meeting. and is automatically revoked by the death or insolvency of the member. Every member entitled to vote at a meeting of the company. and it was immaterial that there was no quorum at the time when the vote was taken. a quorum need to be present only when the meeting commenced. However. the member cannot retract his vote. Therefore. The proxy. Unless the articles of a company provide for larger quorum. any provision in the articles which requires a period longer than forty eight hours before the meeting for depositing with the company any proxy form appointing a proxy.

shall stand dissolved. the members present in person at the meeting elect one of themselves to be the chairman thereof on a show of the hands. Chairman The chairman is the head of the meeting. If called upon the requisition of members. Duties of the Chairman Without a chairman. In any other case. however no director is willing to act as chairman or if no director is present within 15 minutes after the appointed time of the meeting. If there is no Chairman or he is not present within 15 minutes after the appointed time of the meeting or is unwilling to act as chairman of the meeting. a quorum is not present in the person. a meeting is incomplete. He must ensure that the meeting is properly convened and constituted i. In case the Company Law Board calls or directs the calling of a meeting of the company. poll is demanded and taken and a different person is elected as chairman. after the election of a chairman on a show of hands. direct a meeting of the company (other than an annual general meeting) to be called and held where for any reason it is impracticable to call a meeting and direct that even one member present in person or by proxy shall be deemed to constitute a meeting. His duties include the following : 1. if within half an hour from the time appointed for holding a meeting of the company. Unless the articles otherwise provide. or to such other day and time as the Board of Directors may determine. Generally. that proper notice has been given. the members present shall a quorum. the chairman of the Board of Directors is the Chairman of the meeting.e. the government may give directions regarding the quorum including a direction that even one member of the company present in person. No meeting can be valid unless it has a chairperson to preside in the meeting. or by proxy shall be deemed to constitute a meeting. the meeting: a. it shall stand adjourned to the same day in the next week. then that person will be the chairman for the rest of the meeting. The chairman is the regulator of the meeting. the quorum is not present within half an hour from the time appointed for holding the meeting. If at the adjourned meeting also.otherwise provide. Similarly the Company Law Board may. . when default is made in holding an annual general meeting. b. If. If. the directors present may elect one among themselves to be the chairman of the meeting. the members present should choose one among themselves to be chairman of the meeting. at the same time and place.

3. 5. which is not mentioned in the agenda. etc. The chairman has the power to adjourn the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 171 . is taken up unless agreed to by the members. should he in good faith feel that such a step is necessary. He may exercise his powers of adjournment of the meeting. He must impartially regulate the proceedings of the meeting and maintain discipline at the meeting. 4. He must ensure that business is taken in the order set out in agenda and no business. He must ensure that the provisions of the act and the articles in regard to the meeting and its procedures are observed.that the required quorum is present. 2.

the members present may decide to continue the meeting and elect another chairman and proceed with the business for which it was convened. voting takes place by a poll. unless a poll is demanded (sec. Before or on declaration of the result of the voting on any resolution on a show of hands. with or without modifications or a motion may be entirely rejected. (1906) 2 Ch. A chairman however does not have the power to stop or adjourn the meeting at his own will and pleasure. If the majority of the hands raise their hands in favor of a particular resolution. can be discussed at the meeting. 572. if a poll is demanded. initially matters are decided at a general meeting by a show of hands. which are mentioned in the agenda to the meeting. He must exercise his casting vote bonafide in the interest of the company. 6. motions incidental or ancillary to the matter under discussion may be moved and passed. Proxies cannot be used on a show of hands [Earnest v. The Voting may be: Voting by a show of hands · Voting by poll Voting by a show of hands (Secs . A resolution may be passed accepting the motion. 177) in taking a vote by show of hands. 179) Generally. it is taken as passed. 7.meeting in case of indiscipline at the meeting. However. the chairman . then unless a poll is demanded. A motion. 177 and 178). At any general meeting. Generally. However. Loma Gold Mines. He must exercise his power to order a poll correctly and must order it to be taken when demanded properly. The duty of the chairman is to count the hands raised and to declare the result accordingly. since the fundamental voting principle in a company is One Share-One Vote . The motions proposed in a general meeting of a company are decided on the votes of the members of the company. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. motions put to vote are in the first instance decided by a show of hands.] Voting and Demand for Poll (Sec. on being passed. a motion is proposed by one member and seconded by another member. Motion Motion means a proposal to be discussed at a meeting by the members. Voting by a show of hands operates on the principle of One Member-One Vote . without regard to the number of votes that a member raising the hand possesses. as a resolution becomes a decision. Only those motions. If he adjourns the meeting prematurely.

e. of the chairman). if the votes (including the casting vote. When a poll is taken. I. A poll must be ordered by the chairman if it is demanded: Now we are going to discuss about resolutions. 189(1)] An ordinary resolution is one which can be passed by a simple majority. In the case of a public company having a share capital. Resolutions Resolutions mean decisions taken at a meeting. Special resolutions are needed to decide on important matters of the company. Once the motion is passed. by any member or members present in person or by . with or without amendments is put to vote at a meeting. There are broadly three types of resolutions: 1. To change the name of the company by omitting Limited or Private Limited .e. Examples where special resolutions are required are : a. Special Resolution [Sec. To alter / change the name of the company with the approval of the central government c. The chairman may order a poll when a resolution 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 likely to be reversed by poll. Ordinary Resolution [Sec. However. it becomes a resolution. A valid resolution can be passed at a properly convened meeting with the required quorum. the number of votes cast in favour of the resolution is at least three times the number of votes cast against it. 2. either by a show of hands or on a poll in person or by proxy. at a general meeting cast by members entitled to vote in its favour are more than votes cast against it. b. To alter the articles of association d. he must order the poll be taken. Voting may be by way of a show of hands or by a poll provided 21 days notice has been given for the meeting. To alter the domicile clause of the memorandum from one State to another or to alter the objects clause of the memorandum. The decision arrived by poll is final and the decision on the show of hands has no effect. The Central Government may allow a company with charitable a. The intention to propose a resolution as a special resolution must be specifically mentioned in the notice of the general meeting. if any. 189(2)] A special resolution is one in regard to which is passed by a 75 % majority only i. when a demand for poll is made.may order suo motu (of his own motion) that a poll be taken. A motion. A poll is allowed only if the prescribed number of members demand a poll.

by one member having the right to vote on the resolution and present in person or by proxy if not more than seven such members are personally present. on which an aggregate sum of not less than fifty thousand rupees has been paid up. or ii. if more than seven such members are personally present. In the case of a private company having a share capital. c. by any member or members present in person or by proxy and having not less than one-tenth of the total voting power in respect of the resolution. and by two such members present in person or by proxy.555 . b. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 172 11.proxy and holding shares in the companyi. Which confer a power to vote on the resolution not being less than one-tenth of the total voting power in respect of the resolution. In the case of any other.

The following matters requiring Special Notice before they are discussed before tha meeting : a. in respect of any specified matter or matters. Please note that a resolution requiring special notice may be passed either as an ordinary resolution (Simple majority) or as a special resolution (75 % majority). c. 3. Resolution Requiring Special Notice [Sec. To remove a director before the expiry of his period of office. However. Notice of the resolution is required to be given in the same way in which notice of a meeting is given. 190] There are certain matters specified in the Companies Act. Circulation of Member s Resolution Generally. A special notice enables the members to be prepared on the matter to be discussed and gives them time to indicate their views on the resolution. If members having one twentieth of the total voting rights of all members having the right to vote on a resolution or if 100 members having the right to vote and holding paidup capital of Rs1. To appoint another director in place of removed director. To resolve at an annual general meeting that a retiring auditor shall not be reappointed. the Board of Directors prepare the agenda of the meeting to be sent to all members of the meeting. by himself has very little say in deciding the agenda. b. or if that is not practicable. the company may give notice by advertisement in a newspaper having an appropriate circulation or in any other manner allowed by the articles. A member. 1956 or by the articles of a company. Where the articles of a company provide for the giving of a special notice for a resolution. 1956. not less 7 days before the meeting.000 or more. e. the company must : . 1956 which may be discussed at a general meeting only if a special notice is given regarding the proposal to discuss these matters at a meeting. d. The company must within 7 days before the meeting give the notice of the proposed resolution to its members. In case special notice of resolution is required by the Companies Act. require the company to do so.objects to do so by special resolution under section 25 of the Companies Act. To appoint at an annual general meeting appointing an auditor a person other than a retiring auditor. the intention to propose such a resolution must be notified to the company at least 14 days before the meeting. there are provisions in the Companies Act which enable members to introduce motions at a meeting and give prior notice of their intention to do so to all other members of the company.00.

signed by all the requisitionists. if in the opinion of its Board of directors. . must be deposited at the registered office of the company at least 6 weeks before the meeting in the case of resolution and not less than 2 weeks before the meeting in case of any other requisition together with a reasonable sum to meet the expenses. otherwise as soon as practicable thereafter. and 2. All special resolutions 2. notice of any resolution which may be properly moved and is intended to be moved at that meeting. within 30 days after the passing or making thereof. The company is required to serve the notice of resolution and/ or the statement to the members as far as possible in the manner and so far as practicable at the same time as the notice of the meeting . However. or any business to be dealt with at that meeting. if not so agreed. All resolutions which have been unanimously agreed to by all the members but which. Circulate to members entitled to have notice of any general meeting sent to them. be printed or typewritten and duly certified under the signature of an officer of the company and filed with the Registrar of Companies who shall record the same : 1. Registration of Resolutions and Agreements A copy of each of the following resolutions along with the explanatory statement in case of a special business and agreements must. a company need not circulate a statement if the Court. where a copy of the requisition requiring notice of resolution has been deposited at the registered office of the company and an annual general meeting is called for a date six weeks or less after the requisition is deposited. However. Give to the members entitled to receive notice of the next annual general meeting. Secondly a banking company need not circulate such statement. The requisition. would not have been effective unless passed as special resolutions 3. on the application either of the company or any other aggrieved person. is satisfied that the rights so conferred are being abused to secure needless publicity or for defamatory purposes.1. any statement of not more than 1. the circulation will injure the interest of the company.000 words with respect to the matter referred to in any proposed resolution. the copy though not deposited within the prescribed time is deemed to have been properly deposited. It is required to register the resolutions and agreements. The expenses for this purpose must be borne by the requisitionists and must be tendered to the company.

All resolutions or agreements which have been agreed to by all members of any class of members but which. if not so agreed. All resolutions passed by a company conferring power upon its directors to sell or dispose of the whole or any part of the company s undertaking. would not have been effective unless passed by a particular majority or in a particular manner and all resolutions or agreements which effectively bind all members of any class of shareholders though not agreed to by all of those members 5. or to contribute to LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. re-appointment or renewal of the appointment.555 173 . of a managing director 4. or variation of the terms of appointment. or to borrow money beyond the limit of the paid-up share capital and free reserves of the company.All resolutions of the board of directors of a company or agreement executed by a company. relating to the appointment.

the meeting shall stand dissolved if it was called on requisition by members. fresh notice of the adjourned meeting must be given. ignoring the views of the majority. if they do the proceedings there will be null and void. Minutes of Proceedings of Meetings . the quorum is not present. Postponement Postponement of a meeting means deferring the holding of the meeting itself at a later date. it is the decision of the majority of the members present at the meeting itself. If within half an hour after the time appointed for holding a general meeting. All resolutions approving the appointment of sole selling agents of the company 7. The meeting no longer exists once it has been dissolved. In case of adjournment. a fresh notice is not necessary. date and place for holding the adjourned meeting are decided and declared at the time of adjourning it. The majority of members at a meeting may move an adjournment motion at a meeting. An adjourned meeting is merely the continuation of the original meeting and therefore. if the time. the remaining members can continue the meeting.charities beyond Rs50000 or 5 per cent of the average net profits 6. Dissolution Dissolution of a meeting means termination of a meeting. If the chairman adjourns the meeting. Resolutions for voluntary winding up of a company We will know discuss some important terms related to meetings of company in brief. the minority members cannot to continue with such meeting and. Adjournment Adjournment means suspending the proceedings of a meeting for the time being so that the meeting may be continued at a later date and time fixed in that meeting itself at the time of such adjournment or to decided later on. The chairman cannot adjourn the meeting at his own discretion without there being a good cause for such an adjournment. Only the business not finished at the original meeting can be transacted at the adjourned meeting. All copies of the terms and conditions of appointment of a sole selling agent or sole buying or purchasing agent 8. If a meeting is adjourned without stipulation as to when it will be continued. adjourns the meeting as per the view of the majority. acting bona fide within his powers. Postponement is done by the Board of Directors or by the person convening the meeting. Where the chairman.

however. may not object if minutes are maintained in loose-leaf form provided all other procedural requirements are complied with and all possible safeguards against manipulation or interpolation of the minutes are ensured. unless the contrary is proved. The pages of the minute books must be consecutively numbered and the minutes must be recorded therein within 30 days of the meeting. In the case of a meeting of the Board of directors or its Committee. presumed to be correct. The chairman may exclude from the minutes any matters which are defamatory. Every company must keep minutes containing details of all proceedings at the meetings. which does not amount to attachment to any book by pasting or otherwise is permissible provided on the mechanical impression of the minutes. The minute books of the proceedings of general meetings must be kept the registered office of the company. by the chairman of that meeting or that of the succeeding meeting. Each page of every such minutes books must be initialed or signed and last page of the record of proceedings of each meeting in such books must be dated and signed by : a. by a director duly authorised by the Board of directors for the purpose. Entering the minutes in a bound minute book by a chemical process. They have to be written directly on the numbered pages. by the chairman of the same meeting within the aforesaid 30 days or in the event of the death or inability of that chairman within the period. All appointments of officers made at any of the meetings must be included in the minutes of the meeting. dissenting from. and b. and all proceedings thereat have actually taken place. Where minutes of the proceedings of any meeting have been kept properly. and in particular. The Company Law Board. The minutes are a record of the discussions made at the meeting and the final decisions taken thereat. if any. or not concurring with a resolution passed at the meeting. In the case of the meeting of the Board of directors or committee thereof. the minutes must also state the names of directors present at the meeting and the names of directors. they are. The loose leaves must be bound at reasonable intervals. In the case of a general meeting. Pasting or attaching of papers is not allowed. Any member . the original signatures of the Chairman are given on each page. and are valid evidence that the meeting was duly called and held. irrelevant or immaterial or which are detrimental to the interests of the company.Every company must keep minutes of the proceedings of general meetings and of the meetings of board of directors and its committees. The discretion of the Chairman with regard to the inclusion or exclusion of any matter is absolute and unfettered. all appointments of directors or liquidators made at the meeting shall be deemed to be valid.

500 for each offence. Practical Problems Attempt the following problems. But the minutes books of the board meetings are not open for inspection of members. within 7 days after he has made a request to the company. with a copy of any minutes on payment of Rupee One for every hundred words or fraction thereof.has a right to inspect. If any inspection is refused or copy not furnished within the time specified. The Company Law Board may also by order compel an immediate inspection or furnishing of a copy forthwith. giving reasons LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 174 11. any member shall be entitled to be furnished. free of cost during business hours at the registered office of the company. Further. every officer in default shall be punishable with fine up to Rs. the minutes books containing the proceedings of the general meetings of the company.555 .

His claim is invalid (Cousins v.html Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. International Brick Co. Sultan Chand and Sons.1.vakilno1.)]. http://www.com/saarclawnet/osca20. only 15 shareholders were present. After appointing P as his proxy at a meeting of the company. [Hint. 9 voted for a special resolution and 2 against and 4 did not vote at all. a shareholder. claimed to exercise his vote. New Delhi. P. He himself attended the meeting and voted on a particular resolution.saarclawnet. At a meeting of a company. 189)] 2. Yes (Sec. Is this a valid resolution? [Hint. Ltd. Examine his claim. No poll was demanded and the chairman declared the resolution to be carried. N.555 175 . (2003). Elements of Mercantile Law. References Kapoor. thereafter. S.com http://www.D.

you will be able to know about the: The meaning of winding up of a company The modes of winding up of a company The petition for winding up of a company The commencement of winding up of a company ·The powers of a tribunal/ liquidator in the winding up of a company Introduction A company comes into existence by a legal process and when for any reason. . it must go through the legal process of winding up of its affairs. you must understand that winding up and dissolution of the company are not one and the same thing. However. its assets are realized by a liquidator. to the winding up of a company in any of those modes. unless the contrary appears. or (c) Subject to the supervision of the Court. Winding up precedes dissolution. It is the process by which the dissolution of the company is brought about. 1956 THE WINDING UP OF A COMPANY MODES OF WINDING UP OF A COMPANY Learning Objectives After reading the lesson. A company is said to be dissolved when it ceases to exist as a corporate body. Let us learn about the modes of winding up. it is divided among the members of the company in accordance with their rights under the articles. (2) The provisions of this Act with respect to winding up apply. Winding up By The Court Section 433 lays down that the Court in the following case may wind up a company: 1. Modes of Winding Up (1) The winding up of a company may be either( a) By the Court. or (b) Voluntary. Winding up or liquidation is the process by which the management of a company s affairs is taken out of its director s hands. it is desired to end its existence. If any balance remains in the hands of the liquidator.LESSON 35: THE COMPANIES ACT. and its debts are paid out of the proceeds of realization.

has served on the company. (b) If execution or other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part. and. Let us now understand when the Company would be deemed to be unable to pay its debts and what do we mean by just and equitable cause?. It can be done only if a resolution to this effect has passed at a general meeting of the company. The members can however ratify the act of directors already done. 3.If the company has passed a special resolution of it s being wound up by the Court. to whom the company is indebted in a sum exceeding five hundred rupees then due. or in the case of a firm. (2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorized on his behalf. 6. in determining whether a company is unable to pay its debts. if it is signed by any such agent or legal adviser or by any member . 2. or to secure or compound for it to the reasonable satisfaction of the creditor. 4. the Court shall take into account the contingent and prospective liabilities of the company. or (c) If it is proved to the satisfaction of the Court that the company is unable to pay its debts. It does not commence business within one year from its incorporation or it suspends business for a whole year. A Company shall be Deemed to be unable to Pay its Debts (Section 434) (a) If a creditor. by assignment or otherwise. 5. A petition under this ground can be made either by the Registrar with the previous approval of the Central Government or by a contributory or after 14 days after the last day on which the statutory meeting should have been held. by causing it to be delivered at its registered office. If the company makes default in delivering the statutory report to the Registrar or in holding the Statutory Meeting. If the Court of opinion that it is just and equitable that the company should be wound up. It may be mentioned here that without such act cannot be done by the directors themselves. by registered post or otherwise. It is unable to pay its debts. a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum. The number of its members falls before the minimum required i. 2 in case of a private company and 7 in case of a public company.e.

or when it is impossible to carry on the business of the company LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 176 11. The tribunal may order winding up under the just and equitable clause in the following cases.555 . What is just and Equitable Clause ? It depends upon the facts of each case. The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed.of the firm. (1) When the substratum of a company is gone.

(iv) When the existing and probable assets of the company are insufficient to meet its existing liabilities. D. (1882) 20 Ch. (2) When the management is carried on in such a way that the minority is disregarded or oppressed Oppression of minority shareholders will be a just and equitable ground where those who control the company abuse their power to such an extent as to seriously prejudice the interest of minority shareholders. it was just and equitable that the company should be wound up. The German patent was never granted but the company did acquire and work a Swedish patent and carried on business at Hamburg where a substitute coffee was made from dates. that the main object could not be achieved and. Therefore. (ii) When the main object of the company has substantially failed or become impracticable. Held. stated that it was for making a partial substitute for coffee from dates and for the acquisition of inventions incidental there to and also other inventions for similar purposes. In this case. German Date Coffee Co. the objects clause of the German Date Coffee Co.. (1904) 6 F 847 A shipping company lost it s only ship.except at a loss. but not under the protection of a patent. or the existing and possible assets are insufficient to meet the existing liabilities. Where a company s main object fails.increasing burden of interest and deteriorating state of management and control of business owing to sharp differences between shareholders. (3) Where there s a deadlock in the management of the company. When shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the . its substratum is gone and it may be wound up even though it is carrying on its business in pursuit of a subsidiary objects. on a petition by 2 shareholders. The substratum of a company disappears : (i) When the very basis for the survival of the company is gone Pirie v. Where a company is totally unable to pay off creditors and there is ever. A majority in number and value of shareholders petitioned for its compulsory winding up but a minority shareholder opposed this and desired to carry on the business as chatterer. The tribunal will order winding up. the remaining asset being a paltry sum of $ 363. where the majority shareholders are against it. However. Stewart. Re. (iii) When the company is carrying on its business at a loss and there is no reasonable hope that the object of trading at a profit can be attained. the tribunal will not order a company to be wound up merely because it is making a loss. Held it was just and equitable that the company should be wound up. 169.

Held there was a complete deadlock in the management and the company was ordered to be wound up.R. (8) If the tribunal is of the opinion that the company should be wound up under the circumstances specified in Sec. 424 The last two clauses in Sec. The Company 2. it would appear that the court winding up a company will have to take into consideration not only the interest of shareholders and creditors but also public interest in the shape of need of the community. (5) When the company was formed to carry out fraudulent or illegal business or when the business of the company become illegal.company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern. there may arise a case fro winding up ion the just and equitable ground. Public order. (7) If the company has acted against the interests of the sovereignty and integrity of India. Re (1867) L. 355]. friendly relations with foreign states. Having regard to the provisions of Secs. Petition for Winding up Section 439 lays down that an application to the Court for the winding up of a company shall be by petition presented. subject to the provisions of this section. The company made large profits in spite of the disagreement. Any creditor of the Company 3. 333(1) have been added by the Companies [Amendment] Act. Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of . (4) Where public interest is likely to be prejudiced. interest of the employees. Any contributory / shareholder. decency or morality. 397 and 398 (dealing with prevention of oppression and mismanagement) where the concept of prejudice to public interest is introduced. After a time they become bitterly hostile to each other and disagreed about the appointment of important servant s of the company. Ltd. 426. 3 Eq. etc. Yenidje Tobacco co. the security of the state. Re (1916) 2 Ch. (6) When the company is a mere bubble and does not carry on any business or does not have any property [London & County Coal Co. A and B were the only shareholders and directors of a company with equal right of management and voting power. All communications between them were made through the secretary as they were not on speaking terms with each other. 1.

(ii) If the company does not commence its business within one year from its incorporation or suspends its business for a whole year. Besides members.its fully paid shares. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. any person who ceased to be a member 1 year prior to the commencement of winding up is also a contributory. 4. The Registrar may petition for winding up in the following circumstances: ( i) If default is made in delivering statutory report or holding the statutory report.555 177 . not every contributory is a member. While every member of a company becomes a contributory.

and. or (b) The shares in respect of which he is a contributory. and the trustee for the holders of debentures. 6. the holder of any debentures (including debenture stock). whether or not any trustee or trustees have been appointed in respect of such and other like debentures. notwithstanding that he may be the holder of fully paid-up shares. (v) Where the number of members of the company fall below the statutory minimum. and it appears to the Central Government from such report so to do. or that the company may have no assets at all. The Official Liquidator attached to a Court where a company is already being voluntarily wound up and such voluntary winding up cannot be continued with due regard to the interests of the creditors or contributors or both. then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so. or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities. Please note that A secured creditor. or some of them. a contributory shall not be entitled to present a petition for winding up a company unless (a) Either the number of members is reduced. 5. A contributory shall be entitled to present a petition for winding up a company. in the case of a public company. Under section 243. However. shall be deemed to be creditors within the meaning of clause (b) of sub-section (1). (iv) Where the Registrar is authorized by the Central Government to petition for winding up the company. and registered in his name.(iii) If it appears to him either from the financial position of the company as disclosed in the balance sheet of the company or from the report of a special auditor or an inspector that the company is unable to pay its debts. for a least six months during the eighteen months immediately before the commencement of the winding up. (vi) Where it is just and equitable that the company be wound up. below two. misfeasance. if any report of an inspector appointed to investigate the affairs of the company discloses: ( i) That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose (ii) That the persons concerned in the formation or management have been guilty of fraud. below seven. in the case of a private company. or have . Any person authorized by the Central Government. either were originally allotted to him or have been held by him.

the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution.devolved on him through the death of a former holder. if any. on proof of fraud or mistake. thinks fit to direct otherwise. that the company is unable to pay its debts. there is a prima facie case for winding up the company. the winding up of a company by the Court shall be deemed to commence at the time of the presentation of the petition for the winding up. in the case where he is authorized in pursuance of clause (f) of sub-section (1). before the presentation of a petition for the winding up of a company by the Court. the Registrar shall be entitled to present a petition for winding up a company only on the grounds specified in 12[clause (b). In any other case. Please note that a petition for winding up a company on the ground specified in clause (b) of section 433 shall not be presented (a) Except by the Registrar or by a contributory. unless it appears to him either from the financial condition of the company as disclosed in its balance sheet or from the report of 13[a special auditor appointed under section 233A or an inspector] appointed under section 235 or 237. The Central Government shall not accord its sanction in pursuance of the foregoing proviso. A registrar shall obtain the previous sanction of the Central Government for the presentation of the petition on any of the grounds aforesaid. Commencement of Winding up Section 441 lays down that where. Except. and unless the Court. in the opinion of the Court. . (c). (d). and (b) Until such security for costs has been given as the Court thinks reasonable. unless the company has first been afforded an opportunity of making its representations. (e) and (f)] of section 433: It is also provided that the Registrar shall not present a petition on the ground specified in clause (e) aforesaid. Before a petition for winding up a company presented by a contingent or prospective creditor is admitted. a resolution has been passed by the company for voluntary winding up. all proceedings taken in the voluntary winding up shall be deemed to have been validity taken. the leave of the Court shall be obtained for the admission of the petition and such leave shall not be granted (a) Unless. or (b) Before the expiration of fourteen days after the last day on which the statutory meeting referred to in clause (b) aforesaid ought to have been held.

verified by an affidavit. and containing the following particulars. there shall be made out and submitted to the Official Liquidator a statement as to the affairs of the company in the prescribed form. unless the Court in its discretion otherwise orders. namely LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 178 11. Section 454 requires that where the Court has made a winding up order or appointed the Official Liquidator as provisional liquidator.555 .Statement of affairs to be made to Official Liquidator. It is very important document to be prepared by the company.

and in the case of secured debts. (e) Such further or other information as may be prescribed. or within such extended time not exceeding three months from that date as the Official Liquidator or the Court may. The statement shall be submitted within twenty-one days from the relevant date.(a) The assets of the company. (d) Who are or have been within the said year officers of. persons (a) Who are or have been officers of the company. (d) The debts due to the company and the names. . whether by the company or an officer thereof. secretary or other chief officer of the company. The statement shall be submitted and verified by one or more of the persons who are at the relevant date the directors and by the person who is at that date the manager. or within the said year was. without reasonable excuse. a company which is. stating separately the cash balance in hand and at the bank. he shall be punishable with imprisonment for a term which may extend to two years. for special reasons. makes default in complying with any of the requirements of this section. if any. capable of giving the information required. or by such of the persons hereinafter in this sub-section mentioned. (b) Its debts and liabilities. (b) Who have taken part in the formation of the company at any time within one year before the relevant date. or have been in the employment of the company within the said year. and the negotiable securities. held by the company. and are. if any. or concurring in making. If any person. residences and occupations of its creditors. and shall be paid by the Official Liquidator or provisional liquidator. as the Official Liquidator. (c) Who are in the employment of the company. that is to say. or in the employment of. or with fine which may extend to one hundred rupees for every day during which the default continues. or as the Official Liquidator may require. the statement and affidavit required by this section shall be allowed. subject to the direction of the Court. an officer of the company to which the statement relates. Any person making. out of the assets of the company. appoint. stating separately the amount of secured and unsecured debts. in the opinion of the Official Liquidator. particulars of the securities given. or with both. residences and occupations of the persons from whom they are due and the amount likely to be realised on account thereof. such costs and expenses incurred in and about the preparation and making of the statement and affidavit as the Official Liquidator may consider reasonable. as the case may be. subject to an appeal to the Court. their value and the dates on which they were given. (c) The names. may require to submit and verify the statement.

with or without cost. on payment of the prescribed fee. or (b) Adjourn the hearing conditionally or unconditionally. at all reasonable times. or that the company has no assets. and shall. or (c) Make any interim order that it thinks fit. and in a case where no such appointment is made. in a case where a provisional liquidator is appointed. on such terms as it thinks fit. . may (a) Where any suit or proceeding against the company is pending in the Supreme Court or in any High Court. the date of his appointment. the date of the winding up order. the company. apply to the Court in which the suit or proceeding is pending for a stay of proceedings therein. It is provided under Section 442 that at any after the presentation of a winding up petition and before a winding up order has been made. In this section.Any person stating himself in writing to be a creditor or contributory of the company shall be entitled. and (b) Where any suit or proceeding is pending against the company in any other Court. Powers of Court on Hearing Petition (Section 443) On hearing a winding up petition. to inspect the statement submitted in pursuance of this section. and the Court to which application is so made may stay or restrain the proceedings accordingly. apply to the Court having jurisdiction to wind up the company. the expression the relevant date means. or (d) Make an order for winding up the company with or without costs. by himself or by his agent. Any person untruthfully so stating himself to be a creditor or contributory shall be guilty of an offence under section 18223 of the Indian Penal Code (45 of 1860). or any creditor or contributory. be punishable accordingly. the court may (a) Dismiss it. or any other order that it thins fit: It is provided that the Court shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets. on the application of the Official Liquidator. Powers of Tribunal Power of Court to stay or restrain proceedings against company. to restrain further proceedings in the suit or proceeding. and to a copy thereof or extract there from. We shall now discuss about the important powers of the Tribunal.

in the opinion of the Court. are responsible for the default. and (b) Order the cost to be paid by any persons who.555 179 . LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.Where the petition is presented on the ground that it is just and equitable that the company should be wound up. or in holding the statutory meeting. the Court may refuse to make an order of winding up. the Court may (a) Instead of making a winding up order. if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company would up instead of pursuing that other remedy. Where the petition is presented on the ground of default in delivering the statutory report to the Registrar. direct that the statutory report shall be delivered or that a meeting shall be held.

Official Liquidator to be liquidator Section 449 provides that on a winding up order being made in respect of a company. shall be the Official Liquidator attached to the District Court. The Central Government may appoint one or more Deputy or Assistant Official Liquidators to assist the Official Liquidator in the discharge of his functions. an Official Liquidator appointed by the Central Government. by virtue of his office. the time requisite for obtaining a certified copy of the order shall be excluded. except by leave of the Court and subject to such terms as the Court may impose. (a) There shall be attached to each High Court. In computing the period of thirty days from the date of the making of a winding up order. it shall be the duty of the petitioner in the winding up proceedings and of the company to file with the Registrar a certified copy of the order. then. within thirty days from the date of the making of the order. or if pending at the date of the winding up order. and (b) the Official Receiver attached to a District Court for insolvency purposes.Copy of Winding up order to be filed with Registrar ( Section 445) On the making of a winding up order. so far as it relates to the winding up of companies by the Court. shall be proceeded with. such person as the Central Government may. who shall be a whole-time officer. no suit or other legal proceeding shall be commenced. or if there is no such Official Receiver. against the company. the Official Liquidator shall. unless the Central Government considers that there will not be sufficient work for a whole-time officer in which case a part-time officer may be appointed. Effect of Winding up Order (Section 447) An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory. become the liquidator of the company. Appointment and powers of Provisional Liquidator (Section 450) . Suits Stayed on winding up Order (Section 446) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator. Appointment of Official Liquidator (Section 448) For the purposes of this Act. by notification in the Official Gazette appoint for the purpose.

on a winding up order being made. the Court thinks fit to dispense with such notice. for special reasons to be recorded in writing. prosecution. the Court may appoint the Official Liquidator to be liquidator provisionally. or to sell the same in parcels. General provisions as to liquidators are laid down under Section 421 The liquidator shall conduct the proceedings in winding up the company and perform such duties in reference thereto as the Court may impose. (b) To carry on the business of the company so far as may be necessary for the beneficial winding up of the company. (powers exercisable without the sanction of the tribunal) (a) to institute or defend any suit. or other legal proceeding. the Court shall give notice to the company and give a reasonable opportunity to it to make its representations.At any time after the presentation of a winding up petition and before the making of a winding up order. (d) To raise the money on the security of the assets of the company any money requisite. The acts of a liquidator shall be valid. if any. (c) To sell the immovable and movable property and actionable claims of the company by public auction or private contract. notwithstanding any defect that may afterwards be discovered in his appointment or qualification: It is provided that nothing in this sub-section shall be deemed to give validity to acts done by a liquidator after his appointment has been shown to be invalid. with the sanction of the Court. The Official Liquidator shall cease to hold office as provisional liquidator. Where a provisional liquidator is appointed by the Court. civil or criminal. there shall be paid to the Central Government out of the assets of the company such fees as may be prescribed. unless. The liquidator in a winding up by the Court shall have power under Section 457 (powers exercisable without the sanction of . and shall become the liquidator. but otherwise he shall have the same powers as a liquidator. the Court may limit and restrict his powers by the order appointing him or by a subsequent order. Where the Official Liquidator becomes or acts as liquidator. (e) To do all such other things as may be necessary for winding up the affairs of the company and distributing its assets. in the name and on behalf of the company. Powers of liquidator Section 457 provides that the liquidator in a winding up by the Court shall have power. Before appointing a provisional liquidator. with power to transfer the whole thereof to any person or body corporate. or the company.

and to receive dividends in the insolvency.555 . hundi.the tribunal) (i) To do all acts and to execute. and other documents. all deeds. (iii) To draw. hundi or promissory note in the name and on behalf of the company. accept. in respect of that balance. rank and claim in the insolvency of any contributory. make and endorse any bill of exchange. with the same effect with respect to the liability of the company as if the bill. the company s seal. for any balance against his estate. as a separate debt due from the insolvent. ii) To inspect records and returns of the company on the files of the Registrar without payment of any fee. in the name and on behalf of the company. and for that purpose to use. when necessary. and ratably with the other separate creditors.] (ii) To prove. receipts. or note had LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 180 11.

When an event on the happening of which the company is . on the application of the liquidator or of any other person interested and upon such terms as it thinks fit. The members may do a voluntary winding up as the creditors may do it. the entire process is done without Court Supervision. the money due shall. and the company is accordingly dissolved. When the Court is of opinion that the liquidator cannot proceed with the winding up for want of funds or assets or for any other reason whatsoever. the relevant documents are filed before the Court for obtaining the order of dissolution. The person who obtains the order avoiding the dissolution must file a certified copy thereof with the Registrar within 30 days or such further time as the Court may allow. made or endorsed by or on behalf of the company in the course of its business. 500 for every day during which the default continues. the Court may at any time within two years of the date of the dissolution. A copy of this order has to be forwarded by the liquidator to the Registrar within 30 days and the Registrar is required to record it in his books. Winding up of a company leads to dissolution of the company. make an order. be deemed to be due to the liquidator himself: (v) To appoint an agent to do any business which the liquidator is unable to do himself. for the purpose of enabling the liquidator to take out the letters of administration or recover the money. in his official name. When the winding up is complete. the Court may make an order that the company be dissolved from the date of the order. The circumstances in which a company may be wound up voluntarily are: 1. letters of administration to any deceased contributory. declaring the dissolution to have been void. (iv) To take out. In case of default. and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company. accepted. Do the Court may also declare the Dissolution of a Company void in Certain cases? Yes. When the period fixed for the duration of the company in its articles has expired 2. and that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company be made.been drawn. he will be punishable with fine to the extent of Rs. We will now discuss about other modes of winding up. and in all such cases. Voluntary Winding Up (Section 484 to 520) In case of voluntary winding up.

Such a declaration must be made within 5 weeks immediately preceding the date of the passing of the resolution for winding up the company and be delivered to the Registrar for registration before that date. The company shall be deemed to be dissolved from the date of submission of such report. 50. Types of Voluntary Winding Up A voluntary winding up may be: Member s Voluntary Winding Up · Creditor s Voluntary Winding Up Let me tell you about it in detail Member s Voluntary Winding Up In case of a company which is solvent and able to pay its liabilities in full and which desires to be wound up voluntarily. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof. the Court presents a petition for winding up. At the last meeting. If the Official Liquidator makes a . If the winding up proceedings continue for more than one year. A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. the accounts of the liquidator must be approved by the members. The Registrar on receiving such accounts must register them.to be dissolved as per its articles happens 3. On the appointment of the liquidators. This is so even when after passing a resolution for voluntary winding up. managing director and manager of the company cease to have any management power. the Board of directors. The company resolves by a special resolution at a general meeting to be voluntarily wound up. The liquidator may transfer or sell the assets of the company and pay off its liabilities. Any director making a false declaration shall be criminally liable to imprisonment as well as with fine extending up to Rs. the majority of its directors at a Meeting of the Board must make a declaration of solvency verified by an affidavit staling that in their opinion the company will be able to pay its debts in full within such period not exceeding 3 years from the commencement of the winding up as may be specified in the declaration.000. Such accounts must be filed by him with the registrar of Companies and the Official Liquidator attached to the Court having jurisdiction over the company. the liquidator must call a general meeting at the end of each year the liquidation continues. The declaration must embody a statement of the company s assets and liabilities as at the practicable date before the making of the declaration. The company must appoint liquidators for the purpose of winding up and fix their remuneration at a general meeting. The Official Liquidator on receipt of the accounts and other relevant details must make a report to the Court if he is of the opinion that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest.

555 181 . the Court may make an order of dissolution or may make such order as it deems fit and proper ion the given circumstances. On receipt of the investigation report. the Court may direct the Official Liquidator to make further investigation of the affairs of the Company.report that the affairs of the company have been conducted in a manner prejudicial to the interest of its members or to public interest. Creditors Voluntary Winding Up Where the company is not solvent or where the declaration of solvency of the company is not made and delivered to the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.

distress or execution started against the assets of the company after the commencement of the winding up on such terms as it thinks fit on an application made by the liquidator. approve the accounts and regulate the winding up proceedings. It may amend. The creditors may appoint a Committee of Inspection consisting of not more than 5 creditors in order to regulate and supervise the winding up proceedings. It may set aside any attachment. creditor or contributory if the Court thinks fit. as respects the enforcing of calls. it is the creditors who appoint the liquidator. the staying of suits or other legal proceedings or any other matter. . vary. it may determine any question arising in the winding up of a company and it may exercise. It may appoint the Official Liquidator or any other person as liquidator where the appointed liquidator is not acting. It may determine the remuneration of the liquidator when the Official Liquidator is appointed as a liquidator 4. You will find that Court has some specific powers in case of Voluntary Winding Up. Powers of the Court in case of Voluntary Winding Up 1.Registrar in a voluntary winding up. It may order a public examination of any person connected with the promotion or formation of the company or any officer connected with the company. In this case all the provisions of a member s voluntary winding up apply except that instead of the members. It may remove the liquidator and appoint the Official Liquidator or any other person as liquidator on justifiable cause being shown. 6. but subject to such supervision the Court and with such liberty for creditors. 3. the Court may make an order that the voluntary winding up shall continue. On an application of the Liquidator or contributory or creditor. 7. contributories or others to apply to the Court and generally on such terms and conditions. 2. as the Court thinks just. all or any of the powers which the Court might exercise if the company were being wound up by the Court. confirm or set aside the arrangement entered into between a company and its creditors on an appeal made by any creditor or contributory within 3 weeks of the completion of the arrangement 5. it amounts to creditor s voluntary winding up. Winding up subject to the supervision of court When a company has by special or ordinary resolution resolved wind up voluntarily.

The liquidator may exercise his powers for liquidation subject to terms and conditions imposed by the Court. Sultan Chand and Sons.com/saarclawnet/osca20.vakilno1. acts as a stay of actions and other proceedings against the company 5. The Company cannot be dissolved except by order of dissolution by the Court References Kapoor. N.The application for a creditor. The Court obtains jurisdiction over suits and legal proceedings as in case of compulsory winding up by the Court.D. contributory or the voluntary liquidator may make such intervention of the Court.com http://www. http://www. (2003).555 . The supervision order also confers the power on the Court to make calls or to enforce calls made by the liquidators and to exercise all other powers which it would have in case of compulsory winding up by the court. 4. 3. When an order has been made for winding up subject to supervision of Court and an order is afterwards made for winding up by the Court up. The effect of such an order is: 1. New Delhi. the Court has power to appoint any person as either provisional or permanent liquidators. Elements of Mercantile Law. when there are irregularities or frauds in the voluntary winding up. and subject to the control of the Official Liquidator. The supervision order when passed.saarclawnet.html Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 182 11. 2. in addition to.

the same rules shall prevail as in the case of insolvency with regard to: (a) Debts provable. are fully met. In a company limited by guarantee. 2. and (c) The respective rights of secured and unsecured creditors The security of every secured creditor shall. the members are liable to contribute up to the amount guaranteed by them. The liability of present and past contributories has already been discussed in this chapter. all debts payable on a contingency and all claims against the company. 528) Where a company is being wound up. (2) Where the company is insolvent (Sec. you are all aware of Winding Up. all claims of creditors. A contributory may be present or past. ascertained or sounding only in damages. Consequences as to Creditors (1) Where the company is solvent (Sec. Consequences of Winding Up 1.529) Where a company is insolvent and is wound up. His liability continues even after the company goes into liquidation. Today. but he is then described as a contributory. (b) The valuation of annuities and future and contingent liabilities. be deemed to be subject to a pari passu charge in favors of the workmen to the extent of the workmen s portion. therein. you will be able to know about the: The consequences of winding up of a company The proof and ranking up of claims The preferential payments in regard to winding up of a company The meaning of defunct company Introduction By now. Where a solvent company is wound up. however. Consequences as to Shareholders/ Members In a company limited by shares. when proved. present or future. a shareholder is liable to pay the full amount up to the face value of the shares held by him. Where a secured .LESSON 36: THE COMPANIES ACT. 1956 THE WINDING UP OF A COMPANY CONSEQUENCES OF A WINDING UP OF A COMPANY Learning Objectives After reading the lesson. A just estimate of the value of such debts or claims shall be made. we will discuss its consequences and how the claims are settled. shall be admissible to proof against the company. Where a solvent company is wound up. certain or contingent.

(i) He may rely on his security and ignore the liquidation. (b) Any amount realized by the liquidator by way of enforcement of the workmen s charge shall be applied rate ably for the discharge of workmen s dues. A secured creditor has 3 alternatives before him. A secured. he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator. and (c) The debt due to the secured creditor or the amount of the workmen s portion in his security. shall rank pari passu with the workmen s dues for the purposes of sec. the date of the passing of the resolution for the winding up of the company. or if he is not appointed. exceed such sum as may be notified by the central . and make such claims against the company as they are entitled to make. Secured and Unsecured creditors The creditors may be secured or unsecured. in case the company had commenced to be wound up voluntarily before that date. if any) for preservation of the security before its realization by the secured creditor. opts to realize his security (a) The liquidator shall be entitled to represent the workmen and enforce the workmen s charge. (ii) In the case of a voluntarily winding up of a company. (b) All wages or salary of any employee. the date on which a provisional liquidator is appointed. relevant dare means date of commencement of voluntary winding up. If a secured creditor instead of relinquishing his security and proving his debt proceeds to realize his security. (a) All revenues. the amount shall not. the date of the winding up order. (iii) He may surrender his security and prove for the whole debt. 529-A (which deals with overriding preferential payments.) All persons who in any such case would be entitled to prove foe and receive dividends out for the assets of the company may come in under the winding up. in respect of services rendered to the company and due for a period not exceeding 4 months within the 12 months before winding up. (ii) He may value his security and prove for the deficit. The amount should have become due and payable within the 12 months preceding the relevant date. cases and rates due to the central government or a state government or to a local authority at the relevant date. in case of any one claimant. Relevant date means (i) In the case of a compulsory winding up of a company. taxes. In case the company had commenced to be wound up winding up order.creditor instead of relinquishing his security and proving his debt.

government in the official Gazette. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 183 .

235 or 237 in as far as they are payable by the company. has been appointed as provisional liqudator. shall. (e) All amounts due in respect of any compensation or liability under the workmen s compensation act. A winding up order shall be deemed to be a notice of discharge to the officers and employees of the company. the tribunal may order for payment of the costs. (1950) Ch. or in the case of his death to any other person in his right on account of holiday remuneration. charges and expenses of the winding up out of the assets of the company. (d) All amounts due in respect of contributors payable during the 12 months before the winding up order under the employees state insurance act. it shall not be proceeded with against the company. in respect of death or disablement of any employee of the company. In a voluntary winding up also. no suit or other legal proceeding against the company shall be commenced except by leave of the tribunal. except by leave of the tribunal. Primrose (Builders) Ltd. (f) All sums due to any employee form a provident fund. (g) The expenses of any investigation held in pursuance of sec. a gratuity fund or any other fund for the welfare of the employees maintained by the company. 4. Such a discharge shall relieve them of all obligations under their contract of service. The payment shall be made in such order of priority inter se as the tribunal . Similarly if a suit is pending against the company at the date of the winding up order. Advances made by a third person to pay wages or salary to any employee. Held. Consequences as to Proceedings Against the Company When a winding up order has been made or the official liquidator.(c) All accrued holiday remuneration becoming payable to any employee on account of winding up. in a winding up. This.however does not apply when the company is being wound up voluntarily for the purpose of reconstruction or amalgamation with another company. 5. Re. a pension fund. 561 A bank allowed overdrafts to a company for the purpose of paying the wages of the company on the understanding that an amount equal to the loan would shortly be paid in order to reduce the overdraft. have the same priority as the persons to whom these payments are made out of money advanced have priority. 1948. A voluntary winding up shall also operate as a notice of discharge to the company s servants. except when the business of the company is continued. the tribunal may restrain proceedings against the company if it thinks fit. the bank was entitled to preferential payment in respect of the overdrafts 3. 1923. Consequences as to servants and officers. Consequences as to Costs If assets are insufficient to satisfy liabilities.

to the application in accordance with the provisions of this Act of the law of insolvency). whichever is less. shall rank pari passu with the workmen s dues for the purposes of section 529A. of the value of such debts or claims as may be subject to any contingency. the same rules shall prevail and be observed with regard to (a) Debts provable. instead of relinquishing his security and proving his debt. The payment shall. Proof and Ranking of Claims Debts of all Descriptions to be Admitted to Proof Section 528 requires that in every winding up (subject. charges and expenses property incurred in a voluntary winding up. in the case of insolvent companies. Similarly all costs. however. be subject of the rights of secured creditors.thinks just. Application of insolvency rules in winding up of insolvent companies. or for some other reason may not bear a certain value. we will learn about the proof and ranking of claims. and (c) The respective rights of secured and unsecured creditors. shall be admissible to proof against the company. certain or contingent. ascertained or sounding only in damages. so far as possible. shall be paid out of the assets of the company in priority to all other claims. where a secured creditor. (a) The liquidator shall be entitled to represent the workmen and enforce such charge. (2) . and. (b) The valuation of annuities and future and contingent liabilities. Now. opts to realise his security. (b) Any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen s dues. and (c) So much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen s portion in his security. Section 529 lays down that in the winding up of an insolvent company. present or future. all debts payable on a contingency. a just estimate being made. as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: The security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen s portion therein. and all claims against the company. including the remuneration of the liquidator. or may sound only in damages.

] LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 184 11. and make such claims against the company as they respectively are entitled to make by virtue of this section: If a secured creditor instead of relinquishing his security and proving for his debt proceeds to realize his security.555 .All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company. may come in under the winding up. if any) for the preservation of the security before its realization by the secured creditor. he shall be liable to pay 53[his portion of] the expenses incurred by the liquidator (including a provisional liquidator.

in relation to a company. section 529A and section 530. (iv) All sums due to any workman from a provident fund. (ii) All accrued holiday remuneration becoming payable to any workman. or in the case of his death to any other person in his right. (b) Workmen s dues . or unless the company has. (c) Workmen s Portion . rights capable of being transferred to an vested in the workman. in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial disputes Act. means the employees of the company. 1923 (8 of 1923). on the termination of his employment before. a gratuity fund or any other fund for the welfare of the workmen. in relation to the security of any secured creditor of a company. at the commencement of the winding up. namely:( i) All wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman. 1947 (14 of 1947). 1947 (14 of 1947). being workmen within the meaning of the Industrial Disputes Act. For the purposes of this section. (a) Workmen 55. the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen s portion in relation to the security bears to the value of the security. means the amount which bears to the value of the security the same proportion as the amount of the workmen s dues bears to the aggregate of( i) The amount of workmen s dues. the winding up order or resolution. a pension fund. Preferential Payments (Section 530) In a winding up. all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company. there shall be paid in priority to all other debts (a) . means the aggregate of the following sums due from the company to its workmen.For the purposes of this provision. under such a contract with insurers as is mentioned in section 14 of the Workman s Compensation Act. maintained by the company. (iii) Unless the company is being would up voluntarily merely for the purposes of reconstruction or of amalgamation with another company. of. in relation to a company. or by the effect. and (ii) The amounts of the debts due to the secured creditors.

by the company as the employer of any persons. taxes. if redeemable. at the commencement of the winding up. (d) Unless the company is being would up voluntarily merely for the purposes of reconstruction or of amalgamation with another company all amounts due in respect of contributions payable during the twelve months next before the relevant date. and (g) The expenses of any investigation held in pursuance of section 235 or 237. (e) Unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company. (f) All sums to any employee from a provident fund. (c) All accrued holiday remuneration becoming payable to any employee. the winding up order or resolution. and having become due and payable within the twelve months next before that date. be redeemed if the employer made an application for that purpose under the said Act. in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date subject to the limit specified in sub-section (2). be taken to be the amount of the lump sum for which the weekly payment could. under such a contract with insurers as is mentioned in section 1459 of the Workmen s Compensation Act. shall not. or any other law for the time being in force. exceed such sum as may be notified61 by the Central Government in the Official Gazette. (b) All wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee. on the termination of his employment before. (3) Where any compensation under the Workmen s Compensation Act. or in the case of his death to any other person in his right. (2) The sum to which priority is to be given under clause (b) of sub-section (1). all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company. the amount due in respect thereof shall. (4) . under the Employees State Insurance Act. pension fund. in the case of any one claimant. or by the effect of. cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8). maintained by the company. rights capable of being transferred to and vested in the workman. 1923 (8 of 1923) is a weekly payment. 1948 (34 of 1948). a gratuity fund or any other fund for the welfare of the employees. for the purposes of clause (e) of sub-section (1). in so far as they are payable by the company. 1923 (8 of 1923). or unless the company has.All revenues.

to any other person in his right. up to the amount by which the sum in respect of which the employee or other person in his right.( i) On account of wages or salary. or in the case of his death. in a winding up.555 185 . out of money advanced by some person for that purpose. or (ii) To him. have a right of priority in respect of the money so advanced and paid.Where any payment has been made to any employee of a company. on account of accrued holiday remuneration. would have been entitled to priority in the LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. the person by whom the money was advanced shall.

the date of the winding up order. the date of the appointment (or first appointment) of a provisional liquidator. all sums which. unless the assets are insufficient to meet them. and in the case of the debts to which priority is given by clause (d) of sub-section (1). in relation to any person.winding up has been diminished by reason of the payment having been made. in which case they shall abate in equal proportions. (5) The foregoing debts shall( a) Rank equally among themselves and be paid in full. in the ordinary course. by virtue either or his contract of employment or of any enactment (including any order made or direction given under any enactment). and (b) So far as the assets of the company available for payment of general creditors are insufficient to meet them. You must understand that The expression workman. unless in either case the company had . have priority over the claims of holders of debentures under any floating charged created by the company. (7) In the event of a landlord or other person distraining or having distrained on any goods or effects of the company within three months next before the date of a winding up order. formal proof thereof small not be required except in so far as may be otherwise prescribed. and be paid accordingly out of any property comprised in or subject to that charge. or the proceeds of the sale thereof (8) For the purposes of this section( a) Any remuneration in respect of a period of holiday or of absence from work through sickness or other goods cause shall be deemed to be wages in respect of services rendered to the company during that period. (b) The expression accrued holiday remuneration includes. had his employment with the company continued until he became entitled to be allowed the holiday. the debts to which priority is given by this section shall be a first charge on the goods or effects so distrained on. the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them. have become payable to him in respect of a period of holiday. or if no such appointment was made. are payable on account of the remuneration which would. and employee does not include a The expression the relevant date means( i) In the case of a company ordered to be wound up compulsorily. (6) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up.

This section shall not apply in the case of a winding the dated referred to in sub-section (5) of section 230 of the Indian Companies Act. The company went into liquidation and the father of the minor was placed on the list of contributories. There is another important term which you could find in regard to winding up of company. His offer was accepted. Re. shall be deemed to remain in full force. 1913 (7 of 1913) occurred before the commencement of this Act. A creditor of a company applied for winding up of the company for its inability to pay his claim after proper demand had been made by him and on the lapse of the 3 weeks from the dare of such demand. The tribunal may order for the winding up of the company Secs. The father resists this. 300 shares were allotted to him and the directors passed a resolution that S should have the contract. the date of the passing of the resolution for the voluntary winding up of the company. If a company has ceased to carry on business.commenced to be wound up voluntarily before that date. 3. Defunct company A company is a said to be defunct when it is not carrying on business or when it is not in operation. . if a contract for the renovation of the hotel was given to him. 560. An application was made by a father as guardian of his minor daughter for shares and the company registered the shares in the name of the daughter describing her as minor. Simpson s Case)] 2. Practical Problems Attempt the following problems. It was proved to the satisfaction of the tribunal during inquiry.. a builder. the registrar may strike it off the register as a defunct company in accordance with Sec. 433 (e) and 434]. 560 deals with defunct companies. Sec. S paid his deposit on shares and attended 2 meetings of the shareholders. No such contract was made and the company went into liquidation. Is S liable as contributory. wrote to a hotel company offering to take 300 shares in the company. giving reasons 1. Decide. [Hint. No ( Aldborough Hotel Co. S. and in such a case. the provisions relating to preferential payments which would have applied if this Act had not been passed. and (ii) In any case where sub-clause (i) does not apply. will the tribunal order for the winding up of the company? [Hint. that the company was commercially solvent.

borrowed money on the security of a LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 186 11.[Hint. treated the company s properties as though they were properties as though they were properties belonging to the individual members. Re. a company never met either in a shareholders or in a directors meeting. 5. 4.555 . A company. Official Liquidator. ( Rai Sahib V. Ever since its incorporation in 1969 and for 30 years thereafter.)]. Pasupathi Bank Ltd)]. Yes.N. transfers and various dealing with these properties took place for all over those 30 years as will the registrar be justified in striking off the name of the company from the register? [Hint. and sales. The father cannot be placed on the list of contributories ( Palaniappa Mudaliar v. in ignorance of the fact that it had been struck off the register. did not file for more than 10 years any summaries or list of shareholders. Mandal s Estates Ltd.

html Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. Elements of Mercantile Law.)] References: Kapoor..saarclawnet. Is the charge valid? [Hint. N. http://www. (2003).D. On an application by the company.com http://www. the tribunal restored it to the register. Sultan Chand and Sons. New Delhi.vakilno1.com/saarclawnet/osca20. Re.charge on it property.555 187 . Yes (Boxco Ltd.

not in the ordinary course of business and its intention to dispose of such assets is not stated in the offer document. Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 188 11. presently has no stake in ABC Ltd.LESSON 37: TUTORIAL THE COMPANIES ACT. desires to dispose of some assets of ABC Ltd.. during the offer period. XYZ Ltd..555 . which is making a takeover bid to acquire control of ABC Ltd. desires to be appointed on the Board of ABC Ltd. 1956 You are the company secretary of XYZ Ltd. (ii) Your company after acquiring control of ABC Ltd. your director.. another listed Company. Advise your Board of directors in respect of the following queries: (i) Govinda. a listed company.

you will be able to know about: The object of the Consumer Protection Act Salient features of the Act The procedure and authorities for filing a complaint under the Act Introduction The earlier principle of Caveat Emptor or let the buyer beware which was prevalent has given way to the principle of Consumer is King . to be too expensive and time consuming for lay consumers. the Agricultural Produce (Grading and Marketing) Act. The act is intended to provide simple. In India. This leaves the consumer in a difficult position with very few avenues for redressal. the Prevention of Food Adulteration Act. The need to recognize and enforce the rights of consumers is being understood and several laws have been made for this purpose. these laws required the consumer to initiate action by way of a civil suit. . the Trade and Merchandise Marks Act. However. the Indian Standards Institution (Certification Marks) Act. Object of the Consumer Protection Act. which involved lengthy legal process proving. the Dangerous Drugs Act. and reliefs of a specific nature and award of compensation wherever appropriate to the consumer. The basic rights of consumers as per the Consumer Protection Act (CPA) are 1. The onset on intense competition also made producers aware of the benefits of customer satisfaction and hence by and large. we have the Indian Contract Act. the Sale of Goods Act. The origins of this principle lie in the fact that in today s mass production economy where there is little contact between the producer and consumer.LESSON 38: CONSUMER PROTECTION ACT Learning Objectives At the end of this chapter. it lead to the legislation of the Consumer Protection Act. etc which to some extent protect consumer interests. 1986 The main objective of the act is to provide for the better protection of consumers. which they do not intend to fulfill. the need for a more simpler and quicker access to redressal to consumer grievances was felt and accordingly. the principle of consumer is king is now accepted. the Standards of Weights and Measures Act. Unlike existing laws. The act has been amended in 1993 both to extend its coverage and scope and to enhance the powers of the redressal machinery. which are punitive or preventive in nature. 1986. speedy and inexpensive redressal to the consumers grievances. often sellers make exaggerated claims and advertisements. the provisions of this Act are compensatory in nature. Therefore.

or services so as to protect the consumer against unfair trade practices 3. potency. whose main objects will be to promote and protect the rights of the consumers The CPA extends to the whole of India except the State of Jammu and Kashmir and applies to all goods and services unless otherwise notified by the Central Government. access to a variety of goods and services at competitive prices. Let us understand some . The right to consumer education Extend and Coverage of the Act: The salient features of the Act are summed up as under: -The Act applies to all goods and services unless specifically exempted by the Central Government. -Right to seek redressal against unfair trade practices unscrupulous exploitation of consumers. wherever possible . and -Right to consumer education -The Act envisages establishment of Consumer Protection Councils at the Central and State levels. Definitions of Important Terms Before studying the provisions of the CPA. The right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulsous exploitation of consumers 6. The right to be assured. It enshrines the following rights of consumers:Right to be protected against the marketing of goods and services which are hazardous to life and property. -Right to be informed about the quality. quantity. potency. wherever possible. access to variety of goods and services at competitive prices 4. -Right to be assured . it is necessary to understand the terms used in the Act. -It covers all the sectors whether private. standard and price of goods or services so as to protect the consumer against unfair trade practices. The right to be heard and be assured that consumers interests will receive due consideration at appropriate forums 5. -The provisions of the Act are compensatory in nature.The right to be protected against marketing of goods and services which are hazardous to life and property 2. purity. -Right to be heard and to be assured that consumers interests will receive due consideration at appropriate forums. standard and price of goods. purity. public or cooperative. The right to be informed about the quality. quantity.

or LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. or 2. Any voluntary consumer association registered under the Companies Act.of the more important definations. Complainant Means 1. A consumer.1956 or under any other law for the time being in force.555 189 .

The services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in any respect 4. growing crops. 5. One or more consumers where there are numerous consumers having the same interest Complaint means any allegation in writing made by a complainant that : 1. Consumer dispute means dispute where the person against whom a complaint has been made. hire. goods means every kind of movable property other than actionable claims and money and includes stocks and shares. Goods which will be hazardous to life and safety when used. housing construction. board or lodging or both. supply of electrical or other energy. 1930. entertainment. amusement or the purverying of news or other information but does not include the rendereing of any service free of charge or under a contract of personal service. Unfair Trade Practice means unfair trade practice as defined under the Monopolies and Restrictive Trade Practices Act. The .3. hiring or availing of any other goods or services. An unfair trade practice or a restricted trade practice has been adopted by any trader 2. processing. insurance. The trader has charged for the goods mentioned in the complaint a price excess of the price fixed by or under any law for the time being in force or displayed on the goods or any package containing such goods. who or which makes a complaint. The Central Government or any State Government. or 4. or avail of any good or as the case may be. financing. Restrictive Trade Practice means any trade practice which requires a consumer to buy. Under that act. services as a condition precedent for buying. manner and effect of use of such goods . Goods means goods as defined in the Sale of Goods Act. are being offered for sale to the public in contravention of the provisions of any law for the time being in force. The goods bought by him or agreed to be bought by him suffer from one more defects 3. transport. denies or disputes the allegation contained in the complaint. requiring traders to display information in regard to the contents. grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.with a view to obtaining any relief provided by law under the CPA. Service is defined to mean service of any description which is made available to potential users and includes the provision of facilities in connection with banking.

Note :. 1986 as amended by the Consumer Protection (Amendment) Act. for the purpose of promoting the sale. Who is a Consumer? All of us are consumers of goods and services. a consumer means a person belonging to the following categories: (i) One who buys or agrees to buy any goods for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment. contest etc. use or supply of any goods or for the provision of any service. 1993. or as is claimed by the trade in any manner whatsoever in relation to any goods.the word Consumer has been defined separately for goods and services . nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service. quantity. For the purpose of goods . It means a trade practice which.MRPT act has defined certain practices to be unfair trade practices. For the purpose of the Consumer Protection Act. imperfection or shortcoming in the quality. adopts any unfair method or unfair or deceptive practice including any of the following practices. purity or standard which is required to be maintained by or under any law for the time being in force or under any contract. the word commercial does not include use by consumer of goods bought and used by him exclusively for the purpose of earning his livelihood. namely: (a) False or misleading representation. (d) Non compliance of product safety standard. (e) Hoarding or destruction of goods.A person is not a consumer if he purchases goods for commercial or resale purposes However. Defect means any fault. prize. (ii) It includes any user of such goods other than the person who actualy buys goods and such use is made with the approval of the purchaser. potency. The detailed definition is given in the Consumer Protection Act. express or implied. a consumer belonging to the following categories: means a person . imperfection or shortcoming or inadequacy in the quality. by means of self employment. The Act may be consulted before filing a complaint for unfair trade practice. Deficiency means any fault. (b) Bargain price (c) Offering of gifts. -For the purpose of services .

1956 or under any other law for the time being in force. -The Central Government LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 190 11. Who Can file a Complaint The following can file a complaint under the Act: -A consumer -Any voluntary consumer organization registered under the Societies Registration Act.It includes any beneficiary of such service other than the one who actually hires or avails of the service for consideration and such services are availed with the approval of such person.555 .(i) One who hires or avails of any service or services for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment.1860 or under the Companies Act. i.

State and District levels.-The State Government or Union Territory Administrations. National Consumer Disputes Redressal Commission known as National Commission . speedy and inexpensive redressal of consumer grievances.tier quasijudicial machinery at the National. -A trader charging excess of price.are being offered for sale to public in contravention of provisions of any law for the time being in force. The goods hazardous to life and safety. Where to file a complaint Consumer Protection Councils The interests of consumers are enforced through various authorities set up under the CPA. -One or more consumers on behalf of numerous consumers who are having the same interest (Class action complaints) Structure -To provide simple. Consumer Disputes Redressal Commissions known as State Commission. -Deficiencies in services. or (ii) Displayed on goods. or (iii) Displayed on any packet containing such good. -The provisions of this Act are in addition to and not in derogation of the provisions of any other law for the time being in force What Constitutes a Complaint? Under the Act. the State Consumer Protection Council and the District Forum Central Consumer Protection Council The Central Government has set up the Central Consumer Protection Council which consists of the following members : . (i) Fixed by or under any law for the time being in force. Consumer Disputes Redressal Forums. the Act envisages a three. a complaint means any allegation in writing made by a complainant in regard to one or more of the following: -Any unfair trade practice as defined in the Act or restrictive trade practices like tie-up sales adopted by any trader. The CPA provides for the setting up of the Central Consumer Protection Council.known as District Forum. when used. -One or more defects in goods.

and (b) Other official and non-official members representing varied interests The State Council meets as and when necessary but not less than two meetings must be held every year. public affairs or administration. The Council meets as and when necessary but at least one meeting is held in a year. .(a) The Minister in charge of Consumer Affairs in the Central Government who is its Chairman. a District Judge who shall be its President (b) Two other members who shall be persons of ability. District Forum Under the CPA. one of whom shall be a woman. The overnment may establish more than one District Forum in a district if it deems fit. or who has been. Appointments to the State Commission shall be made by the State Goverrnment on the recommendation of a Selection Committee consisting of the President of the State Committee. or is qualified to be. The District Forum has jurisdiction to entertain complaints where the value of goods / services complained against and the compensation claimed is less than Rs. accountancy. 5 lakhs but not exceeding Rs. the State Commission for claims exceeding Rs. integrity and standing and have adequate knowledge or experience of or have shown capacity in dealing with problems relating to economics. commerce. 20 lakhs and the National Commission for claims exceeding Rs.Law Department of the State and the secretary in charge of Consumer Affairs Every member of the District Forum holds office for 5 years or upto the age of 65 years. Each District Forum consists of : (a) A person who is. and (b) Other official and non-official members representing varied interests The Central council consists of 150 members and its term is 3 years. State Consumer Protection Council The State Council consists of : (a) The Minister in charge of Consumer Affairs in the State Government who is its Chairman. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government. whichever is earlier and is not eligilbe for re-appointment. 20 lakhs. 5 lakhs. the State Government has to set up a district Forum in each district of the State. law. Redressal Machinery under the Act The CPA provides for a 3 tier approach in resolving consumer disputes. industry. the Secretary .

However. in addition to jurisdiction over consumer goods services valued upto Rs. the District Forum also may pass orders against traders indulging in unfair trade practices. A complaint shall be instituted in the District Forum within the local limits of whose jurisdiction (a) The opposite party or the defendant actually and voluntarily resides or carries on business or has a branch office or personally works for gain at the time of institution of the complaint. or LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.The District Forum can entertain complaints where the value of goods or services and the compensation.555 191 . claimed is less than rupees five lakhs. if any. sale of defective goods or render deficient services provided the turnover of goods or value of services does not exceed rupees five lakhs. 5 lakhs.

5 lakhs but does not exceed Rs. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government. problems relating to economics. or have shown capacity in dealing with. State Commission The Act provides for the establishment of the State Consumer Disputes Redressal Commission by the State Government in the State by notification. if any claimed exceed Rs. 20 lakhs. accountancy. industry. The State Commission can entertain complaints where the value of goods or services and the compensation. or (c) The cause of action arises.(b) Any one of the opposite parties (where there are more than one) actually and voluntarily resides or carries on business or has a branch office or personally works for gain. Each State Commission shall consist of: (a) A person who is or has been a judge of a High Court appointed by State Government (in consultation with the Chief Justice of the High Court ) who shall be its President. Every appointment made under this hall be made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Commission. National Commission The Central Government provides for the establishment of the National Consumer Disputes Redressal Commission The . and standing and have adequate knowledge or experience of. one of whom must be a woman. at the time of institution of the complaint provided that the other opposite party/parties acquiescence in such institution or the permission of the Forum is obtained in respect of such opposite parties. Secretary Law Department of the State and Secretary in charge of Consumer Affairs in the State. law. commerce. public affairs or administration. whichever is earlier and is not eligilbe for re-appointment. The State Commission also has the jurisdiction to entertain appeal against the orders of any District Forum within the State The State Commission also has the power to call for the records and appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State if it appears that such District Forum has exercised any power not vested in it by law or has failed to exercise a power rightfully vested in it by law or has acted illegally or with material irregularity. (b) Two other members who shall be persons of ability. wholly or in part. integrity. Every member of the District Forum holds office for 5 years or upto the age of 65 years.

Every member of the National Commission shall hold office for a term of five years or upto seventy years of age. or have shown capacity in dealing with. accountancy. the Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer Affairs in the Government of India. law. all consumers so interested . public affairs or administration. Complaints may be filed with the District Forum by : 1. whichever is earlier and shall not be eligible for reappointment. or has been decided by any State Commission where it appears to the National Commission that such Commission has exercised a jurisdiction not vested in it by law. One or more consumers. Any recognised consumer association. if any. claimed exceeds rupees twenty lakhs: (b) To entertain appeals against the orders of any State Commission. commerce. and (c) To call for the records and pass appropriate orders in any consumer dispute which is pending before. one of whom shall be a woman Appointments shall be by the Central Government on the recommendation of a Selection Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of India. The National Commission shall have jurisdiction : (a) To entertain complaints where the value of the goods or services and the compensation.National Commission shall consist of : (a) A person who is or has been a judge of the Supreme Court. or has failed to exercise a jurisdiction so vested. is a member of such association or not 3. (b) Four other members who shall be persons of ability. whether the consumer to whom goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided. or has acted in the exercise of its jurisdiction illegally or with material irregularity. where there are numerous consumers having the same interest with the permission of the District Forum. on behalf of or for the benefit of. The consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided 2. integrity and standing and have adequate knolwiedge or experience of. problems relating to economics. to be appoint by the Central Government (in consultation with the Chief Justice of India ) who be its President. industry.

This period may be extended by another 15 days. sealed and authenticated in the manner prescribed for referring to the appropriate laboratory for the purpose of any analysis or test whichever may be necessary. On receipt of a complaint. directing him to give his version of the case within 30 days.555 . The Central or the State Government. In case of dispute relating to any goods : Where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods. Where the opposite party denies or disputes the allegations or omits or fails to take any action to represent his case within the time provided. LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 192 11. a copy of the complaint is to be referred to the opposite party. a sample of the goods shall be obtained from the complainant. the complaint will be decided on the basis of materials on the record. If the opposite party admits the allegations contained in the complaint.4. the dispute will be settled in the following manner : I.

How to File a Complaint Procedures for filing complaints and seeking redressal are simple. the Redressal Forums may give orders for one or more of the following reliefs: (a) Removal of defects from the goods. Commission. description and address of the opposite party or parties. if any.e. as far as they can be ascertained. (c) The facts relating to complaint and when and where it arose. i. (d) Award of compensation for the loss or injury suffered. (e) . The appropriate laboratory would be required to report its finding to the referring authority. (e) The relief which the complainant is seeking. ( A There should be plain paper. description and the address of the complainant.so as to find out whether such goods suffer from any other defect. (d) Documents. The complaint should be signed by the complainant or his authorized agent. The complaint is to be filed within two years from the date on which cause of action has arisen. (b) Replacement of the goods. (b) The name . A complaint should contain the following information (a) The name. as the case may be. There is no fee District Forum. Relief Available to the Consumers Depending on the nature of relief sought by the consumer and facts. The complaint can be sent by post to the appropriate Forum / Commission. for filing a complaint before the the State Commission or the National stamp paper is also not required) 3 to 5 copies of the complaint on The complainant or his authorized agent can present the complaint in person. (c) Refund of the price paid. in support of the allegations contained in the complaint. the District Forum or the State Commission within a period of fortyfive days from the receipt of the reference or within such extended period as may be granted by these agencies.

The National Commission and State Commissions are required to decide the appeal as far as possible. as far as possible. Read the following questions for a better understanding of the Act: . State Commission and District Forums are required to decide complaints. within a period of three months from the date of notice received by the opposite party where complaint does not require analysis or testing of the commodities and within five months if it requires analysis or testing of commodities.Removal of defects or deficiencies in the services. The National Commission. within 90 days from the first date of hearing. the following provisions have been incorporated in the Act and the rules farmed thereunder: It is obligatory on the complainant or appellant or their authorized agents and the opposite parties to appear before the Forum/Commission on the date of hearing or any other date to which hearing could be adjourned. or (h) Award for adequate costs to parties. Appeal against the decision of a State Commission can be filed before the National Commission within thirty days. To ensure speedy disposal of consumers grievances. Appeal against the orders of the National Commission can be filed before the Supreme Court within a period of thirty days. Procedure for filing the appeal is the same as that of complaint. except the application should be accompanied by the orders of the District/State Commission as the case may be and grounds for filing the appeal should be specified. (f) discontinuance of unfair trade practices or restrictive trade practices or direction not to repeat them. speedy and inexpensive redressal to consumers grievances. Procedure for Filing the Appeal Procedure for filing the appeal : -Appeal against the decision of a District Forum can be filed before the State Commission within a period of thirty days. There is no fee for filing appeal before the State Commission or the National Commission. (g) Withdrawal of the hazardous goods from being offered to sale. Speedy Disposal The thrust of the Act is to provide simple.

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. 2 (o). 2 (d) (ii) in Consumer Protection Act. So. I have instituted a complaint before the Consumer Court against a Medical Practitioner. A eloquent to bring the delinquent medical practitioners within the ambit of Consumer Protection Act. My complaint has been challenge on the ground that a Medical Practitioner cannot be sued under the Consumer Act.555 193 . Thirdly. s. Consumer Protection Act which defines service exempts only two types of services. Secondly the words any service in s. The word hire means employ of wages or fees . What does law provide? A.Q1. one service free of charge and another contract of personal service postulates a relationship of master and servant. Section 2 (d) in defining a consumer in Clause (ii) uses the expression hires and avails of . a negligent medical professional can be proceeded under the Consumer Protection Act 1986. a medical practitioner can be sued under the Consumer Protection Act 1986 for his or her professional negligence resulting in damage to patient. A medical man whose service is requisitioned for a patient answers the clause contract of service but never a contract of personal service . Yes.

Is it a deficiency in service? A. Purchase made for agriculture is not for commercial purpose. However. got burned and was replaced by the department after about two months. you can t approach a Consumer Court for redressal of your said grievance. Q3. Therefore. Am I liable to bear the price increase on account of delay caused by the dealer? A. the complainant is a consumer and entitled to seek redressal of his grievance in a Consumer Court against the party which supplied defective seed to him. I was allotted a Maruti Car. The transformer. The seeds did not germinate. Your grievances is that you application for electricity connection was not granted. Q7. There was a delay in delivery of the car. Does rejection of application for grant of loan by a Bank constitute deficiency in service for which I can approach the Consumer Court? A. Q4. you are not liable to pay any minimum charges. Cancellation of flight on account of technical snag is not deficiency in service as it is due to unavoidable circumstances. You are not liable to pay any price increase in the above mentioned circumstances since the increase in price is totally on account of the delay on the part of the dealer for which a consumer cannot be made to suffer. Hence. Q8. you ought to be allowed refund of the fare but no compensation can be granted on account of any loss suffered by you (if any) because of the said cancellation. I had purchased seeds from a party. which was supplying electricity to me.The Consumer Courts cannot sit in judgement over the discretion exercised by the Bank and as such you will not succeed in any such action. The other party took the plea that I was not a consumer. The flight was later cancelled on account of technical snag. Q5. The Bank has a wide discretion in the matter of granting loans and advances and continuing disbursement of loans sanctioned . When the electricity was not supplied and the electricity bills produced by you showed that there was no consumption of electricity by you and admittedly the reason for that was burning of the transformer. However. I had applied for electricity connection. if taken by you.Q2. power supply was not provided to me. Electricity may be a service but the hiring of the service is not complete till the Electricity Board sanctions service. Whether purchase of seeds for the purpose of agriculture is purchase for commercial purpose? A. Your remedy is to file a civil suit in the Court of law against the Electricity Board. I had got a confirmed ticket on Sahara Airways. However. Am I liable to pay any such charges when there was no consumption of electricity by me? A. Can I seek redressal of my grievance in Consumer Court? A. Can Consumer Forums adjudicate disputes involving scale . the dealer called upon me to make further payment as the price of the car had gone up. However I was billed with consumption charges. Subsequently. Q6.

Can I do so? A. Consumer Forums do adjudicate dispute-involving scale of pay. I had purchased a fridge. Can I approach a Consumer Court? A. Consequently. The insurance claim was rejected on the ground that my driver was not holding valid driving license. the UTI extended the maturity date by two years. I lodged a complaint before the Consumer Forum. The Consumer Court will not be able to grant you any relief since the driver employed by you did not have a driving license. At the time of draw my name was not included. Even though Consumer Forums are not governed by the CPC yet the sound principles of law and procedure embody in that CPC are followed by the Forums. Should I approach a Consumer Court for seeking the Insurance claim? A. wherein the Housing Board argued that I was not a Consumer since no allotment had taken place.of pay? A. second complaint filed on the same cause of action would not be maintainable. This is the basis for the relevant provisions under the Code of Civil Procedure. Where the complainant had paid for the cost of application form as well as the registration fee. What is the correct position in law? A. which suffered from several defects. Q13. You were bound under law to check the ability of the person employed by you and the failure in holding a license for driving well debar you from claiming the Insurance Claims. I had applied for subscription in Rajlakshmi scheme of UTI. However subsequently. Q10. Q9. Q12. which was allowed to me by the State Commission. 1908 (CPC) which embody a sound principal of law to obviate multiplicity of litigation. I filed a complaint before the State Commission regarding payment of policy amount in death claim. the Forum appointed a Local Commissioner who corroborated the version of the complainant. Q11.100 as registration fees. Unilateral alteration of terms of payment by the UTI in their above scheme is Deficiency in Service for which you can seek relief in a consumer court. The essence of the scheme was that the sum of money deposited with the UTI would grow 21 times in 28 years. No. My car met with an accident. You can certainly seek redressal before the Consumer Forum. It is well-settled principal of law that one can not educate the same cause of action before a court of law or before another adjudicating Forum after it had already been adjudicating upon earlier. In a similar case as yours. Can I seek redressal of my grievance? A. I wish to file another complaint claiming the Double Accident Benefit. It was held by the Forum that the fridge was found to be defective within the period of warranty. I had applied for allotment for a plot and paid Rs. he is the potential user and the nature of transaction is covered by the expression service . and those defects could not be removed or repaired by the Company. The opposite party was directed to replace the unit with a new one.

LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 194 11. The Housing Board is deemed to have undertaken to include your name in the draw of lots for allotment of a plot. As such the complaint is maintainable.555 .of any description . However.

The question of pricing of the flat by Housing Board is not a Consumer dispute. Can it be termed a deficiency is service on the part of the hospital? A. My grievance is that I am not getting regular supply of water. If any amount has been illegally charged from you by Housing Board . A registered letter sent to me was not delivered. Q19. Is the complaint within time? A. Session 24 A of the Consumer Protection Act. you can recover the same through a civil court. Q16. Q18. There is no negligence on the part of the hospital by reason of such failure to supply the said papers unless there was a legal duty cast on the hospital to furnish such documents to the patients. Hence the Consumer Forums have no jurisdictions to entertain such a complaint.your application has not been considered because your name was not included in the draw. Q14. delay or damage unless he had caused the same fraudulently or by his willful act or default. The Government supplying water is performing a statutory functions which can not termed to be rendering of service. Q17. A Complainant filed a case against our company who s grievance related to transactions dating back to years 199495 while the complaint was filed in the year 1999.I. 1986 provides a limitation period of two years within which the complaint is required to be filed . mis-delivery .G. You can proceed on this ground. which has to be seen from their Rules and Regulations. Q15. scheme of the Haryana Housing Board and the board had escalated the price of the flats three times within a period of two years. mis-delivery or delay or damage to any postal article in course of transmission by post except in so far as such liability is made in express terms to be undertaken by the Government and no Officer the Post Office shall incur any liability by reason of such loss. In the light of the above. Section 6 of the Indian Post Office Act 1878 provides that the Government shall not incur any liability by reasons of the loss. In view of the said Section 6. It has been laid down that under Consumer Protection Act the pricing policy of flats cannot be adjudicated upon by Consumer Forums. What is the liability of an employee of the Post Office in this matter? A. your complaint is not maintainable unless there is allegation an of fraud or willful act of negligence of any postal employee. Does my case lie within the jurisdiction of Consumer Forums? A. My grievance is that a Hospital where I was treated declined to give me the medical records pertaining to my treatment and operation for Ulcer. the complaint is time barred and hence not maintainable. A Superfast Train in which I was travelling was delayed for . What can I do against the concerned Government Authority before a Consumer Forum? A. The only inference that can be drawn is that the person who prepared the list was negligent in discharge of his duty. My grievance is that I had registered with the M.

letter the same was cancelled but no refund has come so far. Q24. I had paid the telephone bill but inspite of that the telephone department disconnect my telephone without any notice.. you can also approach a Consumer Court for this purpose. Can this be a ground for filing a complaint against the Railways? A. again it was sent by us to Delhi as the deposit was made to Premnath Motors Delhi but Delhi Consumer forum has again written to follow than. Can the department disconnect the telephone without notice to the subscriber? A. Is my claim valid? A. Merely because the value of the share went up you are not entitled to get compensation at the increased rate. I had bought a scooter in last May. then it will be prudent to file a case in the Consumer Forum. I had deposited a booking amount with Pal-Peugeot. When I complained them they return me the Scooter next day and they say again that the problem was removed. The Department is bound by law to give such a notice. You can seek compensation for the same alongwith restoration of the connection. Documents were sent to them but of no avail. I am a shareholder of HLL. I have claimed the loss in terms of the escalation in the market price of the share. as damages are remote damages. Share market is a speculative market and there is bound to be fluctuation in value of shares of the company depending on market condition. Bajaj Scooters Ltd. The packet though gives only 400ml. Can I go to file a case in consumer forum. the share certificates were delivered very late. What action can we take against the company. after some months it is creating problem to me. A. But last week it is creating the same problem again. You must collect adequate evidence before doing the same. Additional charges are taken by the Railways from the passengers travelling by a Superfast Train. We have been buying Parag milk packet 500 ml from a retailer. There is clear case of cheating and you can file a criminal complaint under Section 421 of the Indian Penal Court. Q20. A. If the trains are delayed for long hours and the delay has not been properly explained it amounts to deficiency in service and therefore the Railway is bound to refund the excess charges.e. Despite having made all the payments. Disconnection cannot be effected without notice to the subscriber. Q22. Q21. In case nothing is done even after this. for the last two years. When I complained to Service center they serviced it and say the problem was removed.long hours without any reason. Besides filing a Criminal complaint. Q23. against the service center and wait for their response. retain a sealed packet of Parag Milk which indicates the quantity of 500ml but actually weighs 400ml. But today it is creating the same problem to me. .e. You can definitely file a case before the Consumer Forum but the ideal remedy at this stage would be to complain to the company i. i. The matter was referred to Delhi Consumer forum who referred to than (Maharashtra) consumer forum.

555 195 .LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.

It appears to be spurious. the same would not be construed as sufficient reasons for condoning the delay. it would not be a worthwhile exercise to institute any legal proceedings in the facts and circumstances of the present case. Goa Tourism but there is no reply.2000 from a shop in Panjim. a complain has to be made within 2 years from the date on which the cause of action arose. the Consumer Forum has the power to entertain a complaint even after the said period in case it is convinced that the complaint could not be filed within the said period on account of certain sufficient cause. Or any other detail which you feel Justified to provide me. If they do not replace the vehicle can I move to consumer forum. It is correct that the Consumer Protection Act. Q25. What happens in a case where the 2 year period has elapsed because the I spent the time writing(and replying to) to the manufacturer in the hope that he would replace the good? What argument can I give to the Forum in response to the plea of 2 years which I know will be taken by the manufacturer? A. Q27. I understand that under the Consumer Protection Act. In case the only ground pleaded by you is that you were corresponding with the Manufacturer and hoping to get the goods replaced.1. You should file an appeal before the State Commission against the order of the Consumer Forum. the Distributor was located at Delhi and money also seems to have been paid at Delhi the Delhi Consumer Forum had the jurisdiction in case the distributors (who work at Delhi) have been made parties to the said petition. Who should I make a party i. Since. 1986. Goa a bottle of Scotch Whiskey. The dealer is in Karol Bagh the company office in Greater Kailash and factory s regd. 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 . You can certainly file a complaint before the Consumer Forum against supply of Spurious Whisky supplied to you as well as also lodge a Criminal Complaint in this regard. Since the cause of action arose at Delhi. office in Kanpur in which Jurisdiction/Zone should I file the complaint. You should file an appeal against both the manufacturers as well as the distributors. or the LML company or both of them. provides for a limitation period of two years for filing a complaint and the said period starts from the date when the cause of action arose. it will be virtually impossible to prove that the contents of the Whisky are the same as they were when the bottle was sealed.e. i. However. What remedy is available to me to the relief. I purchased on 1. the dealer. Thus you would have to give a good explanation in order to have the delay condoned from the Consumer Forum. the legal system is totally based on evidence / proof.. A. the difficulty (which is a major one) is that since the bottle of Whisky has been open. i. The same is provided under Section 24-A of the Consumer Protection Act. I have written letters to the MD.. Can I claim for replacement. Prem Nath Motors against the order. However. A.A.e.e. Q26. I find that it is not original in that it tastes too sweat.

making doctors responsible for your condition a party. meniscus tear 3. I am still doing physiotherapy.defect rectified. A. I used to walk with a limp. After the operation my knee developed stiffness. You can also seek damages alongwith the appropriate action against the doctors and the management in the writ petition . Please advise?. So I can not go to Consumer protection court.html Notes: LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 196 11.indiainfoline.in/cpa. I injured my knee in a game of football on 31st December 1997. allowed by Forum if the defect is such that rectify the same. It was diagnosed as ACL TEAR. this whole experience has affected my life badly. ACL Laxity 2. For about 8 months I continued to walk with a limp but then my condition deteriorated & in March-99 I had to start using crutches to move around.vakilno1. My both operations were carried out in military hospitals. and they were done free of cost since I am serving in army.nic. Give the Delhi address of the complaint at Delhi. In case your efforts fail with Consumer Forum at Delhi by making both and the Dealer as parties to the complaint. For that I was operated upon in the knee on 2nd March 1998. References · http://www. So after two months of operation my knee was manipulated under anesthesia to relieve stiffness. I was advised by the doctor to do physiotherapy.htm · http://www. patellofemoral osteoarthritis . Can I sue the doctors for negligence / inefficiency.555 .com/lega/cptc/ch01.htm · http://fcamin.com/consumerprotect_qns. which is unusual in such cases even after undergoing physiotherapy for two months I was unable to bend or straighten my knee. I was told to start walking . you can file the complaint the Company Replacement is it is not possible to the company and file Q28. A plaster was put on the knee for one month. To find out the cause of this pain I underwent investigative arthoscopy in June-99 which revealed the following 1. but neither the pain has reduced nor am I able to walk without crutches. You can file a writ petition in the High Court of judicature against the hospital. and take painkillers for the pain.

1973. we will discuss the two Acts as outlined above in brief just to give you an idea as to the purpose of these Acts and the brief introduction of these Acts. Hence the tenor and tone of the Act was very drastic. Unlike other laws where everything is permitted unless specifically prohibited. . It provided for imprisonment of even a very minor offense.LESSON 39: FEMA AND TRADE AND COPYRIGHTS ACT Learning Objectives After reading the lesson. But for the purposes of FEMA. With liberalization. Let us first talk about FEMA FEMA (Foreign Exchange Management Act) The Foreign Exchange Management Act (FEMA) is a law to replace the draconian Foreign Exchange Regulation Act. a person is presumed innocent unless he is proven guilty. Any offense under FERA was a criminal offense liable to imprisonment. offices and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person to whom this Act applies. under FERA nothing was permitted unless specifically permitted. you will be able to know about the: The brief outline of Fema The brief outline of Trade and Copyrights Act Introduction Today. FEMA contains definitions of certain terms. off-shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign securities. The meaning of these terms may differ under other laws or under common language. It applies to all branches. Therefore FEMA was enacted to replace FERA. which have been used throughout the Act. a need was felt to remove the drastic measures of FERA and replace them by a set of liberal foreign exchange management regulations. whereas FEMA seeks to make offenses relating to foreign exchange civil offenses. Under FERA. Authorized person means an authorized dealer. a person was presumed guilty unless he proved himself innocent whereas under other laws. Let us take up some of the more important ones. the terms will signify the meaning as defined there under. FEMA extends to the whole of India. money changer.

expenses in connection with foreign travel. cheques. ii. spouse and children. credits and balances payable in any foreign currency. remittances for living expenses of parents.Capital Account Transaction means a transaction which alters the assets or liabilities. postal orders. obligation or other liability of (1) a person resident outside India or (2) of a person resident in India and owed to a person resident outside India. letters of credit. Foreign currency means any currency other than Indian currency. other current business. expressed or drawn in Indian currency but payable in any foreign currency. credit cards or such other similar instruments. iv. Drafts. education and medical care of parents. postal notes. as may be notified by the Reserve Bank. outside India of persons resident in India or assets or liabilities in India of persons resident outside India. Deposits. and short-term banking and credit facilities in the ordinary course of business. spouse and children residing abroad. means : i. with its grammatical variations and cognate expressions. Currency includes all currency notes. money orders. travelers cheques. iii. including contingent liabilities. . ii. bills of exchange and promissory notes. services. Export . The taking out of India to a place outside India any goods. and includes transactions by way of giving guarantees or surety for any debt. letters of credit or bills of exchange. ii. Payments due as interest on loans and as net income from investments. Provision of services from India to any person outside India. travelers cheques. drafts. Foreign Exchange means foreign currency and includes : i. Payments due in connection with foreign trade. Currency Notes means and includes cash in the form of coins and bank notes. iii. Current Account Transaction means a transaction other than a capital account transaction and includes : i.

Indian currency means currency which is expressed or drawn in Indian . Foreign Security means any security. stocks.Drafts.rupees but does not include special bank notes and LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11. travelers cheques. but where redemption or any form of return such as interest or dividends is payable in Indian currency.555 197 . with its grammatical variations and cognate expres sions. institutions or persons outside India. letters of credit or bills of exchange drawn by banks. in the form of shares. but payable in Indian currency. debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency. Import . bonds. means bringing into India any goods or services.

a firm. medical assistance. insurance. processing. or receiving any payment for. or drawing. bonds and debentures. purchase. amusement or the purveying of news or other information. and includes use of the realized amount for discharge of a debt or liability denominated in foreign exchange and the expression repatriation shall be construed accordingly: Security means shares. an association of persons or a body of individuals. title. Person Resident in India Means Repatriate to India means bringing into India the realized foreign exchange and i. Transfer includes sale. or for the credit of any person. loan or any other form of transfer of right. What this Act actually regulates? Regulation and Management of Foreign Exchange Except with the general or special permission of the Reserve Bank. The holding of realized amount in an account with an authorized person in India to the extent notified by the Reserve Bank. exchange. gift. deposit receipts in respect of deposits of securities and units of the Unit Trust of India or of any mutual fund and includes certificates of title to securities. real estate. issuing or negotiating any . a Hindu undivided family. but does not include bills of exchange or promissory notes other than Government promissory notes or any other instruments which may be notified by the Reserve Bank as security for the purposes of this Act. whether incorporated or not. boarding or lodging or both. office or branch owned or controlled by such person. legal assistance. or ii. chit fund. possession or lien. savings certificates. no person can : Financial transaction means making any payment to. Service means service of any description which is made available to potential users and includes the provision of facilities in connection with banking. every artificial juridical person and any agency. The selling of such foreign exchange to an authorized person in India in exchange for rupees. a company. 1934 by the Ministry of Finance. but does not include the rendering of any service free of charge or under a contract of personal service. entertainment. transport. Person includes an individual. financing. by order or on behalf of any person. stocks. supply of electrical or other energy. mortgage.special one rupee notes issued under section 28A of the Reserve Bank of India Act. pledge. Government securities.

Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction. d. hold. Any person or body corporate registered or incorporated in India. in such circumstances as would indicate his intention to stay outside India for an uncertain period. No person resident in India can acquire. For any other purpose. a. For any other purpose. otherwise than i. iii. a person residing in India for more than one hundred and eighty-two days during the course of the preceding Financial year but does not include :( a) a person who has gone out of India or who stays outside India. Any class or classes of capital account transactions which are permissible. An office. For carrying on outside India a business or vocation outside India. or iii. For or on taking up employment outside India. branch or agency in India owned or controlled by a person resident outside India. The Reserve Bank may. or resident in India receives any payment by order or on behalf of any person resident . in consultation with the Central Government. or iii. However. Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The limit up to which foreign exchange shall be admis sible for such transactions: i. specify a. impose such reasonable restrictions for current account transactions as may be prescribed. An office. or ii. b. Make any payment to or for the credit of any person resident outside India in any manner. foreign security or any immovable property situated outside India except with the general or special permission of the Reserve Bank. Where any person in. any payment by order or on behalf of any person resident outside India in any manner. in such circumstances as would indicate his intention to stay in India for an uncertain period. A person who has come to or stays in India. b. ii. own. Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person. branch or agency outside India owned or controlled by a person resident in India. or transferring any security or acknowledging any debt. For carrying on in India a business or vocation in India.bill of exchange or promissory note. Receive otherwise through an authorized person. i. possess or transfer any foreign exchange. in public interest and in consultation with the Reserve Bank. or ii. the Central Government may. c. i. For or on taking up employment in India. a.

then.outside India through any other person (including an authorized person) without a corresponding inward remittance from any place outside India.555 . any asset outside India by any person LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 198 11. Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire. such person shall be deemed to have received such payment otherwise than through an authorized e.

Furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter. the value which the exporter. The Reserve Bank may. security or any immovable property situated in India if such currency. Furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified. security or property was acquired. expects to receive on the sale of the goods in a market outside India. restrict. transfer or invest in Indian currency. Every exporter of goods must : a. or regulate establishment in India of a branch. The Reserve Bank may. is received without any delay. containing true and correct material particulars. prohibit. including the amount representing the full export value or. held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. direct any exporter to comply with such requirements as it deems fit. restrict or regulate the following : A person resident in India may hold. prohibit. Every exporter of services shall furnish to the to such other authorities a declaration in such manner as may be specified. by regulation. foreign security or any immovable property situated outside India if such currency. office or other place of business. The Reserve Bank can. own. having regard to the prevailing market-conditions. if the full export value of the goods is not ascertainable at the time of export. A person resident outside India may hold. for carrying on any activity relating to such branch. b. for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines. . held or owned by such person when he was resident in India or inherited from a person who was resident in India. the Reserve Bank cannot impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business. own. security or property was acquired. transfer or invest in foreign currency. having regard to the prevailing market conditions. by regulations. office or other place of business by a person resident outside India. containing the true material particulars in relation to payment for Reserve Bank or form and in such and correct such services.However.

or contravenes any condition subject to which an authorization is issued by the Reserve Bank. if any. or up to two lakh rupees where the amount is not quantifiable. if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency. Property in respect of which contravention has taken place. and where such contravention is a continuing one. where the said property is converted into that currency. No order for the arrest and detention in civil prison of a defaulter shall be made unless the Adjudicating Authority has LEGAL ASPECTS OF BUSINESS a. Transfer or issue of any foreign security by a person resident in India. e.Where any amount of foreign exchange is due or has accrued to any person resident in India. such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. What if the Contravention of The Act takes place? What are the penalties for it ? If any person contravenes any provision of this Act. If any person fails to make full payment of the penalty imposed on him within a period of ninety days from the date on which the notice for payment of such penalty is served on him. or contravenes any rule. Transfer or issue of any security by a person resident outside India. notification. shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf. and any other property which has resulted out of the conversion of that property. b. Deposits between persons resident in India and . f. Any borrowing or lending in foreign exchange in whatever form or by whatever name called. be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable. Transfer or issue of any security or foreign security by any branch. of the persons committing the contraventions or any part thereof.Any Adjudicating Authority adjudging any contravention may. c. security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings. direction or order issued in exercise of the powers under this Act. where the said property is converted into such deposits. office or agency in India of a person resident outside India. he shall be liable to civil imprisonment. Indian currency. Any borrowing or tending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India. he shall. further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. upon adjudication. shall include deposits in a bank. d. regulation.

j. g. i. obligation or other liability incurred (i) by a person resident in India and owed to a person resident outside India or (ii) by a person resident outside India.555 199 . other than a lease not exceeding five years. Transfer of immovable property outside India. © Copy Right: Rai University 11. Acquisition or transfer of immovable property in India. other than a lease not exceeding five years.persons resident outside India. Giving of a guarantee or surety in respect of any debt. Export. import or holding of currency or currency notes. h. by a person resident in India. by a person resident outside India.

such officer shall at once release him. order the defaulter to be detained in the custody of such officer as the Adjudicating Authority may think fit or release him on his furnishing the security to the satisfaction of the Adjudicating Authority for his appearance as and when required.issued and served a notice upon the defaulter calling upon him to appear before him on the date specified in the notice and to show cause why he should not be committed to the civil prison. or has had since the issuing of notice by the Adjudicating Authority. A warrant for the arrest of the defaulter may be issued by the Adjudicating Authority if the Adjudicating Authority is satisfied. That the defaulter. or b. the Adjudicating Authority may make an order for the detention of the defaulter in the civil prison and shall in that event cause him to be arrested if he is not already under arrest. However. A warrant of arrest issued by the Adjudicating Authority may also be executed by any other Adjudicating Authority within whose jurisdiction the defaulter may for the time being be found. has after the issue of notice by the Adjudicating Authority. dishonestly transferred. with the object or effect of obstructing the recovery of penalty. the Adjudicating Authority may. in his discretion. That the defaulter has. Pending the conclusion of the inquiry. by affidavit or otherwise. the Adjudicating Authority may issue a warrant for the arrest of the defaulter. concealed or removed any part of his property . However in order to give a defaulter an . if the defaulter pays the amount entered in the warrant of arrest as due and the costs of the arrest to the officer arresting him. the Adjudicating Authority shall give the defaulter an opportunity showing cause why he should not be committed to the civil prison. and unless the Adjudicating Authority. When a defaulter appears before the Adjudicating Authority pursuant to a notice to show cause or is brought before the Adjudicating Authority. that with the object or effect of delaying the execution of the certificate the defaulter is likely to abscond or leave the local limits of the jurisdiction of the Adjudicating Authority. is satisfied : a. for reasons in writing. the means to pay the arrears or some substantial part thereof and refuses or neglects or has reused or neglected to pay the same. Where appearance is not made pursuant to a notice issued and served. Upon the conclusion of the inquiry. Every person arrested in pursuance of a warrant of arrest shall be brought before the Adjudicating Authority issuing the warrant as soon as practicable and in any event within twentyfour hours of his arrest (exclusive of the time required for the journey).

the Central Government may. before making the order of detention. the Adjudicating Authority may. Any such contravention may. but he shall not be liable to be arrested under the certificate in execution of which he was detained in the civil prison.e. fine paid in lieu of imprisonment) within one hundred and eighty days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank as may be authorized in this behalf by the Central Government in such manner as may be prescribed. up to three years. be compounded (i. if the defaulter is under arrest. against the person committing such contravention. a. on an application made by the person committing such contravention. or release him on his furnishing security to the satisfaction of the Adjudicating Authority for his appearance at the expiration of the specified period if the arrears are not satisfied. by an order published in the Official Gazette. merely by reason of is/release. against whom a complaint has been made a reasonable opportunity of being heard for the purpose of . When the Adjudicating Authority does not make an order of detention. be discharged from his liability for the arrears. and b. Where a contravention has been compounded. as the Adjudicating Authorities for holding an inquiry in the manner prescribed after giving the person alleged to have committed contravention. up to six months However he shall be released from such detention on the amount mentioned in the warrant for his detention being paid to the officer-in-charge of the civil prison. he shall. What are the adjudication authorities and where the appeal can be filed? Adjudication and Appeal For the purpose of adjudication. leave the defaulter in the custody of the officer arresting him or of any other officer for a specified period not exceeding fifteen days. A defaulter released from detention shall not. as the case may be. no proceeding or further proceeding. shall be initiated or continued. In any other case. Where the certificate is for a demand of an amount exceeding rupees one crore.opportunity of satisfying the arrears. 1973. in respect of the contravention so compounded. direct his release. appoint as many officers of the Central Government as it may think fit. Every person detained in the civil prison in execution of the certificate may be so detained . as the case may be. A detention order may be executed at any place in India in the manner provided for the execution of warrant of arrest under the Code of Criminal Procedure.

However where the Adjudicating Authority is of opinion that the said person is likely to abscond or is likely to evade in any manner. the payment of penalty. if levied.imposing any penalty. Every Adjudicating Authority shall have the same powers of a civil court and : LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 200 11. No Adjudicating Authority shall hold an enquiry except upon a complaint in writing made by any officer authorized by a general or special order by the Central Government. The said person may appear either in person or take the assistance of a legal practitioner or a chartered accountant of his choice for presenting his case before the Adjudicating Authority. it may direct the said person to furnish a bond or guarantee for such amount and subject to such conditions as it may deem fit.555 .

where the complaint cannot be disposed off within the said period. may prefer an appeal to the Special Director (Appeals). Any person aggrieved by an order made by the Adjudicating Authority. 1973. . c. e. Shall be deemed to be a civil court for the purposes of sections 345 and 346 of the Code of Criminal Procedure. The Central Government shall. the Special Director (Appeals) may entertain an appeal after the expiry of the said period of forty-five days if he is satisfied that there was sufficient cause for not filing it within that period. by notification. modifying or setting aside the order appealed against. Every appeal must be filed within forty-five days from the date on which the copy of the order made by the Adjudicating Authority is received by the aggrieved person and it shall be in such form verified in such manner and be accompanied by such fee as may be prescribed. appoint one or more Special Directors (Appeals) to hear appeals against the orders of the Adjudicating Authorities under this section and shall also specify in the said notification the matter and places in relation to which the Special Director (Appeals) may exercise jurisdiction. However. Every Adjudicating Authority shall deal with the complaint as expeditiously as possible and endeavor shall be made to dispose off the complaint finally within one year from the date of receipt of the complaint. 1973. Every Special Director (Appeals) shall have the same powers of a civil court and : d. All proceedings before it shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code. On receipt of an appeal. the Special Director (Appeals) may after giving the parties to the appeal an opportunity of being heard. the Adjudicating Authority shall record periodically the reasons in writing for not disposing off the complaint within the said period. All proceedings before it shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code. Shall be deemed to be a civil court for the purposes of sections 345 and 346 of the Code of Criminal Procedure. The Special Director (Appeals) shall send a copy of every order made by him to the parties to appeal and to the concerned Adjudicating Authority. However. b. pass such order thereon as he thinks fit confirming. being an Assistant Director of Enforcement or a Deputy Director of Enforcement.a.

any person appealing against the order of the Adjudicating Authority or the Special Director (Appeals) levying any penalty. the Appellate Tribunal may dispense with such deposit subject to such conditions as it may deem fit to impose so as to safeguard the realization of penalty. The Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period. establish an Appellate Tribunal to be known as the Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals) under this Act. on its own motion or otherwise. The Appellate Tribunal may. The appeal filed before the Appellate Tribunal shall be so dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose the appeal finally within one hundred and eighty days from the date of receipt of the appeal. the Appellate Tribunal is of the opinion that the deposit of such penalty would cause undue hardship to such person. However. An appeal to the Appellate Tribunal must be filed within a period of forty-five days from the date on which a copy of the order made by the Adjudicating Authority or the Special Director (Appeals) is received by the aggrieved person or by the Central Government and it shall be in such form. Where in any particular case. confirming. Where any appeal could not be disposed oft within the said period of one hundred and eighty days. as the case may be. after giving the parties to the appeal an opportunity of being heard. deposit the amount of such penalty with such authority as may be notified by the Central Government. call for the records of such proceedings and make such order in the case as it thinks fit. by notification. shall while filing the appeal. pass such orders thereon as it thinks fit. modifying or setting aside the order appealed against. Miscellaneous . The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and to the concerned Adjudicating Authority or the Special Director (Appeals). On receipt of an appeal. for the purpose of examining the legality. the Appellate Tribunal may. The Central Government or any person aggrieved by an order made by the Adjudicating Authority or Special Director (Appeals).The Central Government shall. propriety or correctness of any order made by the Adjudicating Authority in relation to any proceeding. may prefer an appeal to the Appellate Tribunal. Let us talk about some other miscellaneous provisions in brief. verified in such manner and be accompanied by such fee as may be prescribed. the Appellate Tribunal shall record its reasons in writing for not disposing off the appeal within the said period.

Where any document a. Is produced or furnished by any person or has been seized from the custody or control of any person. or against him and any other LEGAL ASPECTS OF BUSINESS © Copy Right: Rai University 11.555 201 . or b. under this Act or under any other law. Has been received from any place outside India (duly authenticated by such authority or person and in such manner as may be prescribed) in the course of investigation of any contravention under this Act alleged to have been committed by any person. in either case. and such document is tendered in any proceeding under this Act in evidence against him.

such director. shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. give to the Reserve Bank such general or special directions as it thinks fit. or to be in the handwriting of. manager. Admit the document in evidence notwithstanding that it is not duly stamped if such document is otherwise admissible in evidence. the truth of the contents of such document. direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of. Where a person committing a contravention of any of the provisions of this Act or of any rule. no court shall take cognizance of an offence under FERA and no adjudicating officer shall take notice of any contravention under section 51 of the repealed FERA after the expiry of a period of two years from the date of the commencement . or is attributable to any neglect on the part of. that the signature and every other part of such document which purports to be in the handwriting of any particular person or which the court may reasonably assume to have been signed by. is in that person s handwriting. The same provisions also apply to a firm or other association of individuals. that it was executed or attested by the person by whom it purports to have been so executed or attested. the court or the Adjudicating Authority. any particular person. any director. However any such person will not be liable to punishment if he proves that the contravention took place without his knowledge or that he exercised due diligence to prevent such contravention. Presume. was in charge of. and in the case of a document executed or attested. secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. and the Reserve Bank shall. For the purposes of this Act. manager. in the discharge of its functions under this Act. comply with any such directions. and was responsible to the company for the conduct of the business of the company as well as the company. b. at the time the contravention was committed. the Central Government may.person who is proceeded against jointly with him. c. every person who. as the case may be shall : a. Where a contravention of any of the provisions of this Act or of any rule. Notwithstanding anything contained in any other law for the time being in force. unless the contrary is proved. from time to time. secretary or other officer of the company. direction or order made there under is a company. Unless the contrary is proved.

Will be implemented by the Ministry of Communication and Information Technology. Ministry of Commerce and Industry. 1958. Trade Mark: A new Trademarks Act. industrial designs. Patents and Copyrights Act as prevalent In India. 2003 Copyright: The Copyright Act. Do you know what is Intellectual Property Rights (IPR)? IPR is a general term covering patents. This was all about the FEMA. Layout Design of Integrated Circuits: The Semiconductor Integrated Circuit Layout Design Act 2000. 1999 has been enacted superseding the earlier Trade and Merchandise Marks Act. trademarks and geographical indications are administered by the Controller General of Patents. Patents and Copy Rights Act These Acts are covered under the Intellectual Property Rights. . copyright.of this Act. 1958. 1994. The Act on Lay out Design of Integrated Circuits. trademark. Design: A new Design Act 2000 has been enacted superseding the earlier Designs Act 1911. Designs and Trade Marks which is under the control of the Depar