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CA - IPCC
COURSE MATERIAL
Quality Education
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PART A - Book No. A2


Fast Track Material in Business Laws_33e

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1. MEANING & NATURE OF CONTRACT
Contract

Contract:
a) An agreement enforceable by law is a contract. {Sec.2(h)}
b) Offer +Acceptance = Agreement
c) Agreement + Legal enforceability = Contract
d) Legal rights and obligations arise only if agreements are enforceable.

Agreement: Every promise and every set of promises forming consideration for each other is an
agreement. {Sec.2(e)}

Promise:
a) A proposal when accepted becomes a promise. {Sec.2(b)}
b) Agreement = Offer /Proposal + Acceptance of Offer.

Legal enforceability: Enforceability means creating a legally binding obligation between two parties.

Enforceability If the intention of parties is not clear then


depends upon the legal enforceability depends upon
intention of parties. presumptions.

Intention of parties No intention to create legal relations in


can be known from case of domestic, social & political
the agreement. agreements.
Trade or commercial or mercantile
transactions are made with an intention
to create legal obligations.

Case Laws:
a) Balfour Vs Balfour: An agreement where husband promised to wife to pay money is not enforceable
as it is social in nature.
b) Merritt Vs Merritt: Sometimes family agreements are also enforceable.
c) Rose & Frank Co. Vs. J.R. Crompton & Bros.Ltd: Business agreement is not enforceable when
parties want to do so.

Contract as per the contract act:


a) The agreement should satisfy all the conditions stated in Sec.10.
b) If any of these conditions is not satisfied, an agreement is not enforceable at law (void agreement).

Conclusion:
a) Agreement is a wider term. It may or may not be legally enforceable.
b) But a contract is a legally enforceable agreement
c) Thus all agreements are not contracts but all contracts are agreements.

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Essential elements of a valid contract

1. Offer and acceptance: There must be 2 parties to an agreement - proposer or promisor and
other one is offeree or promisee.

2. Intention must be to create legal relationship.

3. Competency of parties: (Sec.11) law recognises a person as competent to contract, provided he is:
a) major,
b) of sound mind,
c) not specifically disqualified by any law

4. Free Consent:
a) Two or more parties are said to consent when they agree upon the same thing in the same
sense.
b) Consent should not be affected by: Coercion, Undue influence, Fraud, Misrepresentation and
Mistake.

5. Lawful consideration:
a) Consideration = quid pro quo i.e. something in return.
b) Consideration is must to form a contract.
c) It should be lawful.
d) It should not be fraudulent or immoral or opposed to public policy or forbidden by law.
e) No consideration - it is not enforceable by law.
6. Lawful Object: Object means the purpose of the contract. The object of an agreement is said to be
unlawful if:
a) It is against to the provisions of any law;
b) It is fraudulent;
c) It involves an injury to the person or property;
d) The court treats it as immoral / opposed to public policy.
e) It is forbidden by law.

7. Certainty of terms:
a) Terms must be clear, complete & certain.
b) If it is vague or illusory or its meaning is not clear, it cant be enforced in a court of law.

8. Possibility of performance: An agreement to do an impossible act is void. Impossibility can be


physical or legal.

9. Legal formalities: Agreement must follow the necessary formalities like writing, registration,
stamping etc., if any.
Conclusion:
a) All the above elements must be present to form a contract.
b) Agreement includes variety of agreements such as personal, social, domestic, lawful, unlawful, void,
voidable, etc. Some of them are enforceable and others are not.
c) Agreements enforceable by law are contracts.

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Different types of contracts

On the basis of validity

Valid contract: Agreements which satisfy all essential conditions of Sec.10 are called valid contracts.

Void agreement:
a) If an agreement fails to meet any of the conditions in Sec.10, it is called void agreement.
b) They are void abinitio i.e. void from the beginning.
c) Void means Null and ineffectual.

Void contract:
a) A valid contract is formed initially but subsequently becomes void.
b) Due to supervening impossibility or subsequent illegality a valid contract may become void.

Voidable contract:
a) A contract which can be put to an end at the option of some of the parties to a contract is a voidable
contract.
b) The party entitled to avoid, may or may not avoid it.
c) If party decides to avoid, it cant be enforced.
d) If parties choose not to avoid then it is a contract.

When a contract becomes voidable?


a) When consent is obtained by coercion or undue influence or misrepresentation or fraud.
b) When one party prevents the other from performing his promise [Sec.53]
c) When time is the essence of a contract and a party fails to perform it within the specified time
[Sec.55].

Illegal agreements / unlawful contract [Sec.23]: A contract is illegal or unlawful, if its consideration or
object is:
a) Forbidden by law,
b) Of such nature, that if permitted would defeat the provisions of any other law,
c) Where the parties agree to commit a fraud on third person, their agreement is unlawful.
d) Injurious to the person or property of another,
e) Immoral,
f) Against public policy,

Note:
1. A contract may be illegal since its formation, or it may become illegal subsequently.
2. The parties to an illegal agreement are punishable
3. All illegal agreements are void but all void agreements/ contracts need not be illegal.

Unenforceable contracts:
a) These are not enforceable because of certain technical defects like non-registration or insufficient
stamp duty, etc.
b) If technical defects are removed - enforceable.

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On the basis of Formation

1. Express contract:
a) It is a contract which is made by words spoken or written.
b) It results in an express contract.

2. Implied contract:
a) It is a contract made otherwise than by words spoken or written.
b) It is inferred from the conduct or the circumstances of the particular case.
c) An implied promise results in implied contract.

3. Quasi contract:
i) Rights and obligations arise not by an agreement but by operation of law.
ii) They are imposed by law because of existence of some special circumstances.

On the basis of Performance

1. Executed contract: Where all the parties have performed their obligations.

2. Executory contract: Where all or some of the parties are still to perform their obligations.

i) Unilateral Contract:
i) A one-sided contract in which only one party has to perform his promise or obligation.
ii) Also called contracts with executed consideration.
ii) Bilateral Contract:
i) Obligation or promise in a contract is outstanding on the part of both the parties.
ii) Also called contracts with executory consideration.

Note:
a) Jus in rem means a right against a thing. It is available against the whole world at large.
b) Jus in personam means a right against a specific person. It is available only against particular
persons.
c) The rights created by a contract are purely personal in nature and they are enforceable only against
party in default.
d) Plaintiff is a person who brings a case against another person in the court.
e) Defendant is a person who is sued in the court.

NOTES
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2. OFFER & ACCEPTANCE
a) Offer is the first step in the agreement.

Legal rules for valid offer

a) Offer may be to do an act or not doing act g) Terms of offer must be clear and certain but
(abstinence, self denial) not confusing.
b) Offer should be made with an intention to h) Must be communicated to offeree.
create legal relationship.
(Lalman Shukla Vs.Gauri Dutt)
c) May be express or implied
i) All terms and conditions must be
d) May be conditional communicated along with offer, before or at
the time of contract.
e) Must be to some other person
j) Offerer should not say that offerees silence
f) Must be made to get the assent of some
will be taken as acceptance.
other person.

Types of Offer

Specific Offer:
a) Offer made to a specific person or group of persons.
b) If made to a specific person should be accepted by that person only.
c) If made to a group of persons - it can be accepted by any one in the group.

General Offer:
a) This is offer made to whole world at large.
b) Any one having knowledge of offer can accept it.
c) If many people accept there will be many contracts.
d) Where some reward is offered to public in cases like finding lost goods - reward is given only to first
person. In such a case fulfilling the condition is sufficient. Acceptance need not be specifically
communicated. (Carlill Vs. Carbolic Smoke Ball Co.)
Cross Offers:
a) Two offers meeting cross purposes, made by two parties to each other, in ignorance of each others
offer, are termed as cross offers.
b) Cross offers do not amount to acceptance of ones offer by the other and cant be treated as a
complete agreement.
Counter Offer:
a) When an offer is made, acceptance should be made as it is. There should not be any change.
b) Acceptance with change is called counter offer.
c) It results in rejection of original offer.
d) It leads to lapse of original offer.
e) Counter offer results in fresh offer by original offeree.
f) If the original offerer accepts it, then contract is formed.
g) Sometimes original offeree wants to accept original offer after making counter offer.

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h) The original offerer has choice whether to accept it or not. If he accepts this new offer then the
contract is formed on the basis of original offer.
i) Mere enquiry is not counter offer.

Invitation to offer

Meaning:
a) Invitation to offer is different from offer.
b) It is understood from wordings used and intention of parties.

Possible forms of invitation to offer:


a) Displaying goods for sale g) Tenders
b) Price lists, catalogues h) Quotation
c) Advertisements Except general offer of i) Menu card
reward to public.
j) Railway time table
d) Auctions
k) Employment advertisements.
e) Declaration of intention
l) Auctions
f) Share offers (prospectus)

Acceptance

Acceptance means agreeing to offer.

Essential elements of valid acceptance:


a) Acceptance can be given by offeree or his agent only.
b) Acceptance should be made without changing anything in the offer (Absolute, unqualified)
c) Acceptance shall be according to the mode prescribed by offerer. Otherwise, offeror has choice to agree
or not to agree it. If disagrees, he should inform the same. If he is silent, it means he has agreed.
d) If offeror has prescribed time limit, acceptance shall be made with in that time. If no time limit is
prescribed, it shall be given with in a reasonable time.
e) Acceptance cant be made in ignorance of offer.
f) Acceptance must be given before offer lapses or before it is revoked.
g) Acceptance must be communicated to the offeror expressly (By words spoken or written) or
impliedly (By conduct).
h) Acceptance cant be implied from silence.
i) Sometimes offeree may indicate by his previous experience that his silence amounts to acceptance. In
such a case silence is acceptance.
j) Agreement to agree in future is not valid.

Termination of Offer

a) Termination = Coming to an end.


b) Termination can be due to
i) Revocation by offer (by communication of notice of revocation). May be revoked at any time
before its acceptance.

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ii) Lapse of time. Offer is automatically revoked after lapse of time specified in offer. If no time is
specified after lapse of reasonable time.
iii) Failure of acceptor to fulfill the condition precedent to acceptance.
iv) Death or insanity of the proposer before acceptance. If the offeree does not know that the offeror
has died or become insane and gives acceptance it is a valid acceptance.
v) Rejection by offeree
vi) When counter offer is made original offer lapses.
vii) Failure to accept according to prescribed mode
viii) Subsequent illegality or destruction of the subject matter.

Tenders

a) Tender = Bid = Offer


b) Tenderer = Bidder = Offeror
Offer Acceptance
c) Invitation to offer
d) Invitation to Tender Tender Acceptance
e) Specific or definite tender Tender is to supply a definite quantity of goods.
f) Standing or open or continuing tender Tender is to supply goods periodically or as per
requirements (Acceptance)
g) Requirement / order = Acceptance
h) As and when an order is placed, it amounts to acceptance. Each order creates a new binding
contract.
i) If offeree gives no order / fails to order full quantity of goods there is no breach of contract.

Revocation or withdrawal of tender:


a) Tender (offer) can be revoked before acceptance (order).
b) It can be revoked even if there is a clause restricting his right to withdraw.
c) It cant be revoked:
i) If some consideration is taken as advance.
ii) Any law prohibits such revocation.

Communication of offer

a) In case of telephone, telegram, fax etc. Immediate communication is presumed. If the machine goes
out of order, communication is not complete.
b) In case of phone, telegram etc., contract is formed at the place where acceptance is received.
c) In case of acceptance by post, the place where letter is posted is the place of contract.
d) Communication of offer is complete when it comes to the knowledge of offeree.

Communication of acceptance

a) Communication of acceptance is complete


i) In case of offeror - When letter of acceptance is posted by the acceptor.
ii) In case of acceptor - When letter of acceptance reaches offeror.

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b) The offeror becomes bound by the contract immediately when acceptor posts the letter, even if it is
lost in post.
c) Acceptor becomes bound by contract only when letter reaches offeror.

Communication of revocation of offer & acceptance

a) Offeror can revoke offer before letter of acceptance is posted by acceptor.


b) Offer can be revoked before its acceptance.
c) Communication of revocation of offer should reach offeree before he posts the letter of acceptance.
d) Offerer may agree to keep offer open for a certain period and may revoke it before the expiry of it:
i) If offer is accepted in the mean time.
ii) If there is no consideration for keeping the offer open.
e) Acceptor can revoke acceptance before letter reaches offeror.
f) English law doesnt permit revocation of acceptance.

Rules for revocation of offer:


a) It must always be expressed.
b) It must move from the offeror himself or a duly authorised agent.
c) Notice of revocation of a general offer must be given through the same channel by which the original
offer was made.
d) Offer cant be revoked even if the letter of acceptance is lost or delayed in transit.

NOTES
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3. LEGALITY OF OBJECTIVE & CONSIDERATION
a) Consideration = quid pro quo = Something in return
b) Doctrine of consideration: Agreement without consideration is void.

Features of consideration

a) Consideration should be given at the request of promisor but not voluntary.


b) It may move from promisee or any other person. Under English law it must move from promisee.
c) Consideration may be an act, abstinence (Self denial), forbearance (Foregoing ones legal right) or
detriment (Loss).
Forbearance to sue - compromise of a disputed claim, compromise with creditors are some
examples.
d) It can be past, present or future. Under English law past consideration is no consideration.
e) It need not be adequate.
f) It must be real, not illusory.
g) It must be something which promisor already not bound to do.
h) It must be lawful.
i) In some cases part of consideration is unlawful and other is lawful. In such cases the agreement is
void if unlawful part cant be separated from the lawful part.

Exceptions to doctrine of consideration

a) Love and affection:


i) Made on account of natural love and affection
ii) Must be in writing,
iii) Must be registered,
iv) Between near relatives. It includes parties related by blood or marriage. Nearness of relation
does not necessarily imply natural love and affection.
b) Promise to pay for past voluntary services.
c) Promise to pay time barred debt.
i) It is made in writing,
ii) It is signed by the debtor or by his agent,
iii) Promise may be to pay whole / part of debt.
d) Gift
e) Remission - Agreeing to receive less than due.
f) Charitable subscriptions.
i) If promisee makes some commitments on the strength of promisee then promisor is bound to pay
the amount.
g) Agency
h) Guarantee Consideration recd. by the principal debtor is a sufficient consideration for surety.

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Doctrine of Privity of contract

a) Under the law of contract, an agreement is enforced only by the parties to it (Nemo Dat Quad Non-
Habet).
b) This is known as doctrine of privity of contract.
c) But in some cases others (stranger to contract) can also enforce it. They are:
i) Beneficiary under a trust. Beneficiary can enforce the rights given under the trust, even though he
was not a party to the contract.
ii) Family settlements made among male members for the benefit of female members can be
enforced by female members.
iii) Marriage settlement of minor can be enforced by him, even though agreement is between
parents.
iv) Agency. Principal can enforce contracts entered into by agent.
v) Covenants running with land can be enforced by transferee of land.
Copy Rights Reserved
vi) Acknowledgement or estoppel.
To MASTER MINDS, Guntur
vii) Assignment of a contract.
d) There can be stranger to a consideration but not stranger to the contract.

Agreements expressly declared to be void

a) If the object of an agreement is the performance of an unlawful act, the agreement is unenforceable.
b) Where consideration or object is prohibited by law.
c) If it defeats the provisions of any other law.
d) Where the consideration or object is of such nature that it is fraudulent.
e) Where the consideration or object of the agreement involves injury to other person or property.
f) Consideration or object is Immoral.
g) Opposed to public policy.

Agreements opposed to public policy

a) Trading with enemy.


Copy Rights Reserved
b) Agreements Interfering with the course of justice
To MASTER MINDS, Guntur
c) Stifling prosecution
d) Maintenance & Champerty
i) Maintenance - helping a person in litigation by money or otherwise. This is valid.
ii) Champerty - helping a person in litigation and sharing the proceeds from the case. This is void.
iii) According to English law both are void.
e) Traffic in public offices.
i) Agreement to provide money to a member of parliament or assembly or minister.
ii) Induce a public officer to act corruptly.
iii) Procure a public title like "Bharat Ratna", "Padma Vibhushan", etc. for reward.
iv) Procuring votes in election for consideration.
v) To sell seat in a medical or engineering college.
f) Agreements creating interest opposed to duty
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g) Interfering with parental duties.
h) Marriage brokerage agreements
Copy Rights Reserved
i) Agreement to form monopoly To MASTER MINDS, Guntur
j) Agreement to defraud creditors or tax authorities
k) Agreements not to bid against each other
l) Agreement to commit a crime. Similarly agreement to indemnify a person against criminal acts.
m) Agreement to interfering with marital duties.

Unlawful & Illegal agreements

a) Illegal acts are those which involve the commission of a crime or contain an element of obvious
moral turpitude or contrary to public policy.
b) Unlawful acts are those which are less rigorous in effect and involve a non-criminal breach of law
c) Unlawful agreements are less severe than illegal agreements.
d) All illegal agreements are unlawful but all unlawful are not illegal.
e) Effects of illegality Collateral transactions are also illegal. No action can be taken for recovery of
money paid or for breach of illegal agreement.
f) In an illegal agreement, in cases of equal guilt, the position of the defendant is better than that of
plaintiff.
g) An agreement may contain 2 parts, one legal and other illegal. If it is possible to separate them legal
part can be enforced. Illegal part cant be enforced.
Basis of distinction Void agreement Illegal agreement
All void agreements need not All illegal agreements are always
Void / illegal
necessarily be illegal. void.
Effect on collateral The collateral agreements do not The collateral agreements also
agreement become void become void.
If a contract becomes void The money advanced or thing
Restoration of benefit
subsequently, the benefit received given cant be claimed back.
received
must be restored to the other party.

NOTES
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4. CAPACITY TO CONTRACT
Minor

Minor: Minor is a person who has not completed 18 years of age. But in the following 2 cases he attains
majority after completion of 21 years of age.
1. Where a Court has appointed guardian of a minors person or property or both (under the Guardians
and Wards Act, 1890); or
2. Where the minors property has been placed under the superintendence of a Court of wards.
a) The age of majority is decided by the law to which he is subject to.
b) Agreements entered into by a Minor are void ab initio (Mohri Bibi Vs. Dharmodas Ghosh)

Rules regarding contracts entered by minors:


a) No Specific performance. An agreement with minor cant be enforced.
b) An agreement entered by minor cant be ratified even after attaining the age of majority.
c) Doctrine of estoppel does not apply. Even if minor misrepresents his age, he cant be made liable.
d) No restitution (Restore back) of the benefit taken by minor, unless minor still possesses that.
e) Agreements where minor is a beneficiary are enforceable.
f) If a minor enters into agreement jointly with a major, major is liable and minor is not liable.
g) Minor can be a partner to share profits only but not losses.
h) Minor cant be principal but he can be an agent.
i) Minor can apply for fully paid up shares in a company through guardian.
j) Minor cant be declared as insolvent.
k) Guardian can enter in to a contract on behalf of minor, if it is for the benefit of minor and guardian is
given authority to do so. Guardian cant enter into a valid contract for purchase of immovable
property for his/her service.
l) Parent / Guardian of minor is not liable for acts of the minor.
m) Minor is liable for civil wrongs (torts). If it arises out of the contract then minor is not liable.
n) Minor cant give guarantee.
o) A minor can negotiate a cheque or other instrument. He is not personally liable for payment.
p) A contract of apprenticeship is valid if it is beneficial for the minor. But he should be of 14 yrs of age
and physically fit.
q) If minor is above 15 years he can be a member of trade union.
r) Marriage contracts of minor depends on the personal law of the concerned community.
s) Minor has no personal liability under any case. But his property is liable in some cases like supply of
necessities.

Unsound Mind

a) A contract entered with a person of unsound mind is void.


b) A person is sound mind if at the time when he enters into contract is capable of
i) Understanding it, and
ii) Forming a rational judgment as to its effect upon his interests.

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Different forms of unsoundness:
a) Idiot Permanently unsound mind. Agreement is always void.
b) Lunacy or insanity Contracts entered during lucid intervals is valid.
c) Drunkard or intoxicant During that time void
d) Delirious (sick) person During that time void
e) Hypnotised persons During that time void
f) Mental decay During that time void

Effect of agreement with unsound mind:


a) A contract by a person of unsound mind is absolutely void.
b) A contract for his benefit is valid.
c) His property is liable to necessaries supplied to him or to his dependents.
d) Burden of proof lies on the person who wants to cancel the contract on the basis of unsound mind
e) Soundness of mind is required at the time of entering into contract.
f) If a person becomes unsound after entering in to contract, the contract is valid.

Persons specifically Disqualified to enter in to contract:


a) Foreign (alien) enemies - during war time.
b) Foreign sovereigns and ambassadors They cant be sued in our courts except with the prior
permission of the central government.
c) Insolvent while insolvency proceedings are pending he is not capable.
d) Convict while in prison not capable.
e) Corporations should act with in power mentioned in memorandum
f) Women - are capable.
i) Even husband and wife can enter into valid contract and can sue each other.
ii) A husband is not liable for the contract made by his wife unless he allows her to act as his agent
either with express or implied authority.
iii) However, a husband is liable for the contract made by his wife for supply of pressing necessaries
of life. In such a case she is an agent of her husband by necessity.

NOTES
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5. FREE CONSENT
Free Consent

a) Two or more persons are said to consent when they agree upon same thing in the same sense.
b) Consent = consensus adidem = Identity of minds
c) No consensus adidem means error in consensus.
d) Salmond describes it as error in consensus
e) To make a valid contract, consent should be free.
f) Lack of free consent may be caused by:
i) Coercion iii) Fraud v) Mistake
ii) Undue influence iv) Misrepresentation
g) When consent is obtained from first 4 voidable.
h) When caused by mistake void.

Coercion

Coercion is the threat or force used by one party against another for forcing him to enter into an
agreement.

Acts amounting to coercion:


a) Committing of any act forbidden by IPC
b) Threating to commit any act forbidden by IPC
c) Unlawful detaining of property
d) Threating to detain any property

Important observations:
a) IPC may or may not be in force at the place where coercion is employed.
b) Coercion may also proceed from a third party.
c) Coercion may be applied against third party also.
d) Threat to commit suicide amounts to coercion.

Acts not amounting to Coercion:


a) Act done under statutory compulsion.
Copy Rights Reserved
b) Threat to strike. To MASTER MINDS, Guntur
c) Detaining property under mortgage.
d) Threat to prosecution.

Coercion Vs. Duress:


a) In the English law the near equivalent of the term "Coercion" is "duress".
b) Duress does not include detaining of property or threat to detain property.
c) Duress can be employed only by a party to the contract or his agent.

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Effect of coercion:
a) The contract is voidable.
b) If the aggrieved party decides to set aside the contract, he must give back any benefit received.
c) If the aggrieved party does not set aside - it is a valid contract.

Burden of proof:
a) The burden shall lie upon the aggrieved party who wants to set aside the contract.
b) Has to prove that he would have not entered into a contract, if coercion was not employed.

Undue influence

Undue influence is said to be there when:


a) The relation between the parties is such that one of the parties is in a position to dominate the will of
the other and
b) The dominant party uses his position to obtain an unfair advantage over the other.

When domination exists:


a) Real or Apparent authority A person has actual authority which can be easily seen.
b) Fiduciary relation It is a relation of trust and confidence. There is no exhaustive list. It is
understood through common sense and past decisions. E.g.: - Spiritual guru and disciple.
c) Persons whose mental capacity is affected by old age or mental or bodily illness or any other cause.

Presumption of undue influence:


a) Parent and child
f) Solicitor and Client
b) Guardian and ward
g) Fianc and fiance
c) Trustee and beneficiary
h) pardanashin women
d) Religious adviser and disciple
e) Doctor and patient

No presumption of undue influence:


a) Landlord & tenant b) Creditor and debtor c) husband and wife

Pardanashin women: Law presumes undue influence and the other party has to prove that undue
influence is not exercised.

Effect of undue influence:


a) The agreement is voidable.
b) Other party is required to refund the benefit recd.
c) If the aggrieved party does not want to set aside the contract, it becomes a valid contract.

Burden of Proof: Generally weaker party has to prove that:


a) The other party is in a position to dominate the will
b) Other party actually used his influence to obtain unfair advantage
c) Transaction is unreasonable.
d) In case of unreasonable transactions, the dominating party has to prove that such contract was not
induced by undue influence.

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Fraud

Meaning: Fraud means intentional misleading of one person by another.

Acts which constitute fraud:


a) Giving a suggestion which he does not believe to be true.
b) Active concealment of fact, by one, having knowledge of the fact. Copy Rights Reserved

c) A promise made without any intention to perform


To MASTER MINDS, Guntur
d) Any other act designed to deceive others
e) Any other act or omission which is specifically declared by law as fraudulent.

Essential elements of fraud:


a) There should be some false representation.
b) Representation must relate to a material fact which exists now or in past.
c) Made before contract.
d) Made with an intention to induce other party to enter in to a contract.
e) Knows that it is false or does not believe it to be true or made recklessly.
f) Other party relied upon the statement.
g) Other party suffered loss by acting upon the statement.

Effect of fraud:
a) Aggrieved can rescind the contract and may claim restitution i.e., to be placed in the same position
as if there was no contract at all.
b) He can also claim compensation for damages. But he cant do so in the following cases:
i) Silence amounts to fraud and truth can be discovered truth with ordinary diligence.
ii) party gave the consent in ignorance of fraud;
iii) takes a benefit under the contract;
iv) Before the contract is rescinded, an innocent third party acquires some interest.
v) Parties cant be restored to original position.
c) Aggrieved party may insist that the contract shall be performed and that he shall be put in the
position in which he would have been if the representation made was true.
d) Aggrieved party can claim damages, if any.
e) Shall restore any benefit recd. to the other party.

Where silence is fraud: Generally silence is not fraud except in the case of contract of uberrimae fidei
(utmost good faith). They are:
a) Contract of insurance e) Contracts of family settlements
b) Contract of sale of immovable property f) Where silence is treated as equal to speech
c) Allotment of shares g) Latent defects
d) Contracts of marriage h) Half truth

Where silence is not fraud:


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a) Defrauded party could discover the truth by ordinary carefulness.
b) Defrauded party did not rely upon the statement.

Misrepresentation

Meaning: Misrepresentation is untrue statement made innocently generally fraud is made intentionally.

Acts that make misrepresentation:


a) Unwarranted Statement Statement made without any proof. (of course innocently)
b) Breach of duty when there is a duty to disclose, but not disclosed.
c) Inducing mistake about subject matter.
d) Under English law it is called constructive fraud

Essentials of misrepresentation:
a) Misrepresentation must be of fact, but not opinion.
b) It must be of material fact.
c) It is made without any intention to deceive other party.
d) It is made before or at the time of contract.
e) Addressed to other party.
f) It must induce other party i.e. other party believed it to be true and acted on that basis.

Effect:
a) Right to rescind the contract. But he cant do so in the following cases:
i) Party could discover the truth by ordinary diligence;
ii) Gave consent in ignorance of misrepresentation;
iii) Where party takes benefit under the contract;
iv) An innocent third party acquires some interest for consideration.
v) Parties cant be restored to their original position.
b) Aggrieved party may insist that the contract shall be performed and that he shall be put in the
position in which he would have been if the representation made was true.

Mistake

Meaning: Mistake means an erroneous belief about something.


a) Mistaking of Indian law
i) Ignorance of law is no excuse.
ii) If parties did not understand law and enter in to contract on such mistake, they cant ask for
cancellation of contract. Contract is valid.
b) Mistake of foreign law is treated as mistake of fact.

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Mistake

Mistake of Law Mistake of fact

Mistake of Mistake of Unilateral Bilateral


Indian law Foreign law mistake mistake

Contract Treated as Contract Agreement


is valid mistake of is valid is void
fact

Exceptions:
Mistake as to identity of person
Mistake as to character of document

Bilateral Mistake

Conditions
a) Both the parties are under mistake.
b) Mistake of fact but not law.
c) Mistake about fact essential to agreement.

Cases/Situations
a) Mistake about subject matter
i) As to the existence of subject matter iv) As to the quantity of the subject matter
ii) About the title of the subject matter v) As to the price of the subject matter
iii) As to the identity of the subject matter vi) As to the quality of the subject matter
b) Mistake about possibility of performance.
i) Physical impossibility ii) Legal impossibility

Effect of Lack of Free Consent

Type Details Validity


Coercion a) Voidable at the option of aggrieved party.
b) If aggrieved party does not set aside, it is valid. Voidable
c) Aggrieved party should return any benefit received.
Undue Same as above Voidable
influence
Fraud a) Aggrieved party can seek cancellation of contract or
claim restitution or damages. But he cant do in the
following cases: Voidable
 Where silence amounts to fraud and he did not take
minimum care to examine.

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 Given consent in ignorance of fraud.
 After becoming aware of fraud, takes benefit out of
contract.
 An innocent third party acquirers some interest in
property for consideration
 Parties cant be restored to original position.
b) Demand specific performance
c) If he wants to cancel, should return the benefit.
Misrepre a) Rescind contract
sentation Voidable
b) Insist on specific performance
Mistake of Ignorance of law is no excuse Valid
Indian law
Mistake of Unilateral Valid
Foreign law Void
Bilateral
Mistake Unilateral Valid
of fact Void
Bilateral
Unilateral mistake about identity of person or character of document Void

Burden of Proof: Burden of proof lies on the party who pleads lack of free consent.

NOTES
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6. VOID AGREEMENTS, CONTINGENT CONTRACTS & QUASI CONTRACTS
A Void agreement is an agreement which is not enforceable by law.

Agreement expressly declared as void:


a) Agreements entered by incompetent parties. (Sec.11)
b) Agreements entered into through a mutual mistake of fact between the parties. (Sec.20)
c) Agreements with unlawful object / consideration. (Sec.23)
d) Agreements with partly unlawful object or consideration [Sec.24]
e) Agreements without consideration [Sec.25]
f) Agreement in restraint of marriage [Sec.26]
g) Agreement in restraint of trade [Sec.27]
h) Agreement in restraint of legal proceedings [Sec.28].
i) Agreement having uncertain meaning [Sec.29]
j) Wagering agreement [Sec.30]
k) Agreements contingent upon impossible events.(Sec.36)
l) Agreements to do impossible acts (Sec.56 )
m) Agreements to do reciprocal promises, one set of which is legal and the other is illegal.(Sec.57)

Agreements in restraint of marriage

a) There should not be any type of restriction (partial or absolute) on any person (other than minor) on marriage.
Such restrictions are void.
b) An agreement which provides a penalty on remarriage is valid.

Agreements in restraint of trade

Meaning:
a) Freedom of trade is a right given by constitution.
b) Any agreement which restricts the doing of any profession, trade or business is void to that extent.
c) Complete or partial restraint is void.
Copy Rights Reserved

Burden of proof: To MASTER MINDS, Guntur


a) The party challenging must show that the restraint is injurious to the public.
b) The party supporting must show that the restraint is necessary to protect his personal interest.

Exceptions: Sometimes restrictions or controls on freedom of trade or employment are good for society
and they are valid. Accordingly certain restrictions are provided by contract Act, partnership act, etc.
1. Restrictions in Contract Act - Sale of goodwill:
a) Purchaser of goodwill can restrain the seller from carrying on similar business in specified local
limits, for some specified period.
b) Such restrictions are enforceable, if the following conditions are satisfied:
i) Restrictions must relate to similar business.
ii) Restriction must be within specified local limits.
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iii) Such local limits must be reasonable depending on the nature of business.
iv) Restriction for reasonable period of time
2. Restrictions By Partnership Act: Partnership agreement may state that:
a) A partner should not do any business other than that of firm, when he continues as partner.
b) An outgoing partner should not do similar business in specified area for some period.
c) When dissolution of firm is anticipated, partners should not do similar business in local area.
d) When business of firm is sold, the buyer (of goodwill) can restrain partners from doing similar
business.

3. By Judicial decisions:
a) Restraint on Employees: There can be reasonable restrictions on employees like:
i) To serve employer for a specified period.
ii) Not to work any where else during employment
iii) After leaving employment, should not do competing job or business,
These are valid if the intention is to protect the interest of the employer.
b) Clause to prevent the employee from accepting similar engagement after termination:
i) It is not a restraint - if it is intended to protect the interest of the employer.
ii) It is treated as restraint - if it is intended for any other purpose.
c) Restraint in trade combinations:
i) Trade associations which regulate business are valid.
ii) But if they create monopoly, it is void
d) Restraint in sole trading agreements: A person agrees to sell only the products of / to a particular
manufacturer alone is valid.

Agreements in restraint of legal proceedings

a) An agreement by which any party is restricted absolutely from enforcing his legal rights under a
contract is void to that extent.
b) Individuals by agreement cant alter the provisions of any law.
c) Partial restriction does not render an agreement void.
d) Partial restrictions like restraint on going to higher court on appeal are valid.
e) If any party is restricted absolutely from enforcing his legal rights under or in respect of any contract -
void to that extent.
f) Agreement limiting the period of limitation provided by the limitation act is void.
g) Agreements referring disputes to arbitration or exclusion of jurisdiction of a particular court are valid.

Exceptions: i.e. even absolute restraint is valid:


a) Referring disputes to arbitration.
b) Exclusion of jurisdiction of a particular court.

Copy Rights Reserved

To MASTER MINDS, Guntur

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Uncertain agreements

a) Agreement the meaning of which is uncertain is void.


b) It is not certain but it is possible to know the meaning then it is valid.
c) Uncertainty may be regarding existence of the subject matter, quality, quantity, price or title.

Wagering agreements

Meaning: A wager occurs when the parties agree that a payment will take place between them
depending upon the outcome of an uncertain event in which they have no interest other than their
agreement.
Essentials of a wager:
a) Uncertain event: It may be a future uncertain event or it may be a past event, about which the
parties have no knowledge.
b) Win or lose situation: When one party wins, other party should loose and vice versa.
c) Parties should not have any interest other than stake money. This is the main difference between
wager and insurance.
d) Parties should not have control over the event.
e) Stake money should come out of parties own pockets.
f) There must be promise to pay money or moneys worth.
g) There must be common interest to bet.
h) Only one party stands to win or lose to the other party.

Effect of wagering agreements:


1. Main Transaction:
a) Wagering transaction is void. Copy Rights Reserved

b) No suit for recovering anything won. To MASTER MINDS, Guntur


c) In Gujarat and Maharashtra it is illegal.
2. Collateral transaction:
a) If main transaction is void then collateral transaction is valid.
b) If main transaction is illegal then collateral transaction is also illegal.
c) Transactions collateral (related to) to wagering agreements is valid.
d) In Gujarat and Maharashtra collateral transactions to wagering are also illegal.
3. Suit to recover money deposited:
a) Winner has no right to recover, but looser can recover.
b) If it is already paid to the winner, he cant recover.

Examples:
1. Agreement to settle the difference between contract price and market price on a particular day.
2. Lotteries
3. Puzzle competition based on luck.

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Not Wagering Examples:
a) Puzzles or competitions based on skill or d) Share market transactions in which delivery
intelligence. is intended.
b) Prize worth more than Rs.500 to horse race e) Prize competitions where prize is not more
winner than 1000.
c) Contracts of insurance f) Govt. authorized lotteries.
g) Permitted speculative transactions

Agreements to do impossible acts

a) Agreement to do an impossible act in void.


b) It may happen that an event becomes impossible after the contract is made.
c) Then the contract becomes void from the date of happening of such event.

Quasi Contracts

1. Generally contracts are formed on the basis of actual promises.


2. But in some cases, even though there are no actual promises, law imposes certain rights and
obligations.
3. They are similar to contracts.
4. It is based on the maxim No man should grow rich out of another persons cost
5. In English law it is called as Constructive contracts.
6. Indian contract describes it as certain relations resembling those created by contracts.
7. Sometimes it is also known as Law of restitution
8. Forms of Quasi contracts (Sections 68 to 72):
a) Claim for necessaries supplied to a person who is incapable of entering into a contract.
b) Payment of lawful dues by interested parties.
c) Obligation of a person enjoying benefit of a non-gratuitous act.
d) Finder of lost goods.
e) Recipient of goods delivered by mistake or under coercion.

Supply of necessaries to incapable persons

Conditions:
a) Incapable person may be minor or unsound mind person.
b) Other person has supplied necessaries suited to the condition of life of such incompetent person.
c) Supplied necessaries either to him or to anyone whom he is legally bound to support.
d) If there is no property to him nothing can be recovered.

Effect:
a) Amount is to be recovered from the property of incapable person. No personal liability.
b) Only a reasonable price is paid, but not the price mentioned in the contract.
c) Necessaries include physical necessaries and social necessaries.
d) Loan granted for purchase of necessaries also comes under this section

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Payment of lawful dues by interested persons

A person making the payment on behalf of someone else, to safeguard his own interest, can claim it
from such other person who was legally bound to pay.
Conditions:
a) The person who made the payment should have interest in such payment.
b) The payment must be one which is to be paid compulsorily and lawful It should not be voluntary
and unlawful.
c) The person who made payment was not himself legally bound to pay.
d) Payment must not be made to self.

Effect: The person who made the payment is entitled to get reimbursement from such other person.

Enjoying Benefit of a non-gratuitous Act

If a person enjoys benefit of a non gratuitous act he is liable to compensate the other person or restore
the thing. Non gratuitous act means an act which is not intended to be done free.

Conditions:
a) A person has lawfully done something or delivered something to the other.
b) It has been done by a person not intending to act gratuitously.
c) The other person has enjoyed the benefits of goods or services so provided.

Effect: The person enjoying the benefit must repay.

Finder of Lost goods

A person who finds goods belonging to another and takes them into his custody is subject to the same
responsibility of a bailee.

Duties of finder:
1. Finder has no legal duty to take charge of them.
2. If however, he takes charge, he is liable to:
a) Try and find out the true owner
b) Not to use goods for his own use
c) When real owner is traced, restore to real owner
d) Take care of goods as a man of ordinary prudence would take care of his own goods
3. Finder is treated as bailee of the goods.
4. Bound to take as much care as a man of ordinary prudence would take care of his own goods.

Rights of finder:
1. The finder is the owner of goods against the whole world except true owner.
2. Finder can exercise lien right on goods for expenses incurred by him in preserving the goods and
finding the true owner.

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3. When some reward is announced for lost goods, finder may claim it and may retain the goods until
he gets the reward.
4. When owner refuses to pay the lawful charges, he can sell goods in the following conditions:
a) When goods are in perishable condition,
b) When lawful charges incurred by the finder amounts to 2/3 of its value or more.

Restitution

1. Rescission of voidable contract:


a) When an aggrieved party rescinds a voidable contract, the other party need not perform.
b) If aggrieved party already recd. any benefit he must restore such benefit.
2. Obligation of person who has received advantage under void agreement or void contract: When an
agreement / contract become void, any person who has recd. any advantage must restore such
benefit.
3. It is based on doctrine of unjust enrichment.
4. It is repayment of benefit enjoyed but not loss suffered by defendant.
5. This principle is applied to contracts which are discovered to be void and contracts which become
void
6. This is not applicable for:
a) Contracts which are known to be void when they are entered in to (Initial impossibility)
b) Contracts entered by incompetent persons.

Contingent Contracts

A contingent contract is a contract to do or not to do something if some event, collateral to such


contract, does or does not happen.

Conditions:
a) Its performance depends on the happening or non happening of some future event.
b) The event must be uncertain.
c) The event must be collateral (In wagering agreement, the event is the main).
d) If the performance of promise depends on mere will and pleasure of promisor, it is not a promise at all.

Rules regarding enforcement of Contingent contracts

Type of Contract When Enforceable When void


Contingent upon happening of If the event becomes
Only when the event happens
uncertain future event impossible

Contingent upon non-happening of When happening of that event If the event happens with
uncertain future event becomes impossible in fixed time

Continent upon future conduct of a


It becomes certain that such If the person does anything
person.
event will not happen. which makes it impossible.

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Contingent upon non happening of If that event does not happen With in fixed time that
uncertain event with in a fixed time. event happens

Contingent upon happening of Only when event happens with If it does not happen or
uncertain event with in fixed time. in fixed time. event becomes impossible.

Agreements Void whether known or not


Never enforceable.
contingent upon impossible events. at the time of contract.

NOTES
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7. PERFORMANCE OF CONTRACT
Performance of contract

1. Performance of a contract means fulfillment of the legal obligations created by a contract.


2. Performance of contract can be in two ways:
a) Actual performance
b) Attempted / Tender of performance

Tender of Performance

Actual performance:
a) A party is said to actually perform when he fulfills all his obligations under the contract.
b) When it is actually performed, the contract comes to an end.

Attempted Performance (Tender): The promisor is ready to perform his promise and offers to perform
the same, but promisee refuses to accept it. This is called attempted performance.

Effects of Tender:
a) Valid tender is equivalent to performance of promise and this discharges a party from his obligations
under a contract.
b) Promisor is not responsible for non performance.
c) Promisor does not loose his rights under contract.

Types of Tender

Tender of goods Tender of


or services money

Effects Effects
Goods or services need not Promisor is not
be offered again. discharged from his
Promisor may sue promisee liability.
for non performance. Promisor need not pay
Promisor is discharged from interest from the date of
his liability. valid tender.

Essentials of a valid Tender:


1. Unconditional Exactly as per terms of contract
2. At proper time Agreed time.
a) If not during business hours.
b) Tender of goods or money, before due date, is not a valid tender.
3. At proper place Agreed place
a) If not Promisees place of business or residence.

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4. Reasonable opportunity to promisee to verify.
5. Whole obligation should be performed. Sometimes minor deviations are valid.
6. To proper person To promisee or his agent or any joint promisee.
7. In case of payment of money Exact amount and Legal tender money.
8. By an able and willing person who has clear title.
9. Proper form Agreed form.
a) If not - usual form.

Who should perform the Contract?

1. Promisor himself:
a) If it appears that contract should be performed by promisor himself.
b) Involve exercise of personal skill, taste, etc.
c) Death of promisor puts an end to the contract.
2. Legal representative of the promisor:
a) Personal contracts / contracts that should be performed by promisor only in such a case death
of promisor puts an end to contract.
b) In other cases Legal representatives are bound to perform. But their liability is limited to the
extent of assets.
3. Agent For contracts not involving skill.
4. Third person:
a) Performed by a stranger to the contract.
b) Promisee may or may not accept it.
c) If he accepts performance contract comes to an end.
5. Joint Promisors Unless contract intention appears, following persons must perform contract:
a) All joint promisors alive all of them.
b) Death of any of them Representative of deceased + surviving promisors.
c) Death of all Representatives of all of them.

Who can demand performance of contract

1. Promisee
2. Legal representative:
a) Death of promisee Legal representative can demand unless contrary intention appears.
3. Third party can also demand in some cases.
4. Joint promisees can be demanded by:
a) All are alive promisees can jointly demand.
b) Death of any promisee Representative of deceased + surviving promisees.
c) Death of all Representatives of all of them.

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Time and Place of Performance

Time not specified & application not required Perform within reasonable time. Reasonable time
is a question of fact.
Day for performance is specified and promisor Perform during usual business hours on such
himself has to perform. agreed date.
Day for performance is specified and promisor Perform it only when asked by promisee. He
has to perform only when asked by promisee. must demand at proper time, place and usual
business hours.
Place is not specified & application not needed. Apply to promisee to fix a reasonable place for
performance.
Manner & time is fixed by promisee. Perform in that manner and in that time.

Effect of failure to perform within time

1. Parties may specify that the contract is to be performed within certain period of time. If one party fails
to perform within such time, the other party:
a) Can avoid - if time is the essence of contract.
b) Cant avoid - if time is not the essence of contract.
2. Everything depends whether time is the essence of contract or not.
3. Whether time is the essence of contract or not depends upon the:
a) Terms of the contract
b) Intention of parties that can be gathered from
i) surrounding circumstances,
ii) subject matter of contract,
iii) construction of the contract.
iv) Objective of the contract.
4. Presumptions:
a) In Mercantile transactions
i) Delivery of goods or services - time is the essence.
ii) Payment of money time is not essence
b) In non mercantile transactions time is not the essence.
c) Sale of Immovable property Time is not the essence of contract. If circumstances show that
time is essence then time is essence.

Effect of non performance in time - when time is essence:


1. Contract is voidable at the option of promisee.
2. If chooses to rescind the contract then contract comes to an end and can sue for damages.
3. If he chooses to accept performance then
a) Accept performance without any objection cant claim compensation.
b) Accept performance with objection can claim compensation.

Effect of non performance in time - when time is not essence: Not voidable, but can claim
compensation for loss caused to him by such delayed performance.

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Devolution of Joint liabilities

a) Joint and several liabilities of joint promisors Promisee may compel any one or more of joint promisors to
perform the whole promise.
b) Right to claim contribution If a joint promisor is compelled to perform the whole promise, he may
compel other promisors to bear amount equally.
c) Sharing of loss by default in contribution By remaining joint promisors equally.
d) Release of one joint promisor by promisee will not release other joint promisors. The joint promisor
so discharged is still liable to other joint promisors.

Devolution of Joint rights

When a promise is made to two or more persons jointly, then, unless a contrary intention appears,
following persons can claim performance:
a) All are alive promisees can jointly demand.
b) Death of any promisee Representative of deceased + surviving promisees.
c) Death of all Representatives of all of them.

Reciprocal Promises

Meaning: Promises which form the consideration or part of the consideration for each other are called
reciprocal promises.

Types of reciprocal promises:


a) Mutual and independent: Promises should be performed by each party independently, without
waiting for other.
b) Mutual and dependent: Performance of one party depends on prior performance of other party.
c) Mutual and concurrent: Promises are to be performed simultaneously.

Rules for enforcement:


1. Regarding simultaneous performance Promisor need not perform his promise unless the promisee
is ready and willing to perform his promise.
2. Order of performance As per the agreement.
a) If the agreement is silent - as per the nature of the contract.
3. Effect of preventing performance Voidable at the option of prevented party. Preventing party cant
claim compensation from the other party.
4. Effect of non performance in mutual and dependent promises Defaulting party cant claim
performance and must pay compensation for any loss suffered.
5. Effect of promise to do legal and illegal things Legal part is valid and illegal part is void.
6. Effect of alternative promise being illegal legal branch alone can be enforced.

Copy Rights Reserved

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Appropriation of payments by debtor

Condition Appropriation
Debtor expressly indicates the Should be done as expressed by debtor. Creditor has no choice.
debts to be discharged.
No Express intimation by debtor. Gather intention of debtor from circumstances.
Debt to be discharged is not Creditor has choice. He can set off against a bad debt or even
indicated and circumstances are time barred debt but not to a disputed or unlawful debt.
not indicative.
Debtor does not intimate and Towards payment of earliest debt. If there are several debts on
creditor did not appropriate. the same day, appropriate proportionately.
Current account First debit entry is offset against first credit entry.

Claytons case Running Appropriated in the order of date.


Account.
Principal and interest. First appropriate towards interest.
At the request of debtor, if it is appropriated towards principal
first then it cant be changed later on.

Assignment of contract

Assignment of a contract means transfer of contractual rights and liabilities to a third party.

Assignment by act of parties By operation of law

Contractual Rights Contractual liabilities


Personal cant be Personal cant be assigned.
assigned. Expressly / impliedly provides that it
Non-Personal can be cant be assigned then cant be
assigned. assigned.
Actionable claims Others can be assigned but
can be assigned in promisor remains liable to promisee.
writing. Notice should Novation promisor may transfer his
also be given to debtor. liability to third party by entering into
tripartite agreement.

Death of party Insolvency of party

Death of party The rights and Insolvency of party The rights and
obligations of deceased person will obligations of such party will pass on
pass on to his legal representatives. to the official receiver or assignee.

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Assignment vs. Succession

a) Succession - one person succeeds in another person's rights, interests, benefits, obligations, etc. by
operation of law. Both obligations and rights will pass on to the legal heir but the liability is limited to
the extent of property inherited.
b) Assignment - only benefits can be assigned and not the liabilities attached thereto.

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8. DISCHARGE OF CONTRACT
Discharge by Performance of contract

a) Performance means fulfillment of legal obligations.


b) When both parties fulfill their obligations contract is discharged and comes to an end.
c) It is the most usual mode of discharge.
d) By actual performance should be complete, precise and according to terms of the agreement.
e) By attempted performance Tender of performance is equal to actual performance.

Discharge by Impossibility of Performance

Initial Subsequent /
Impossibility supervening impossibility

Impossibility exists at the


Void contract
time of entering into contract
Void agreement.

Physical impossibility Legal impossibility

a) Law does not recognize what is impossible.


b) Impossible agreements does not create any legal obligations.
c) Where impossibility exists at the time of entering into contract itself - agreement does not come into
existence.
d) When both promisor and promisee know about the initial impossibility Absolutely impossible void
abinitio.
e) Where both parties do not know It is a case of mutual mistake void agreement.
f) Where only promisor knows impossibility Void, but he should pay compensation to promisee.
g) Supervening impossibility - Impossibility arises subsequently i.e. after the formation of contract.

Doctrine of Supervening impossibility

Meaning:
a) Sometimes the performance of a contract is possible when it is made by the parties.
b) But some event subsequently happens which makes its performance impossible.
c) This is known as doctrine of supervening impossibility or 'post - contractual impossibility'.
d) In English Law it is called doctrine of frustration.
Conditions: (Parties need not perform only if the following conditions are satisfied)
a) The act became impossible or unlawful.
b) It is caused by circumstances which are beyond the control of the parties.
c) The impossibility should not be the result of some act or negligence of the promisor himself i.e.
impossibility should not be self-induced.
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Cases where contract is discharged

a) Destruction of the subject matter, without any fault of the parties. If only part is destroyed promisor
is still liable in respect of that part.
b) Failure of the ultimate purpose of the contract. Called as frustration of the contract.
c) Death or personal incapacity of the promisor (in case of personal contracts)
d) A change in law or government policy that makes the performance illegal.
e) Outbreak of war. Contract gets suspended during war and can be revived after the war.

Effect:
a) In such a case the contract becomes void.
b) The contract gets discharged from the moment it becomes void.
c) Any benefit received must be restored.
d) Recover amount, as the court considers just.

Exceptions to this doctrine:


a) Difficulty in performance Copy Rights Reserved

b) Commercial hardships To MASTER MINDS, Guntur


c) Impossibility due to conduct of third party
d) Strikes & lock outs
e) Failure of one of the objects but not all.
f) Self induced impossibility
g) Where any of the parties know about impossibility at the time of contract.
h) Where parties could have come to know about impossibility by using due diligence.

Discharge by Mutual Agreement

Novation:
1. Novation takes place when a new contract is substituted for an existing one.
2. It may be between same parties with new terms or between new parties with old or new terms.
3. The consideration for new contract is the discharge of old contract.
4. Rules:
Copy Rights Reserved

a) Consent of all parties. To MASTER MINDS, Guntur


b) It should take place before the breach or expiry of the old contract.
c) New agreement must be valid and binding.
d) If these rules are fulfilled new contract is valid and old contract is discharged.
e) If these rules are not fulfilled new contract is not valid and old contract will continue.
Alteration:
a) Change in the terms and conditions of a contract.
b) Here parties must remain same.
c) A valid alteration discharges the original contract and parties become bound by the new contract.
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Rescission:
1. Means cancellation of contract.
2. The obligations of both the parties are discharged.
3. It may happen:
a) When parties agree to rescind.
b) When one party fails to perform his obligation, the other party may rescind and claim
compensation
c) Person who breaches contract cant rescind.
d) When a person at whose option a contract is voidable, rescinds it.
4. Rules:
a) No Partial rescission
b) Rescission shall be communicated similar to communication of revocation of proposal.
c) Rescinding party should restore benefit recd.

Remission:
a) Acceptance of lesser amount or performance is called remission.
b) It should be done prior to the due date of performance.
c) A remission need not be supported by consideration.
d) A remission once made is irrevocable.
Copy Rights Reserved

e) Remission may be conditional. To MASTER MINDS, Guntur


Waiver:
a) Intentional relinquishment of a right is called waiver. On waiver, other party is discharged.
b) Agreement or consideration is not necessary.

Discharge of a contract by lapse of time

a) Every contract must be performed within a stipulated period of time or within a reasonable time
according to the nature of contract.
b) If such time is lapsed, the contract is discharged.
c) The limitation act, 1963 has prescribed the different periods for different contracts.
d) Parties cant reduce this period though express agreement.

Discharge of contract by operation of law

1. Death only personal contracts are discharged.


2. Insolvency rights and liabilities are transferred to an official assignee.
3. Merger inferior right merges with superior right.
4. Unauthorised material alteration:
a) alteration to a material term of contract is made, without the consent of the other party.
b) both parties are discharged
c) same as cancellation of the document.

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d) A material alteration is changes the legal identity or character of the contract.
e) If it is not a material alteration - does not affect the validity of the contract.
5. By identity of promisor and promisee i.e. rights and liabilities under a contract vest in the same
person,
6. Loss of evidence of contract,
7. Order of the Court.

Breach of Contract

1. Failure of a party to perform his obligations.


2. When one party commits breach, the aggrieved party can rescind the contract.
3. It operates as a mode of discharge of the contract.
4. occurs when a party any of the following:
a) Fails or refuses to perform his obligations,
b) Disables himself from performing his part,
c) Makes the performance of the contract impossible by his own acts.

Actual Breach:
1. One party fails to perform his contractual obligations on the due date of the performance, or during
the performance,
2. A party performs obligations, but not strictly according to the contract.
3. Effect:
a) When time is the essence - aggrieved party can rescind and claim damages.
b) When time is not the essence - aggrieved party cant rescind, but can claim damages.

Anticipatory Breach:
a) Here party indicates, before the arrival of time for performance, that he is not going to perform his
obligation
b) Also called as "constructive breach of contract".
Copy Rights Reserved
c) May be express or implied.
To MASTER MINDS, Guntur
Effect of anticipatory breach:
1. Aggrieved party may treat anticipatory breach as actual breach. He is discharged from his promise.
He can sue for damages without waiting for due date of performance.
2. Aggrieved party may ignore anticipatory breach and wait till due date. If he does so:
a) Contract is operative. If promisee performs on or before due date, promisor should accept.
b) If supervening impossibility happens, contract is discharged.
c) Anticipatory breach will not apply for money debts like promissory notes.
3. Amount of damages will be measured by the difference between the price prevailing on the date of
breach and the contract price.
4. The date of breach will be the date on which the promisee elects to treat the contract as discharged

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9. REMEDIES FOR BREACH OF CONTRACT
1. Every contract imposes certain obligations on both the parties.
2. When one party fails or refuses to perform his obligations, it is called Breach of Contract.
3. In such a case law will try to protect the other party.
4. Following are the remedies available to the aggrieved party:
a) Rescission,
b) Claim for damages,
c) Demand for specific performance,
Copy Rights Reserved
d) Injunction,
To MASTER MINDS, Guntur
e) Restitution, and
f) Quantum Meruit.
5. The purpose is to put the aggrieved party, in a position as if the contract is performed.

Rescission of contract

Meaning:
a) When a contract is broken by one party, the other party may sue to treat the contract as rescinded
and refuse further performance.
b) In such a case he is discharged from all his obligations.
c) It means a right not to perform the contract.

May take place in any of the following manner:


a) Mutual agreement,
b) Breach: Parties are discharged and aggrieved party can claim damages.
c) Option given by law: When one partys consent is not free, the contract becomes voidable and the
aggrieved party can rescind the contract.

Consequences of rescission:
a) Both the parties are relieved from their contractual duties.
b) Rescinding party can claim damages.
c) Rescinding party shall restore benefits (if any) received by him under the contract.

No rescission in following cases:


a) The plaintiff has expressly or impliedly ratified the contract; or
b) Due to change of circumstances (not due to any act of the defendant), the parties cant be restored to
their original position; or
c) Third parties have acquired rights in good faith and for value; or
d) Only a part of the contract is required to be rescinded and such part is not severable.

Suit for Specific Performance

1. This remedy is granted under Specific Relief Act.

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2. Courts have discretion to order specific performance instead of or in addition to damages.
3. Here court will force the parties to perform the contract as it is.
4. It is not allowed when:
a) Money compensation is adequate,
b) In case of personal contracts,
c) Performance of contract requires regular supervision of court,
d) Contract is not equitable to either party,
e) Where one party is incompetent to contract.

Suit for Injunction

a) It means courts stay order.


b) It is an order by court which prohibits a person from doing a particular act.
c) Where a party to a contract does something which he promised not to do, the court may issue an order
which prohibits him from doing so.

Damages

a) Meaning Monetary compensation for loss suffered as a result of breach.


b) Object To put the injured party, as for as money can do, in the same position as if contract is done.
c) Important case law Hadley vs. Baxendale.

Types of damages

Compensatory Interest Nominal Liquidated Vindictive

General Special

Rules for damages (Sec.73): Injured party is entitled to


a) Damages which naturally arose in the usual course of things - ordinary damages.
b) Damages which the parties knew, at the time of entering into contract - special damages.
c) Compensation will not be given for any remote or indirect loss or damages.
d) Damages from breach of a quasi contract shall be same as in any other contract.

Compensatory damages: Object of these damages is not to punish but to compensate the loss
suffered.
1. General damages:
a) These damages are natural outcome of breach.
b) It is calculated as difference between contract price and market price on the date of breach.
c) These are related only to direct consequences but not to indirect consequences or losses.
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2. Special damages:
a) It is allowed only when special circumstances of contract are communicated to defaulted party
before or at the time of contract.
b) If the special circumstances were already known to the other party then it is not necessary to
communicate.

Nominal damages:
a) A person may prove that breach has actually occurred but fails to prove any actual loss suffered.
b) In such a case, only nominal damages are given simply to recognise the right of aggrieved party.
c) They are of very small amount.

Liquidated damages & penalty:


a) At the time of entering into the contract itself, parties may agree to pay certain sum of money, in case
of breach by either party.
b) If the purpose is to compensate the injured party, it is called liquidated damages.
c) If the purpose is to discourage the party from breaching, it is called penalty.
d) Depending on the circumstances, court will decide whether it is damage or penalty.
e) Name given in the agreement is not the criteria.
f) In India there is no difference between penalty and liquidated damages. Courts allow only
reasonable compensation not exceeding the specified sum.
g) Under English law, liquidated damages are enforceable but not penalty.

Stipulation of interest:
1. Payment of interest in case of default.
a) If the rate of interest is reasonable - damages,
b) If it is unreasonable - it is penalty.
2. Payment of interest at higher rate from the date of the debt is always a penalty.
3. If it is from the date of default it may be considered as damages or penalty depending on the
circumstances.
4. Payment of compound interest on default at the same rate as simple interest is not penalty. If it is
higher than the rate of simple interest, it is penalty.
5. Payment of interest at a lower rate if interest is paid on due date is not penalty.

Vindictive or Exemplary damages:


1. When there is a breach it not only causes monetary loss, but also mental tension. These damages are
allowed to compensate it.
2. It is a punishment to the wrong doer.
3. They will be unusual and quite heavy in amount.
Copy Rights Reserved
4. This concept is borrowed from English law. To MASTER MINDS, Guntur
5. In India, they are allowed in cases of:
a) breach of contract to marry &
b) in case of wrongful dishonor of cheque by bank. In this case, lesser the amount of cheque, higher
the amount of damages.

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Quantum Meruit

a) It means as much as earned i.e. payment in proportion to the work done.


b) In case of non gratuitous act or void contract the person who already supplied goods or services can
demand proportionate payment.
c) This is not a damage, but supplementary damage.

Restitution

a) Act of restoring back to the rightful owner that which has been taken away or lost.
b) The principle of Quantum merit or restitution is based on the doctrine of unjust enrichment.

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10. BAILMENT AND PLEDGE
Meaning and essential elements of Bailment.

Introduction:
a) Derived from the French word ballier which means to deliver.
b) It means
i) delivery of goods by one person to another
ii) for some purpose &
iii) when the purpose is accomplished,
iv) Be returned or otherwise disposed off according to the contract.
c) The person delivering the goods is Bailor
d) The person to whom they are bailed is Bailee,
e) The transaction is called Bailment.
Essential elements of Bailment:
a) There must be an agreement, either express or implied (even by law also).
b) Bailor must surrender possession of the bailed property to bailee.
c) The delivery may be actual or constructive
d) For a valid bailment, the recipient knowingly accepts the property.
e) A bailor need not be the owner of the property.
f) Change of possession does not mean change of ownership
g) Only movable goods can be delivered for the purpose of bailment.
h) Goods should be delivered by the bailor to bailee for some specific purpose (Not by mistake).
i) At the end of the bailment period, bailee returns identical goods (In original or altered form) to the
bailor/third person as per bailors direction.
j) Deposit of money in a Bank is not bailment.

TYPES OF BAILMENT

On the basis of Reward On the basis of Reward

Bailment for the


Gratuitous Bailment exclusive benefit of the
bailor

Non- gratuitous
Bailment for exclusive
benefit of the bailee

Bailment for mutual


benefit of the bailor or
bailee

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Rights and duties of Bailor

Rights of Bailor: Rights of Bailor = Duties of Bailee.


a) If the bailee has not taken reasonable care/special care, then bailor has right to claim damages for
the loss.
b) Bailor has the right to terminate the contract & claim damages, if the conditions of bailment are not
followed by the bailee.
c) Bailor has right to demand restoration of goods lent gratuitously & if bailee incurs any loss, then
bailee can claim compensation from bailor.
d) If a wrong doer does some harm to goods bailed, then bailor may file suit & recover compensation.
e) In the absence of a contract to the contrary, bailor has right to take any increase or profit accrued
from the goods bailed.
f) Right to sue bailee for the enforcement of duties imposed upon a bailee.
g) Bailee, without the consent of the bailor, mixes bailors goods with his own goods &
i) Goods cant be separated - bailor has a right to claim compensation
ii) Goods can be separated - bailor has a right to claim his goods after separation.

Duties of Bailor:
a) Bailor is required to disclose the faults which materially effect the use of goods bailed or may expose
the bailee to extraordinary risks. If he fails to disclose, he is liable to pay damages.
i) If goods bailed on hire He is responsible even for those faults which are not known to him.
ii) In case of non-gratuitous bailment - Bailor is responsible whether he was aware of the fault or
not.
iii) In case of gratuitous bailment Bailor is responsible for those damages caused because of
known faults.
b) Bailor has a duty to bear expenses in case of gratuitous bailment.
c) Bailor has a duty to bear only extraordinary (Not ordinary) expenses in case of non-gratuitous
bailment.
d) Bailor has a duty to indemnify the bailee for the loss due to defective title of bailor
e) Bailor has a duty to receive back the goods when they are returned by the bailee on the expiry of the
term/on fulfillment of the purpose.
f) Bailor must bear the risk of normal loss/deterioration, if the bailee has taken reasonable care.
g) Bailor has a duty to indemnify the bailee for demanding back the goods lent gratuitously before the
end of specific purpose.

Rights and Duties of Bailee

Duties of Bailee: Rights of Bailee = Duties of Bailor.


a) Bailee is bound to take reasonable care of goods delivered to him as of his own goods. The bailee is
not liable for damages, if the goods are damaged / destroyed because of the events beyond his
control.
b) Bailee must use the goods bailed to him strictly for the purpose of bailment & If not so, then bailment
becomes voidable at the option of the bailor [Sec.154].
c) Bailee should not mix goods of the bailor with his own goods. If he mixes

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i) With the bailors consent Both shall have a proportionate interest in the mixture.
ii) Without the bailors consent & goods can be separated Bailee bound to bear the expenses of
separation & damages arising from the mixture (Sec.156).
iii) Without the bailors consent & goods cannot be separated - Bailee is bound to compensate the
bailor for the loss of the goods. (Sec.157)
d) Bailee should return the goods without waiting for demand from the bailor as soon as the purpose of
bailment is accomplished. If he fails, he will keep the goods at his own risk and liable to loss, even if it
arises without his negligence/ due to act of God [Sec. 160, 161].
Bailee is not liable to return the goods if goods are lost by operation of law.
e) Bailee is bound, in the absence of a contrary agreement, to deliver any increase / profit which may
accrue from the goods bailed.

Rights of bailee:
a) Right to claim damages arising from the undisclosed faults in the goods bailed.
b) Right to claim reimbursement for extraordinary expenses incurred in relation to goods bailed.
c) Right to claim indemnity for any loss suffered due to defective title of the goods bailed.
d) Right to claim compensation for safe custody of goods when bailor refuses to take their delivery
e) Right to deliver the goods to any of the several joint owners.
f) Right to deliver goods in good faith to a bailor not having good title.
g) Right to file a suit to decide the title of goods bailed in case person other than the bailor claims the
goods.
h) Bailee has a right to file a suit against the wrong doer.
i) Bailee has a right to retain any property, until the charges due are paid. Bailee is entitled only to a
particular lien.

Rights and Duties of Finder of lost Goods as a Bailee

A person who finds goods belonging to another and takes them into his custody is subject to the same
responsibility of a Bailee.

Duties of Finder:
a) try and find out the true owner,
b) not to appropriate the property to his own use, and
c) when the real owner is traced he must restore the property to him.
d) bound to take as much care of the goods as a man of ordinary prudence would take care of his own
goods [Sec.151]

Rights of the finder:


a) He is entitled to retain it against the whole world, except the true owner
b) Can exercise lien right on goods for expenses incurred by him
c) the finder may claim any reward announced by owner and may retain the goods until he gets such
reward
d) the finder then he can sell the goods in certain cases

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Bailees General Lien and Particular Lien

Introduction: Right of lien - right of a person to retain the possession of any property of some other
person until the charges due to the person in possession are paid.

Bailees lien may be of two types:

Particular Lien: Bailee is entitled to particular lien only. Bailee can retain only that particular property in
respect of which the charges are due subject to
a) Bailee rendered some services involving exercise of skill.
b) Services must be performed in accordance with bailors direction.
c) There should not be any agreement to perform the services on credit.
d) Goods must be in possession of bailee.
e) Bailee cant charge bailor for the expenses incurred in keeping them.

General Lien: It entitles the bailee to retain any goods bailed to him by the bailor for any amount due
from him. It cannot be excluded by an agreement. It is given only to certain kinds of bailees only.
a) Bankers: Banker can retain the goods and securities deposited by the customers for any money
due to him from the customer.
b) Factors: A factor is an agent entrusted with the possession of goods for the purpose of selling
them on behalf of his principal. If any money is due to the factor by his principal, he can retain the
principals goods until his money is paid.
c) Wharfinger:
i) Wharf means a place adjoining to water, used for the purpose of loading or unloading the goods.
Wharfinger is a person who owns or keeps a wharf.
ii) A Wharfinger has general lien on the goods bailed to him until his charges due for the use of
wharf are paid.
d) Attorneys of high court: An attorney or a solicitor who is engaged by a client is entitled to general
lien over the papers of the client, until the fee for his professional services and other costs
incurred by him are paid.
e) Policy brokers: An insurance agent employed to effect marine insurance is called a policy broker.
His lien extends to any balance of any insurance account due to him from the person who employed
him.

When Bailment comes to an end?

a) On expiry of the specified period.


b) On accomplishment of purpose.
c) If bailee does something inconsistent with the terms - bailment becomes voidable at option of bailor.
d) A gratuitous bailment is terminated by death of bailor or bailee [Sec.162].
e) Gratuitous bailment may be terminated by the bailor at any time
f) On destruction of the subject matter or by a change which incapacitates the use.

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Meaning and essential elements of Pledge

Introduction: It means - Bailment of goods as a security for payment of a debt or performance of a


promise is called pledge. The bailor is pawnor and the bailee is pawnee. The transaction is called
pledge.

Essential features of pledge:


i) It is a special kind of bailment. So, all essential elements of bailment must be present.
ii) Pledge can be made for movable goods only.
iii) There must be delivery of possession of goods, whether actual or constructive.
iv) The delivery should be made in pursuance of a contract of pledge and it is not necessary that the
delivery of goods & advance of money should be simultaneous.
v) The delivery should be for the purpose of security but not for other purposes.
vi) Goods should be delivery upon a condition to return on fulfillment of obligation.

Rights and duties of Pawnor and Pawnee

Duties of a Pawnor: Duties of Pawnor are same as the duties of bailor. Additional duties are
1. Duty to repay the loan.
2. Duty to pay expenses in case of default.
Rights of a Pawnor: Rights of a Pawnor are similar to those of bailor.
a) Pawnor can enforce the duties of Pawnee by a suit in the court of law.
b) Pawnor has an absolute right to get back his pledged goods from the Pawnee on repayment of his debt.
When the time fixed for repayment is expired, even then entitled to get back if lawful sale is not yet
made.

Duties of a Pawnee: The duties of Pawnee are almost similar to those of a bailee
a) Duty to take reasonable care of goods pledged to him.
b) Not to make use of the goods pledged.
c) Not to mix the pledged goods with his own goods.
d) To return back the goods to pawnor on repayment of the relevant debt.
e) Not to do any act in violation of the terms of the contract of pledge
f) To deliver any accretion to the goods to the true owner.

Rights of a Pawnee: The rights of Pawnee are also similar to those of a bailee.

1. Pawnee has a right to retain the goods until his dues are paid. His dues may comprise of debt, interest
& expenditure for preservation of pledged goods.

2. Even after creating a pledge, a subsequent advance is made without any further security in such a
case, absence of a contract to the contrary, Pawnee can retain the goods until the subsequent
advance is also repaid.

3. Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged.
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4. Rights in case of default by pawnor [Sec. 176]:
a) File a suit against the Pawnor & retain the pledged goods as a security.
b) Pawnee may sell the goods pledged to him subject to
i) Must give reasonable notice of sale to the pawnor. Sale without notice is void.
ii) Cant sell the goods to himself.
iii) If the proceeds from sale are insufficient - he can sue the pawnor for the balance. And if the
sale proceeds exceed his claim -required to return surplus.

Pledge by Non Owners.

Generally, only owner can ordinarily create a valid pledge. But in the following cases even a non
owner can create a valid pledge:
a) Pledge by mercantile agent:
i) Where mercantile agent is, with the consent of the owner, can pledge the goods, when acting in
the ordinary course of business.
ii) Pledge is valid only if the pawnee acts in good faith.
b) A seller left in possession of goods after sale and a buyer, who obtains possession of goods with the
consent of the seller before sale, can create a valid pledge provided the Pawnee acts in good faith
and has no notice of the previous sale.
c) Where a person pledges goods in which he has only a limited interest, he pledge is valid to the
extent of that interest (Sec. 179). A person having a lien or a finder of goods may pledge them to the
extent of his interest.
d) One of the several co owners of goods in possession thereof with the assent of the other co
owners may create a valid pledge of the goods.
e) Where a person obtains possession under a voidable contract, the pledge created by him is valid
provided the contract has not been rescinded & the Pawnee acts in good faith and without notice of
the pawnors defect of title (Sec. 178 A).

Distinguish between Bailment and Pledge.

Basis Bailment Pledge


For some purpose but not as As security for a loan or for the
1. Purpose
security. fulfillment of an obligation.
No right of sale Has right to sell, on default by the
2. Right of sale
pledger, after giving notice.
3. Right of using the No restriction for a bailee. No right of using the goods
goods pledged.
Remain with the bailee till the Sometimes, goods remain with the
4. Possession
purpose of bailment is achieved. pledgor for some special purpose

Distinguish between Bailees Particular lien and General lien

General Lien: This is the right to retain any property, which belongs to other party in respect of any
payment due, provided the property is in the possession of the person exercising the right.

Particular Lien: Bailee is entitled to retain such goods on which he has worked, i.e., particular goods,
until the due remuneration is paid to him.
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Basis General Lien Particular Lien
Only for charge on labour employed or
Nature For a general balance of account.
expenses incurred upon the goods.
Bailee is unpaid & has worked upon the
Condition Bailee is unpaid.
goods.
Bankers, Factor, Wharfingers, Any Bailee who has exercised his skill
Persons entitled Attorneys of High Court and Policy and labour in respect of the goods
brokers. bailed.

NOTES
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11. INDEMNITY AND GUARANTEE
Meaning of Indemnity, Indemnity holder and Indemnifier

Meaning: Dictionary meaning is to compensate. When a person assures the other to compensate the
probable cost/loss, a contract of indemnity occurs.
The person who promises is called indemnifier & the person whose loss is made good is called
indemnity holder or indemnified

Essential Features:
a) First, it must satisfy all the essentials of a valid contract.
b) It is a contingent contract as its performance is contingent upon incurring of such loss.
c) It may be express or implied from the circumstances of case.

Rights of indemnity holder: Indemnity holder can recover all the losses incurred by him because of
acting according to the directions of the indemnifier. He can recover
a) All damages which he may be compelled to pay in any suit.
b) All costs of suit which he has paid in defending the suit provided
i) He acted under the authority of the Indemnifier and as per his orders &
ii) He acted in such a way as a prudent man would act in his own case.
c) Sum paid for compromise of any such suit, if:
i) The compromise was not contrary to the orders of the Indemnifier or
ii) The compromise was under the authority of the Promisor.

Rights of indemnifier: No specific provisions but same as the rights of a Surety.

Contract of Guarantee & its special features

Meaning: To perform the promise made/discharge the liability incurred by a third person in case of
default of such third party

Parties:
a) Surety - The person who gives the guarantee.
b) Principal debtor - The party is respect of whose default the guarantee is given.
c) Creditor - The person to whom the guarantee is given.

Features:
a) It is a tripartite agreement between the Principal debtor, Creditor and Surety.
b) It may be either oral or written.
c) Purpose - provide security for the payment of a debt.
d) There must be someone liable as a Principal debtor and the Surety promises to pay on his default.
e) It must contain all essential elements of a valid contract.
f) A guarantee for past debt would be invalid unless there is a fresh debt.
g) Guarantee not to be obtained by Misrepresentation.
h) Guarantee not to be obtained by concealment.

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Specific Guarantee and Continuing Guarantee

Specific guarantee: A guarantee given to a single debt/specific transaction. It ceases to be effective on


the repayment of debt.

Continuing guarantee [Sec.129]: A guarantee which extends to a series of transactions. Suretys


liability continues until revocated.
Revocation of continuing guarantee:
a) It may at any time be revoked by the Surety, as to future transactions, by notice to the Creditor.
b) In the absence of any contract to the contrary, revoked by death of the Surety
c) By variance in the contract without consent of surety.
d) By any act or omission on the part of the Creditor U/S 139.
e) By any change in the constitution of the firm.
f) By Novation.
g) By expiry of fixed period for which such guarantee was given.

Nature and extent of Suretys liability

1. Suretys liability is co-extensive with liability of principal debtor:


2. Commencement of suretys liability:
a) Immediately on default by the principal debtor.
b) The creditor is not required to:
i) First sue the principal debtor or
ii) First give a notice to the principal debtor.
3. Surety may fix a limit on his liability.
4. Suretys liability may be continuous:
a) Surety may agree to become liable for a series of transactions.
b) Surety may fix
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ii) The time period.

Rights of a Surety against the Principal debtor, Creditor and co-sureties

Rights of Surety

Rights against the Rights against the Rights against the


Principal Debtors Principal Creditors Co-securities

Rights of Right to Right to


Subrogation Security contributor

Right of Set off


Right of
Indemnity

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Rights against the Principal debtor:

a) Right of subrogation [Sec.140]:


On payment of a debt, the surety shall be entitled to all the rights which the creditor could claim
against the Principal debtor.

b) Right of indemnity [Sec.145]:


i) There is an implied promise by the Principal debtor to indemnify the Surety.
ii) Surety is entitled to recover from the Principal debtor whatever sums he has rightfully paid.
iii) He cant claim more than what he has actually paid.
Debt should have been actually paid. If he gives a Promissory Note, he cannot get
indemnification from the Principal debtor.

Rights against the Creditor:


a) Surety is entitled to get all the securities from creditor when a Surety pays a debt in full. It is
immaterial whether the Surety had knowledge of this security at the time of the contract or not.
If the Creditor, without the consent of the Surety, parts with the security (Not by act of god) then
the Surety is discharged to the extent of the value of security.
If any security is acquired after formation & parted with it - Suretys liability will not be reduced.

b) Right to claim set off, if any:


i) It may also happen that a debtor is also having some claims against the Creditor.
ii) If the Creditor sues Surety for repayment - then Surety can set off, if any, that the Principal debtor
had against the Creditor.
c) right to call upon the creditor to dismiss the person from services if the person whose fidelity is
guaranteed

Rights against co-sureties: Where a debt is guaranteed by two or more persons


a) Co-sureties, in the absence of any contract to the contrary, are liable to pay an equal share of the
whole debt, or of that part of it which remains unpaid by the Principal debtor.
b) When different co-sureties guarantee different amounts of debt, they are supposed to contribute
equally as far as the limits of their guaranteed amount permit.
c) Right to share security obtained from the creditor.

Discharge of a surety

A Surety is discharged when his liability comes to an end.


1. By Revocation (Sec. 130):
i) Specific guarantee: Revoked only if liability of principal debtor has not arisen.
ii) Continuing guarantee: Revoked only in respect of future transactions.
2. Continuing guarantee gets terminated with respect to the future transactions on the death of the
Surety.
3. By Novation:
i) Terminated by creating a fresh contract between the same parties or between other parties.
ii) Then original contract comes to an end & the Surety is discharged.

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4. By variance [Sec.133]:
a) When a Creditor makes any change in the terms of contract without consent of the Surety - then
Surety stands discharged
b) In case of continuing guarantee - Surety stands discharged as to the transactions entered after
such variation.
c) Surety does not get discharged when:
i) When a Creditor receives further security for the same debt.
ii) An attempted variation which does not become effective.
iii) When a Surety gives his consent.
iv) When the variation made is not for the benefit of the Surety
5. By release or discharge of Principal debtor [Sec.134]:
a) Creditor makes a contract with the Principal debtor by which the latter is released from the
liability.
b) Creditor does any act or omission which has the effect of discharging the Principal debtor.
6. When creditor makes a composition with, or promises to give time to or not to sue the Principal debtor
then surety is discharged.
7. Creditors act or omission impairing suretys eventual remedy (Sec.137 and 139):
a) If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act
which his duty to the surety requires him to do then the surety is discharged.
b) Mere forbearance on the part of the creditor to sue does not discharge the surety (Sec.137).
8. If a Creditor loses, or without the consent of Surety, parts with the security then Surety is
discharged to the extent of the value of the security.
9. A Surety is discharged from the liability when a contract of guarantee is invalid where
a) Guarantee is obtained by means of misrepresentation - it is invalid.
b) Creditor obtains a guarantee by remaining silent as to material circumstances, the guarantee is
invalid.
c) Guarantee on contract that creditor shall not act on it until co-Surety joins- Not valid if other
person does not join.

DIFFERECNCES

Contract of Indemnity Vs. Contract of Guarantee

Basis Contract of Indemnity Contract of Guarantee


It is a contract to perform the promise/
Where one party promises to save the
1. Meaning discharge the liability of third party in case of
other from loss caused to him
his default.
2. Parties Indemnifier & indemnity holder. Creditor, Principal debtor & Surety.

3. No. of
Only one contract in one deal. Three contracts in one deal
Contracts
To provide security of a debt or performance
4. Purpose To reimburse the loss.
of the promisor.
The liability of indemnifier is primary The liability of a Surety is secondary and
5. Liability
and unconditional. conditional.

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6. Right to
An indemnifier cannot sue the third A Surety can proceed against the Principal
sue the
party. debtor in his own name
third party
Not necessary that it should be given Surety should give the guarantee at the
7. Request
at the request of indemnity holder. request of the Principal debtor.
8. Eligible All parties must be competent to When a minor is Principal debtor even then
parties contract. the contract is valid.

NOTES
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12. CONTRACT OF AGENCY

Meaning and Features of contract of Agency

Introduction:
It is not possible for a person to carry on all business by himself. So, he has to depend on the
services of another
The person who acts on behalf of some other is known as agent & such contract is known as
Contract of Agency.
Agent - A person, employed to do any act for another or to represent another with third persons.
Principal - The person for whom such act is done/who is so represented
Contract of agency - The contract which creates the relationship of principal and agent

Sailent Features:
a) Any person who is of the age of majority & who is of sound mind (Competent person) can appoint an
agent.
b) A minor/person of unsound mind cant employ an agent. But they can act as agents.
c) No consideration is necessary for creating Agency. But agent is remunerated with commission.
d) Agency is depends upon good faith. The agent must disclose to his principal every fact in his
knowledge which can affect decision of principal & he should not use against principal.
e) Every person who acts for another is not an agent. To become an agent, he should bind the
Principal for his acts & should create legal relationship.

Different modes of creation of an agency relationship

Agency

Express Implied Ratification Operation of


Agreement Agreement Law

By Estoppel By Holding By Necessity


out

1. Agency by Actual authority (Sec. 186 & 187) - express or implied or it can be in the form of words
spoken or written.
2. Agency by ratification
3. Agency by ostensible authority - authority of the Principal is inferred by the conduct of the Principal
a) Agency by estoppel (Sec.237) - either by his conduct or by words spoken or written, lead another
person to believe that the person is his agent
b) Agency by Holding out: Past positive or affirmative action on the part of the Principal
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4. Agency by necessity: Sometimes circumstances would compel and a relation of agency
5. Agency by Operation of Law: Agency by Operation of Law is said to arise where the Law treats
one person as an agent of another.

Agency by Ratification

Ratification is an approval of the previous act or contract. Here the agent may commit an act beyond his
authority and later on the principal may adopt it.

Nature of Ratification:
a) When a contract is ratified, the agency comes into existence from the moment the agent acted, and
not from the time when the principal ratified.
b) Ratification may be express or implied.

Essentials:
a) The agent must act on behalf of principal
b) The act to be ratified must be valid and not illegal.
c) Only that principal, who was named at the time of the contract, can ratify the contract.
d) Since ratification relates back to an earlier period, principal must be in existence at the time of
original contract.
e) The principal must have contractual capacity both at the time of original contract and at the time of
ratification.
f) Ratification must be done within a reasonable time.
g) The whole transaction must be ratified.
h) No valid ratification can be made by a person whose knowledge of the facts of the case is materially
defective.

An act which has the effect of subjecting a third person to damages or of terminating any right or
interest of a third person cant be ratified

A delegatee cant further delegate

Delegatus non potest delegare - means a delegatee cant further delegate. An agent is a delegatee &
he cant further delegate because principal places trust and confidence on agent.

Exceptions i.e. can delegate


a) Where the principal has expressly permitted or inferred from conduct of principal such delegation.
b) By custom of trade, a sub-agent may be employed.
c) Nature of work of an agent is of such nature that it requires delegation.
d) Agent can delegate routine work/acts
e) In case of unforeseen emergencies which causes the appointment of sub-agent necessary.
In all the above cases, sub agent is known as properly appointed sub agent.

Who is a sub-agent? A person appointed by an agent to perform functions undertaken by the agent for
the principal.

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Consequences, when the sub-agent is properly appointed:
a) Principal is bound by the acts of sub-agent to the third parties.
b) Agent (principal cannot sue) is responsible to the principal for the acts of sub-agent.
c) Sub-agent is liable to the agent only unless sub-agent is guilty of fraud / willful negligence.

Consequences, when the sub-agent is improperly appointed:


1. The principal is not liable for the acts of sub-agent.
2. The agent is responsible for the acts of sub-agent to the principal & third parties,
3. The sub-agent is responsible only to the agent even in the cases of fraud / willful wrong.

Substituted agent

a) When an agent holds express/implied authority to name another person to act on his behalf & has
named another person accordingly - such person is Substituted agent (not a sub-agent)
b) Substituted agent is directly responsible to the principal & privity of contract is deemed between him
and the principal.
c) In selecting such agent for his principal - agent is bound to exercise the same amount of discretion
as a man of ordinary prudence.
d) If he makes the selection carelessly agent becomes liable to the principal for the negligence.

Pretended agent

a) Not actually an agent but he poses himself as an agent. So, he himself responsible for his acts.
b) He is not authorised by his principal & he is personally liable for any loss sustained by a third party.
c) Third persons have the right to claim compensation from the pretended agent & he has no right to
require performance of the contract.

Irrevocable Agency

1. Agency coupled with interest [Sec.202]: Under this, agent has interest in the subject-matter of
agency. It provides security to the agent.
2. If an agent undertakes personal liability, agency becomes irrevocable, because principal cant be
permitted to withdraw the agent.
3. When the agent has already exercised some authority & the principal is bound by the acts already
done on his behalf.

Position of Unnamed Principal towards third parties

Principal whose existence is disclosed by the agent but identity is not disclosed. Even then the agent is
able to bind the principal by his acts with third parties.

In following cases agent is personally liable:


a) Where there is a custom of trade making the agent personally liable.
b) When agent declines to disclose the identity of the principal.
c) If the principal stops existing before the disclosure of his identity by his agent, then estate of the agent
will be liable to third parties.

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Position of Undisclosed Principal and agent towards third parties

When an agent hides the fact that he is an agent then such principal is undisclosed principal.

Position of principal:
a) Undisclosed principal has a right to enforce the contract as long as the agent acts within his
authority.
b) Undisclosed principal is liable for any breach of contract even though the principals existence was
not known to the third party because it is the duty of principal to control the agent.
c) If the agent suffers any loss/damage - principal is bound to indemnify him.

Position of third party: Third party can rescind if he proves that


a) If he knew the principal, he would have not entered into the contract
b) If he knew that the agent was acting in representative capacity, he would have not entered into the
contract.
c) The liability of the principal and agent is joint and several.

Position of agent: Agent has all the rights and duties of an agent as against the undisclosed principal.
Agent is personally liable if the third party chooses to make him so liable.

Extent of Agents authority

An agent can make the principal legally responsible for his acts only when he is authorised by the
principal to act in such a way.
Actual or real authority:
a) Express authority: Given by words spoken or written. It is the most common type.
b) Implied authority: It is impossible for the principal to express all the authority needed. It is
reasonable for an agent to believe that he has authority to carry out incidental.
Authority in emergency: An agent has authority, in emergency, for the purpose of protecting the
principal from loss.

Position of named Principal towards third parties

When agent acts within the scope of his authority [Sec.226]: Will have the same legal
consequences, as if the contract had been entered by the principal himself.
When agent exceeds his authority: Either reject or to ratify the same. If ratifies, he becomes liable for
those acts.
a) When excess of agents authority is separable, then the act within his authority is binding between the
agent and the principal.
b) When excess of agents authority is not separable, then the principal can repudiate the whole
transaction.
Other Cases:
1. Liability by Estoppel: A Principal is liable where he has by words or by conduct induced a belief the
contracting party that the act of the Agent was within the scope of his authority.
2. Liability for Misrepresentation: The Principal is liable for misrepresentation or fraud of his Agent
acting within the scope
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Notice given to Agent (Sec.229):
Any notice given to or information obtained by the Agent, shall have the same legal consequences as if
it had been given to the Principal.
However, notice should be given or obtained in the course of the business transacted by him for the
Principal.

Duties of an Agent against his Principal

1. Agent should bind the directions of principal & in the absence of any directions, go by the customs.
2. Agent is bound to carry out the work with reasonable skill and diligence unless the principal has
notice of his lack of skill.
3. Agent is bound to render proper accounts supported by vouchers to his principal on demand.
4. Should communicate with the principal in case of difficulty and obtain instructions.
5. Should pay all sums received on behalf of principal.
6. Agent should not to make secret profits from the agency & if so, principal is entitled to recover.
7. Agent should not delegate his authority except in certain circumstances.
8. In case of principals death or insanity - should take all reasonable steps for the protection and
preservation of the property entrusted to him.

Rights of an agent against his Principal

a) Every agent has a right to receive his agreed remuneration / reasonable remuneration.
b) Agent has the right to retain his principals money (Any sum) until his claims, if any, are paid.
c) Agent has the right to retain (Particular lien) the goods, papers etc. until the amount due to him has
been paid.
d) Principal is bound to indemnify the agent all lawful acts done in exercise of authority granted.
e) Agent has a right to be indemnified by the principal against the consequences of an act done in good
faith, even though it may cause an injury to the rights of third parties.
f) Principal must compensate his agent in respect of injury caused by the principals neglect.
g) Agent has right of stoppage of goods in transit if he purchased with own money & principal has
become insolvent.
h) Where an Agent is guilty of fraud/misrepresentation - he is personally liable
i) Where an Agent receives/pays money by mistake/fraud to a third party - he shall be personally liable
to such third party.
j) Where an Agent executes a Contract in his own name, without disclosing that he is acting as Agent
for a Principal, he shall be personally liable.
k) When the Agent is personally liable, a person dealing with him may hold either him, or his Principal,
or both of them liable.

Rights and duties of a Principal

Rights of a principal:
a) He can enforce various duties of an agent.

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b) He can recover compensation from agent for any breach of duty by him.
c) He can forfeit agents remuneration where the agent is guilty of misconduct.
d) Principal is entitled to get any extra profit that an agent makes out of his agency.
e) Principal is entitled to receive all sums that agent receives on principals account.

Duties of a principal:
a) Should pay agreed remuneration to the agent unless agent is guilty of misconduct.
b) Should indemnify the agent for the consequences of all lawful acts entrusted to him
c) Should compensate the agent for any loss or damage incurred by him.

Position of an Agent towards third parties

Generally, agent is not personally liable. But liable when


a) The agent expressly agrees.
b) Where an agent contracts for the sale or purchase of goods for a merchant residing abroad.
c) Where an agent acts for an unnamed principal & declines to disclose the identity.
d) Where an agent acts for an undisclosed principal unless the third party comes to know.
e) When the agent acts for the principal who cant be sued.
f) When the agent acts for a non-existent principal.
g) When the agent is a pretended agent if the principal does not ratify his act.
h) When the agent exceeds his authority.
i) When the agents authority is coupled with interest.
j) Personally liable when there is some custom, usage or trade.

Different modes of termination of Agency

1. By mutual agreement.
2. The principal can always withdraw his authority from his agent.
a) May be express or implied.
b) At any time before the authority has been exercised.
c) Cant revoke the authority given to his agent after the authority had been partly exercised.
d) Where the agency is continuous/for a fixed period, the principal must give to the agent a reasonable
notice of revocation of the agency.
e) Where the agency is for a fixed term, and principal revokes it before the expiry of such term,
without sufficient cause, he has to compensate the agent for premature termination.
3. Renunciation by agent:
a) Renunciation means giving up. An agency can be terminated by an agent by renouncing.
b) This right has been given to an agent only & it may be express or implied.
c) Agent must give a reasonable notice of renunciation to the principal.
d) If the agency is for a fixed period of time, an agent should compensate the principal if he
renounces his obligations, before the fixed period without any sufficient cause.

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Termination by operation of law:
a) Created for a particular purpose & such purpose have been accomplished.
b) Where an agent has been appointed for a fixed term & the time has expired.
c) An agency automatically comes to an end on the death or insanity of the principal or the agent.
d) The insolvency of the principal puts an end to the agency.
e) The loss or destruction of the subject-matter of an agency terminates the agents authority.
f) When Principal or agent becomes alien enemies.
g) If a principal/agent is a company, its dissolution terminates the agency relationship.
h) If a change in the law makes the agency/performance of the authorised act illegal, the agents
authority is ordinarily terminated.

NOTES
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13. PAYMENT OF BONUS ACT, 1965
Applicability of Payment of Bonus Act.

This act is applicable to:


1. Every Factory &
2. Every other establishment with 20 or more employees on any day.

Once covered always covered:

Even for 10 to 19: At the discretion of appropriate Government - notified in the Gazette by giving 2months
notice to the establishment.

Employees excluded from Bonus Act.

1. Employees of LIC.
2. Employees of RBI.
3. Seamen-Merchant Shipping Act, 1958.
4. Under the Dock Workers (Regulation of Employment) Act.
5. Employees of:
a) Indian Red Cross Society or any other
b) Universities and educational institutions.
c) Institutions established not for the purpose of profit.
6. Employees of:
a) IFCI f) The IDBI
b) Established under State Financial g) The NABARD
Corporation Act.
h) SIDBI Act 1989.
c) The DIC
i) Any other- Central Government may by
d) The National Housing Bank notification specify.
e) The UTI
7. Employees of any department of CG or SG or a Local Authority (Including UDA).
8. Employees employed by Inland water transport establishments

Who is entitled and who is not entitled to claim bonus.

Eligibility: Every employee of an establishment covered under the Act and worked for not less than 30
working days with a salary less than Rs. 10,000 p.m.

Disqualifications - Sec.9: Dismissed from service for


a) Fraud Or
b) Riotous / Violent behaviour while in the premises of the establishment Or
c) Theft, misappropriation or damage of any property of the establishment.

But a dismissed employee reinstated with back wages is entitled to bonus.

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An employee in the following cases is entitled to bonus:
a) Temporary workman- total number of days d) Retrenched employee-If worked for
worked. minimum qualifying period.
b) Seasonal employee-proportionate bonus e) Probationer
c) Part time employee- as a sweeper engaged f) Piece-rated worker.
on a regular basis.
g) Contract employee

Employees not entitled to bonus:


a) Apprentice.
b) Dismissed-misconduct.

G.P.U/S 4 & deductions as prior charges U/S 6.

Sec.4: Compute G.P- specified in:


st
a) The 1 Schedule - In the case of a banking co. &
b) 2nd Schedule - In any other case.

Prior charges (Sec.6): Deducted as prior charges from G.P.


a) Depreciation-U/S.32(1) of the I.Tax Act.
b) Development rebate or development allowance, investment allowance - under the I.Tax Act.
c) Direct tax payable
rd
d) Further sums as are specified in the 3 Schedule.

Available surplus.

Gross profit (As per Sec.4) XXX


Less: Prior charges (Sec.6) XXX
Add: Tax savings on account of bonus in respect of previous accounting year. (*) XXX
Available surplus XXX

Calculation of gross profit for a Banking company.

In the case of banking company as per the first schedule of the Payment of Bonus Act, 1965, the
following are to be added to the Net Profit
1. Provision for Bonus to employees, Depreciation, Development Rebate Reserve and any other
Reserve.
2. Bonus paid to employees in respect of previous year, amount debited in respect of Gratuity paid or
payable to employees in excess of prescribed.
3. Donation in excess of the amount admissible for Income tax
4. Capital expenditure, Capital losses
5. amount certified by RBI
6. Losses of or expenditure relating to any business situated outside India

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rd
Deductions under the 3 schedule.

1. Co. other than a banking co.:


a) The dividends payable on its preference share capital.
b) 8.5% of its paid-up equity share capital in opening B/S.
c) 6% of its reserves shown in the opening B/s.

2. Foreign co.: 8.5% of (net fixed assets + current assets-outside current liabilities).

3. Banking co.:
a) Dividends payable on its preference share capital.
b) 7.5 % of its paid up equity share capital.
c) 5 % of its reserves.
d) Sum Transferred by it:
 To a reserve fund.
 As per the direction given by the RBI, whichever is higher.
4. Foreign banking co.:
a) Dividends payable to its preference shareholders.
b) 7.5 % of its paid up equity share capital as bears.
c) 5 % of its reserves.
d) Any sum deposited by it with the RBI.
5. Corporation:
Copy Rights Reserved

a) 8.5 % of its paid up capital. To MASTER MINDS, Guntur


b) 6 % of its reserves.
6. Co-operative society:
a) 8.5 % of the capital invested
b) Such sum-transferred to a statutory reserve fund
7. Partnership firm:
a) 8.5 % of the capital invested.
b) 25% of the G.P. as remuneration to partners (subject to max. of 48,000 per partner).

8. If the Employer is an Individual or HUF


a) 25% of the G.P.
b) Rs.48,000,
Whichever is less

9. Any other employer not falling under any of the aforesaid categories- 8.5 % of the capital
invested by him in his establishment

Allocable surplus.

a) Banking co. - 67% of the available surplus.


b) Other case - 60% of the available surplus.

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Determination of direct tax payable by the employer for the purpose of computation of available
surplus.

Direct tax payable-At the rates applicable to the income of the employer.
But no account shall be taken for:
a) Any loss incurred in any previous year and carried forward.
b) Any unabsorbed depreciation.
c) Any exemption U/S.84.
d) Any deduction entitled under Sec.101(1).
e) Rebate.

Provisions relating to minimum & maximum bonus.

Payment of Minimum Bonus - Sec.10:



a) 8.33% of the salary or Rs. 100, whichever is higher ( ).
b) Payable whether or not the employer has any allocable surplus.
c) But if the employee has not completed 15 years- 8.33% of the salary or Rs.60, whichever is higher

( )

Payment of Maximum Bonus - Sec.11:


a) If A.S. > Min.- upto a maximum of 20% of such salary or wages.
b) Amount Set on or Set off under the Sec.15 shall be taken into account.
c) If salary or wage of an employee exceeds Rs. 3,500 p.m.-the bonus payable as if his salary is 3,500
p.m.

"Set on & set off" of allocable surplus (Sec.15)

Set on of allocable surplus:


a) Where A.S. > Max. bonus.
b) Then the excess shall, subject to a limit of 20%.
c) Be carried forward for being set on in the next 4 accounting years.

Set off of allocable surplus:


a) Where A.S = 0, A.S. Min. Bonus &
b) There is no amount or sufficient amount carried forward.
c) Then the deficit shall be carried for ward for being set off in the next 4 accounting years.

Procedure for computing of number of working days.

Deemed working days sec.14


a) Laid off under an agreement or by a standing order.
b) On leave with salary.
c) Absent due to temporary disablement caused by accident in the course of employment.
d) On maternity leave.
e) Seasonal establishment-employee actual working days.
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Sec.13: If an employee has not worked for all the working days then minimum bonus should be
proportionately reduced.

Eligible deductions from bonus payable to employees.

Adjustment of customary or interim bonus:


a) Any Puja bonus or other customary bonus can be deducted.
b) Advance payment of Bonus can also be deducted.
Deduction for loss due to misconduct of employee - Sec.18: If in any accounting year, an employee
is found guilty of misconduct causing financial loss to the employer and then the employer can lawfully
deduct the amount of loss from the amount of bonus payable by him to the employee in respect of that
accounting year only.
Conditions:
1. The misconduct and related financial loss must be duly proved.
2. The employer must have proper notice.
3. Finding of misconduct and resultant loss after proper enquiry.
4. This deduction shall be in addition to any punishment.

Time limit for payment of bonus & the recovery of bonus due from the employer.

Bonus shall be paid in cash by the employer:


a) Where there is a dispute- within 1 month from the date of settlement.
b) Any other case-Within a period of 8 months from the close of the accounting year.
c) This can be extended upto a maximum of 2 years by the appropriate government, on an application
being made by the employer.

Interest: Interest at 9% p.a. will be awarded on the arrears.

Certification proceedings for recovery of bonus due from an employer (Sec.21) (*):
a) Employee can make an application to the appropriate government
b) The application can be made even by his assignee or heirs.
c) Must be made within 1 year. Late application may be accepted, if the appropriate government is
satisfied.
d) The appropriate government is to be satisfied that the bonus is so due.
e) On such satisfaction, it must issue a certificate for that amount to the collector.
f) Collector shall proceed to recover the same as an arrear of land revenue.

Powers of inspectors appointed under bonus act.

1. Appointment: By the appropriate government.


2. Powers: For this purpose he may:
a) Require an employer to furnish such information as he may consider necessary.
b) Enter any establishment or any premises.
c) Examine the employer, his agent or servant or any other person.
d) Take extracts / copies from any books, register or other documents.
e) Other powers as prescribed by AGE.
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3. Public servant: The inspector is deemed to be a public servant.
4. Bound: Any person shall be bound to do so.
5. Banking Co.: This Section do not empower an inspector to ask such information, which a banking
co. cannot disclose under Sec.34A of the Banking Regulation Act, 1949.

Applicability this act to the establishment in public sector.

1. In general- not applicable.

2. Exception:
a) If it sells any goods or renders any services in competition with private sector &
b) The income from such sale or service or both is not less than 20% of the gross income then the
provisions of the Bonus Act shall apply to it.

Payment of bonus to employees linked with productivity.

Any such agreement is valid unless:


a) It results into the relinquishment of the employees right to receive minimum bonus or
b) Bonus payable under such agreement exceeds 20% of the salary.

Provisions regulating the payment of bonus by new establishments.

1. For the first 5 accounting years - payable only in the accounting year in which the employer derives
profits.

2. When an employee is deemed to have derived profit:


a) After he has made provision for that year's depreciation as per I.Tax Act &
b) After the Unabsorbed depreciation & unabsorbed losses.

3. But in the 6th & 7th accounting years-Sec.15 shall apply subject to the following
modifications:
a) For the 6th accounting year- taking into account the excess or deficiency of the 5th and 6th
accounting years.
b) For the 7th accounting year-the same principle is to be followed.

4. From the 8th accounting year- provisions of Sec. 15 shall apply

5. Period of Trial run excluded:


a) Sale of goods produced during trial running of any factory or any oil field shall not be taken into
consideration.
b) Where any question arises with regard to such production decision of the AG, made after giving a
reasonable opportunity to the parties for representing the case, shall be final and shall not be called
into question by any court or other authority.

Possibility of relying upon the B/S & P & L a/c of a non banking co. in the case of a dispute.

Case I:
a) If these statements are audited by the C&AG, then appropriate authority may presume that those are
accurate.
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b) But if the authority is satisfied that those statements are not accurate, it may take such steps as it
thinks necessary.

Case II:
a) In case of clarification relating to any item in the balance sheet or the profit and loss account
b) The appropriate authority may direct the employer to furnish to the trade union / employees,
clarification within given time.

Audit of accounts of banking companies not to be questioned (Section 24):


a) Where any dispute the authority shall not permit any trade union or employees to question the
correctness of such accounts.
b) But the trade union or the employees may be permitted to obtain from the banking company such
information as is necessary for verifying the amount of bonus

Audit of accounts of employers not being corporation or companies (Section 25):


a) Section 23 will also apply to employer who is not a corporation or company
b) Appropriate Govt ask the employer to get his accounts audited within the stipulated time if the same
not audited earlier.

Provisions relating to offences by companies and Penal Provisions.

1. If a co. commits the offence under this Act, then every person who was in charge of and responsible
to the co. for the conduct of its business and also the co. would be deemed to be guilty of the
offence and punishable.
2. But such person shall be excused, if he proves that the offence was committed without his
knowledge or that he exercised all due diligence.

Note: Co. includes - A partnership firm & Director - includes a partner in the firm.

Penal provisions:
Offence Punishment
Where a person is found guilty of Imprisonment upto 6 months, and / or
Contravention of any of the provisions of this Act
Fine upto Rs.1,000
or any Rules made there under, or
Failure to comply with the direction given or
requisition made under this act.

Cognizance of offences under the payment of bonus Act, 1965.

a) No Court shall take cognizance of any offence punishable under this Act except on complaint made
by or under authority of the Appropriate Government.
b) No Court inferior to that of presidency magistrate or a magistrate of the first class try any offence
punishable under this Act.

Circumstances under which an employer is exempted to pay the minimum bonus.

1. The appropriate Government has powers


a) Having regard to its financial position and other relevant circumstances &
b) It will not be in the public interest to apply the bonus act.

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2. Conditions for grant of exemption:
a) Must be given opportunity of being heard.
b) Cant be given retrospectively.
c) Through a notification in Official Gazette.
d) From all or any of the provisions of the act.
e) For the limited period specified in notification.
f) May impose certain conditions as it may think fit.

3. If the bonus liability is negligible compared to loss suffered, co. should not be relieved of liability to
pay minimum bonus.

Accounting year, wages, employer, employee and Appropriate Government.

Accounting Year:
1. In relation to a corporation- the year ending on the day on which the books are closed.
2. In relation to a co.-Profit or loss account of the co. laid before it in an AGM
3. In any other case-
a) the year commencing on the first day of April, or
Copy Rights Reserved
b) At the option of employer. To MASTER MINDS, Guntur
Salary / Wages:
a) Salary or wage means all remuneration capable of being expressed in terms of money
b) Terms of employment may be express or implied.
c) Salary or wage includes DA, retaining allowance, city compensatory allowance only
d) If free food allowance/free food in lieu of salary-deemed to form part of the salary.

Employer:

In relation to Employer includes -


An Establishment which is a a. Owner or Occupier including Agent,
Factory b. The Legal Representative,
c. Manager of the Factory u/s 7
Any other Establishment a. The Person who has the ultimate control
b. Manager or Managing Director or Managing Agent

Employee: Any person other than an apprentice employed on a salary or wage not exceeding
Rs.10,000 p.m.

Appropriate Government:

Situation Appropriate Government


An establishment in respect of which the Appropriate Central Government
Government under the Industrial Disputes Act, 1947.
Any other establishment State Government

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Circumstances under which different departments of a co. can be treated as a separate
establishment for the payment of bonus.

a) In general-all such departments or undertakings or branches are to be treated as parts of the same
establishment.
b) But if a separate balance sheet and profit & loss account are prepared - then such department,
undertaking or branch shall be treated as separate establishment.

NOTES
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14. PAYMENT OF GRATUITY ACT, 1972
Meaning of gratuity and the benefits of it.

Meaning:
Latin word - Gratuitas (Gift).
Paid at the time of retirement or superannuation.

Benefits to Workers:
Helps to meet the living expenses.
Provides financial assistance to his family.
Shall not be liable to attachment even by an order of any court (Sec.13).

Establishments covered.

Initial Applicability Continued Applicability

a. Every Factory, Mine, Oilfield, Plantation, Port and Railway A Shop or Establishment shall
Company continue to be governed by this
b. Every Shop or Establishment, in which 10 are / were act, even though the number of
employed, on any day of the preceding 12 months. employees falls below 10.

c. Such Other or Class of Establishments, in which 10 or


more employees are/were employed, on any day of the
preceding 12 months, as notified by C.G.

The Central Government has notified the following establishments and made gratuity Act applicable to
them:
a) Motor Transport Undertakings, e) Solicitors Officers,
b) Clubs, f) Local Bodies, and
c) Chambers of Commerce & Industry, g) Circus Industry,
d) Inland Water Transport Establishments,
in which 10 or more persons employed on any day of the preceding 12 months.

Power of appropriate government to exempt establishments and / or employees.

Exemption granted to Condition


1. Any Establishment, Factory, Mine, Oilfield, Plantation, Port, If the App. Govt. is of the opinion
Railway Company or Shop to which this Act applies. that-actual gratuity benefit are
(Employer) more favorable than the benefits
2. Any Employee or class of Employees employed in any conferred under the Act.
Establishment, Factory, Mine, Oilfield, etc. to which this Act
applies. (Employee)

May be issued retrospectively, subject to the following conditions:


Cant be issued earlier than the date of commencement of this Act &
Shall not be at any ones interest.
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Eligibility & payment of gratuity.

Eligibility / When it is payable: Payable after rendered continuous service for not less than 5 years:
On his retirement or
On his superannuation or
On his death or disablement. [5 year - not applicable].

Payee / To whom it is payable: To the employee himself.


Situation Gratuity Payable to
Death of employee & nomination was made Nominee (s).
Death of employee & no nomination was made. Legal Heir (s).
Where Nominee (s)/ Legal Heir(s) is a Minor. Deposited with Controlling Authority,

Computation of gratuity amount payable.

Establishment Computation of Gratuity Amount


Est. other than seasonal Est. In case monthly wage employees:15/26 X Last Drawn Salary X No. of
(General case) completed years of service or part thereof in excess of 6 months.
In case Daily wage employees: 15 days wages x last drawn salary / wage
x No. of completed years of service or part thereof in excess of 6 months.
Piece Rate Employee-Last 3 months average wages.
O.T. Wages shall not be included.
Seasonal Establishment Worked throughout the year:15/26 rule as above
Worked only during the season: 7 days gratuity for each season.

Maximum: It shall not exceed Rs.10,00,000

Disabled Employee: Disabled due to any accident or disease and re-employed on reduced wages
Period preceding the disablement - Original wages
Subsequent to the disablement - reduced wages.

Continuous service U/S 2A of the payment of gratuity act.

Meaning - Sec.2A(1) Permissible Interruptions


Has been in uninterrupted service or Sickness,
service with permissible Accident,
interruptions. Leave,
Absence from duty without leave
Lay-off,
Strike or Lock-out not due to any fault of the employee.
Deemed Continuous Service [(Sec.2A(2)]:
Seasonal Establishments Other than Seasonal Establishments
Not less than 75% of the For 1 year period For 6 months period
working days.
190 days-employee employed 95 days &
below the ground in mine or
establishment works for less than
6 days in a week, and
240 days- in any other case
120 days.
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Inclusion of Certain days:
a) Laid-off under an agreement or by an order,
b) Leave with full wages,
c) Absent due to temporary disablement caused by accident arising out of and in the course of his
employment, and
d) In the case of a female- on maternity leave (not exceeding 12 weeks)

Define employee, employer & wages.

Employee Employer
Means: Means in relation to any Est.,
Any person (other than an apprentice), Factory etc.:

Employed on wages, Belonging to, or under the control


of CG/SG,
In any Establishment, Factory, etc.,
Belonging to, or under the control
To do any skilled, semi-skilled or unskilled, manual, of any Local Authority,
supervisory, technical or clerical work,
In any other case, the
Whether the terms of employment are expressed or person/authority, who / which has
implied, and the ultimate control over the affairs
Whether or not employed in a managerial / administrative of it.
capacity.
Not to include a C.G./S.G. employee and is governed by any
other Act or rules

WAGES
Means Includes Excludes
All emoluments, earned by an employee, while on duty Bonus, Commission,
or on leave in accordance with the terms and HRA, Overtime Wages
D.A.
conditions of his employment, and which are paid or and any other
are payable to him in cash. allowances.

Explain the provisions as to application for payment of gratuity.

1. Time of Application:
a) Shall apply- within 30 days - in Form I.
b) If date of retirement is known earlier-apply before 30 days of the date of retirement.
c) A Nominee in case of death of the employee- within 30 days-in Form J.
d) Dies without making a nomination- his legal heir- within 1 year- in Form K.
e) The application shall be-either by person or by RPAD.

2. Relaxation of Conditions:
a) An application on plain paper shall also be accepted.
b) An application even after the prescribed period shall be accepted- if the sufficient cause for delay.

3. Determination & Intimation: Immediately after becomes payable-e employer shall determine the
amount of gratuity and should intimate.

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4. Notice for Payment of Gratuity:
a)
i) If the claim admissible - in Form L, specifying the gratuity amount payable
ii) If not found admissible - in Form M, specifying the reasons for the same.
b) If the claimant is a Nominee or a Legal Heir:
i) The employer may ask any evidence.
ii) The time limit-from the date such evidence.

5. Payment of Gratuity:
a) Shall arrange gratuity within 30 days.
b) If it is not paid so-simple interest at the notified rate.
c) Interest shall not be payable-delay is fault of the employee and the employer has obtained
permission from the CA.
6. Mode of Payment of Gratuity:
a) Either in Cash or in Demand Draft or Bank Cheque to the claimant.
b) If the claimant desires & the amount payable is < Rs.1,000- by Postal Money Order.
c) Employer shall send intimation to the CA.

7. Recovery of Gratuity in case of default in payment:


a) Where an employer fails- may apply to the CA - in Form T.
b) CA issue a certificate to the Collector to recover the same along with compound interest as
arrears of land revenue.
c) CA shall give the employer of being heard.
d) Interest shall not exceed the amount of gratuity payable.

Reduction & forfeiture of gratuity.

Situation: For any act, willful omission, or negligence causing any damage or loss to, or destruction of
property belonging to the Employer.

Extent of forfeiture: To the extent damage or loss


a) For his riotous or disorderly conduct or any other act of violence on his part.
b) For any act which constitutes an offence involving moral turpitude, where such offence is committed
in the course of his employment.

Extent of forfeiture: Wholly or partially Forfeited.

Provisions as to compulsory insurance U/S 4A

1. Compulsory Insurance: Shall obtain an insurance from (a) LIC, or (b) any other prescribed Insurer.
need not obtain such insurance cover:
a) Belonging to or under the control of CG/SG.
b) An Approved Gratuity Fund u/s 4A(2).

2. Approved Gratuity Fund [Sec.4A (2)]: The Appropriate Government may exempt:
a) Employers who have already established an Approved Gratuity Fund and
b) Employers having 500 or more persons
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3. Registration: Every employer shall get his establishment registered.

4. Rules:
a) Composition of Board of Trustees of the Approved Gratuity Fund, and
b) Recovery by the Controlling Authority

5. Default: punishable with fine upto Rs.10,000 and in case of continuing offence with a further fine of
upto Rs.1,000 per day of default.

Provisions as to nomination for gratuity.

1. Nomination: Each employee who has completed 1 year of service-in form-F in duplicate with in 30
days.
2. Multiple Nominees: may distribute the amount of gratuity among > 1 nominee.
3. Family: Only in favour of members (s) of his family-otherwise-void.
4. Acquiring a Family:
a) Previous nomination become invalid on his acquiring family and
b) Shall make a fresh nomination -in Form G, in duplicate, within 90 days.
5. Modification: In Form H in duplicate.
6. Death of Nominee: Shall file a fresh nomination-Form H in duplicate.

Provisions in respect of disputes as to gratuity.

1. Application to CA:

Subject Matter of Dispute Condition


a. Amount of gratuity payable to an employee. Deposit such amount as he admits to CA.
b. Admissibility of any claim
c. Person entitled to receive the gratuity.

2. Inquiry & Decision on Dispute:


a) The CA shall- inquiry and give a reasonable opportunity of being heard to both parties
b) CA shall direct the employer to pay such amount or the difference of amount
c) CA shall pay the amount:
 To the applicant or
 To the Nominee / Guardian of Nominee / Legal Heir

3. Powers of Controlling Authority:


a) It will be a Judicial Proceeding.
b) For conducting inquiry- have the same powers as are vested in the Court.

4. Appeals: Aggrieved party within 60 days- make an appeal to the AA. The time limit may be
extended by another 60 days.

Copy Rights Reserved

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Powers of inspectors under this act.

1. Appointment: By a notification in the official gazette


2. Deemed Public Servant.
3. Powers of Inspectors:
a) To furnish such information as he may require.
b) Enter and inspect, at all reasonable hours, any premises of or place in any Factory, Mine etc.,
c) Examine the employer or any person
d) Make copies of, or take extracts from, any register, record etc.
e) Exercise such other powers as may be prescribed.

Application to controlling authority for direction in certain cases.

1. Application for Direction:

Act / Omission by Employer Application for Direction


Refusal to accept nomination. The Claimant may- within 90 days apply
Refusal to accept an application in Form N to the CA
Issue of notice either with less amount of The CA may accept any application
gratuity or rejecting eligibility belatedly on sufficient cause
failure to issue the notice within 15 days.

2. Procedure of Controlling Authority:


a) Notice: On receipt of application - CA shall issue a notice in Form O.
b) Failure to attend: If employer fails to appear without sufficient cause- determine application Ex-party
or dismiss the application.
c) Order: After completion of enquiry, the CA shall determine amount.
d) Re-hearing: May be reviewed on good cause being shown within 30 days
e) Records: Shall record the particulars of each case in Form Q.
f) Direction for Payment: CA shall issue a notice - in Form R specifying the amount payable.

Penalties under this act.

1. Penalties [Sec.9]:

Act/Omission constituting an Offence Penalty


Any person knowingly makes any false Imprisonment up to 6 months and/or Fine upto
statement Rs.10,000
Violation of the provisions by an Imprisonment of 3 months to 1 year and / or Fine
Employer of Rs.10,000 to Rs.20,000.
Non-Payment of any gratuity Imprisonment of 6 months to 2 years

2. Transfer or exemption of punishment / liability.


a) Where an employer is charged with an offence and he makes some other person responsible,
such other person will be liable to the punishment
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b) For this the following conditions should be satisfied:
c) The Employer should make a complaint in this regard
d) The Employer should prove that: (i) he has used due diligence (ii) the said person committed the
offence without his consent.
3. Cognizance of Offences [Sec.11]:
a) No Court shall take cognizance of any offence punishable under this Act except on a complaint
made by the Appropriate Government.
b) No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall
try any offence punishable under this Act.

4. Protection against action taken in good faith [Sec.12]: No suit can be filed against the CA.

Various definitions under the payment of gratuity act.

Term Definition
C.Govt, in the case of an establishment: Any other case -
State Govt.
Appropriate Belonging to, or under the control of the CG,
Government [Sec.2(a)] Having branches in more than one State,
Factory belonging to/under the control of CG,
Major Port, Mine, Oilfield or Railway Company.
Controlling Authority The Appropriate Government may, by notification, appoint any Officer to be a Controlling
[Sec.2(d)] Authority.
Superannuation & Sec.2(r): Superannuation- attainment by the employee of such age.
Retirement Sec.2(q): Retirement- termination of the employment
Notification [Sec.2(k)] Means a Notification published in the Official Gazette.

Miscellaneous provisions under the payment of gratuity act.

a) Notice as to Authorised Officer: Employer shall display a notice at or near the main entrance in
bold letters, in English and in the language understood by the majority of the employees, specifying
the name of the Officer with designation.
b) Display of abstract of the Act & Rules: In English and in other language understood by the
majority of the employees at the important place at or near the main entrance in Form U.
c) Notice of Change or Closure: A notice shall be submitted by the Employer to the CA, within 30
days of any change in name, address, employer or nature of business.

NOTES
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15. THE EMPLOYEES PROVIDENT FUND & MISCELLANEOUS PROVISIONS ACT, 1952

Entities to which EPF act applicable.

Applicability:
a) Every establishment - specified in Schedule I and 20 persons are employed on any single day.
b) Any other establishment -which the CG may specify.
Once covered always covered:
Applicability can be extended:
a) C.G. may extend -by a notification in the Official Gazette.
b) Where the employer and employees - made a request to Central Provident Fund Commissioner
Power of the CG to Add to Schedule-I: Through a notification in the Official Gazette and it is required
to be laid before Parliament.
Establishment to Include All Departments and Branches.
Composite Factories: Supreme Court held that the provisions of the act will apply to all primary
industry & subsidiary industry.

Classes of establishments to which this act is not applicable.

a) Registered under the Co-operative Societies Act, employing less than 50 persons.
b) Belonging to the CG or a SG.
c) Set up under any Central or State Act.
d) Newly set up until the expiry of a period of 3 years.
e) Power of the C.G. to exempt certain establishments: Having regard to the financial position or
other circumstances-conditions as specified -either prospectively or retrospectively.

Meanings.

1. Basic Wages: All emoluments earned while on duty or on leave or on holidays- in accordance with
the terms & conditions - paid or payable in cash to him.

However, it does not include the following:


a) Food concessions.
b) DA, house-rent allowance, OT, bonus, commission etc.
c) Any presents made by the employer.

2. Employer:
a) Factory- owner or occupier of the factory including the agent.
b) Any other- who has the ultimate control over the affairs.

3. Employee: Any person employed for wages in any kind of work- also includes any person:
a) Employed by or through a contractor.
b) Engaged as an apprentice - other than the apprentice engaged under the Apprentice Act.

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4. Appropriate Government means:
a) Under the control of CG Or in relation to an establishment connected with a railway company, -
the CG.
b) Any other establishment - the State Government.

5. Factory- any premises, including the precincts.

6. Exempted / Excluded Employee: (a) member of the fund but withdrew (b) whose salary / pay
exceeds Rs.15,000 P.M. (c) A disabled employee.

7. Exempted Establishment - It means an establishment in respect of which exemption has been


granted under Sec.17

Employees provident fund scheme.

a) The CG is empowered to frame Employees Provident Fund scheme.


b) Immediately- Fund shall be established.
c) Administered by the Central Board of Trustees.

Salient features:

1. Employees: Every employee other than an excluded employee.

2. Contributions:
a) Contribution by the employer- 12% of basic wages +DA+RA.
b) Employees- matching contribution.
c) If drawing more than Rs 15,000- only on Rs 15,000
d) They desire can make contribution in excess of 12%.
e) Payment of Contribution: The employer shall pay both the contributions.
f) Employer shall not deduct his contribution.
g) Employees contribution - deduction from wages.
h) The Provident Fund Scheme is mandatory.
i) Employer pay- administration charges - 1.10% of wages & 0.18% inspection charges.
3. Nomination: Can nominate a person
4. Advances and withdrawals-limitedly allowed.

Employees family pension scheme.

a) The CG may by notification in the Official Gazette frame this scheme.


b) Family Pension Fund will be established.
c) Administered by the Central Board of Trustees.

Salient Features:

1. Membership of the Scheme: To all subscribers of employees provident fund.

2. Contribution: Not required to make any contribution-employers share of Provident Fund


Contribution representing 8.33% of the wages diverted .The C.G. @ 1.16% of the wages.

3. Provides for superannuation pension, retiring pension or permanent total disablement pension.

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4. Age Conditions:
a) On completion of 58 years.
b) Earlier pension-at reduced rate.
c) At normal rates-on completion of 20 years pensionable service.
d) Short service pension at discounted rates.
Pensionabl e Salary [Pensionab le Service + 2]
Monthly Pension =
70
OR Rs. 1000
Whichever is higher.
Pensionable salary = Average monthly pay of last 60 months

5. Benefits payable:
a) On superannuation or retirement or disablement.
b) Family pension-To widow/widower.
c) Children -upto 25 years of age.
d) If person is unmarried / has no family - To nominee.
6. Commutation of Pension: Up to 1/3rd - after 3 years.
7. Adjusted along with Cost of Living index.
8. No separate administration or inspection charges.

Employees Deposit-Linked Insurance Scheme.

a) The C.G. may by notification in the Official Gazette frame this Scheme
b) Established Deposit-linked Insurance Fund.
c) Administered by the Central Board of Trustees.
Salient Features:
1. Application of the Scheme: To all establishments to which the EPF Act applies.
2. Contributions to the Insurance Fund:
a) 1% of the aggregate of the basic wages + DA + RA by the employer.
b) The CG - equal to of the employer contribution.
3. Administration Expenses:
a) @ 0.01% of the total emoluments- subject to a minimum of Rs.2 p.m. per member
b) CG - of the employers contribution.
4. Benefits:
A) EDLI (Amendment) Scheme, 2010:
a) Average balance in the account of the deceased in PF fund in preceding 12 months or during
the period of his membership, whichever is less.
b) If average balance exceeds Rs 50,000, amount payable shall be 50,000 + (40% of the amount
in excess of Rs 50,000) subject to a Maximum of Rs 1 Lakh.
B) EDLI (Amendment) Scheme, 2011:
a) In the event of death of an employee who was member of the scheme at the time of the
death, their family will get 20 times of the average wages of the last 12 months of the
member.
b) Maximum benefits is limited to Rs.1,30,000.
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C) Take higher of A or B (i.e As per Notification 2010 or 2011which ever is higher).
D) As per EDLI (Amendment) Scheme, 2014 the benefit under the EDLI has been increased by 20%
in addition to the existing admissible benefits (i.e Amount as per (C) * 120%).
5. Nomination: Nomination made under the PF Scheme.

Circumstances under which the C.G. may grant exemption from insurance scheme.

1. The Appropriate Government / Central Provident Fund Commissioner may grant exemption
prospectively or retrospectively.
2. By way of a notification in the Official Gazette.
3. Terms of exemption:
a. The exemption-conditions as may be specified.
b. From the operation of all or any of the provisions of any scheme.
4. Conditions for giving exemption:
i. Provident Fund Scheme: The exemption shall be given by Appropriate Government.
Before giving the exemption, Appropriate Government shall consult the Central Board. The
Central Board shall forward within such time limit as may be specified.
ii. Pension Scheme: The exemption shall be given by Appropriate Government.
iii. Insurance Scheme:
a. Requested to do so by the employer and
b. If it is satisfied that the employees of such establishments are, in enjoyment of benefits are
more favourable to such employees than the benefits available under the Insurance
Scheme.
5. In the case of exempted establishments, the employer has to pay inspection charges.
Note: The points in - 4 (iii) are common points for 4(i), 4(ii).

Constitution, rights and duties of the central board of trustees.

Constitution:
a) A Chairman and a Vice-Chairman-by the CG.
b) The Central Provident Fund Commissioner.
c) Not more than 15 persons appointed by the CG.
d) Not more than 15 persons representing state governments appointed by the C.G.
e) 10 persons representing employers or establishments appointed by the CG.
f) 10 persons representing employees appointed by the CG.
Executive committee: The CG may by notification in the Official Gazette.
Rights:
a) Right to administer the fund.
b) Right to perform other functions: Such other functions as may be required.
c) Right to appoint officers.
d) Right to delegate functions.
Copy Rights Reserved

Duties: To MASTER MINDS, Guntur


1. Accounts: Shall maintain proper.

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2. Audit:
a) By C&AG.
b) Audit fees shall be paid by the Central Board.
c) The C&AG shall have the right to inspect books, vouchers, documents etc.
3. Duty to forward audit report to the Central Govt.
4. Duty to submit annual report.
5. Laid before parliament.

Executive committee under the EPF Act.

The Central Government may, by notification in the Official Gazette, constitute an Executive Committee
to assist the Central Board.

Membership:
a) The secretary to the Government of India from the Ministry of Labour and Employment -
Chairperson
b) 2 persons, Additional secretary to the Government of India and the Financial Advisor from the
Ministry of Labour and Employment will be appointed by the Central Government.
c) 3 persons representing the governments of the states appointed by CG
d) 3 persons representing the employers from amongst the members of the Central Board.
e) 3 persons representing the employees from amongst the members of the Central Board.
f) The Central Provident Fund Commissioner.

Powers of the commissioner to determine money due.

1. The Central Provident Fund Commissioner, Additional / Deputy / Regional / Assistant Provident Fund
Commissioner may, by order:
a) Dispute regarding the applicability - decide such dispute; and
b) Determine the amount due.

2. May conduct the necessary enquiry &


a) Enforcing the attendance & examining him on oath.
b) Discovery and production of documents.
c) Receiving evidence on affidavit.
d) Issuing Commissions for the examination of witnesses.
Any such enquiry shall be deemed to be judicial proceeding.

3. No order shall be passed unless the employer is given an opportunity of being heard.

4. Fails to attend without showing valid reason- on the basis of evidence collected. (Ex-party order).

5. Request for set aside/cancellation:


a) Employer within 3 apply for setting aside/cancel such order.
b) Cannot be cancelled unless notice has been served on the opposite.

6. Continue the enquiry: Satisfies the officer that the show cause notice was not duly -r shall cancel ex-
party order and shall proceed with the enquiry.

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Time limit for settlement of claims for Provident Fund by the Commissioner.

a) Settle disputes within 30 days from the date of its receipt by the Commissioner.
b) If there is any deficiency in the claim, the same shall communicated to the applicant within 30 days
c) In case the Commissioner fails shall be liable for the delay
d) Penal interest at the rate of 12% per annum may be charged on the benefit amount and the same may
be deducted from the salary of the Commissioner.

Determination of escaped amount.

1. Previously passed orders are re-opened- believe that previously the amount was underdetermined
(Escaped amount) due to:
a) Omission of any information or
b) In consequence of the information available in hands of the officer.

2. Within a period of 5.

3. Employer must be given an opportunity of being heard.

Recovery of money due from employer.

1. Authorised officer issue to the recovery officer, a certificate specifying the amount of arrears.
2. The recovery officer shall then
a) Attachment or sale of the movable or immovable property.
b) Arrest of the employer
c) Appointing a receiver
3. The attachment and sale of any property be first effected.

4. Has property within the jurisdiction of more than one recovery officer - (a) not able to recover the entire
amount or (b) send the certificate specifying the amount to be recovered to another officer.

Protection against attachment of provident fund.

a) It shall not be charged.


b) Shall not be liable to attachment even by order of court.
c) Neither the official nor official receiver shall be entitled to claim.
d) PF-at the time of his death- payable to his nominee
e) Any amount so vested in the nominee shall be free from any debt.
f) The protection is only to the balance in the PF account and not to PF money.

Transfer of accounts of an employee.

a) The amount to his credit will be transferred -if the new establishment is also covered under PF.
b) Amount transferred to such fund within 3M-If it have its own fund-at the request of employee.
c) The balance transferred at request of employee to his new account.

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Priority of Payment of Contribution over other debts (Section 11):

a) Employers contribution, must be included among the debts which are to be paid in priority to all
other debts under Section 49 of the Presidency-Towns Insolvency Act, Section 61 of the Provincial
Insolvency Act, Section 530 of the Companies Act, 1956, in the distribution of the property of the
insolvent or the assets of the company
b) This payment will be a preferential payment provided the liability therefor has accrued before this
order of adjudication or winding up is made

Liabilities of a person who acquires an establishment.

a) Employer and the purchaser shall jointly and severally be liable to pay the contribution.
b) Liability of the transferee shall be limited to the value of the assets obtained.

Nomination, withdrawal and payment of the fund.

Nomination:
a) Every member of the Fund is required to nominate.
b) > 1 nominee may be appointed and the amount distributed among them in proportion.
c) Must be in favour of a family member only.
d) Where a member does not have a family, nomination may be made in favour of any person.

Withdrawal:

1. Different percentages are allowed depending upon the purpose.

2. A member can withdraw full amount to his credit:


a) On retirement or on superannuation, or permanent and total disablement.
b) Permanent settlement abroad.
Copy Rights Reserved
c) Retrenchment.
To MASTER MINDS, Guntur
Payment:
a) The Commissioner should arrange to make prompt payment.
b) If the claimant is a minor or lunatic-payment to the guardian.
c) Payment can be claimed by the member or his nominee.

The appointment of inspectors and their powers.

1. Appointment: The Central Government, by notification in the Official Gazette, may appoint
Inspectors (Public Servant).

2. Purposes for which powers may be exercised: Copy Rights Reserved

a) Inquiring into the correctness of information. To MASTER MINDS, Guntur


b) Ascertaining compliance with provisions.
c) Ascertaining applicability of the Act to a particular establishment.
d) Determining the compliance of conditions for granting exemption.

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3. Powers:
a) Information
b) Entry and Search: At any reasonable time.
c) Production of books: To require any person in charge to produce any account, books.
d) Examination of persons: To examine any person whom the Inspector believes to be or have
been an Employee of the Establishment.
e) Copies: Make copies of, or take extracts from, any book, register or other document.
f) Seizure: Seize such book, where he has reason to believe that any offence has been committed
by the Employer.
g) Others: Exercise such other powers as the Scheme may provide.

Orders passed by employees PF appellate tribunal against the orders passed by officers.

a) The appellate tribunal may pass such orders as it think fit like confirming, modifying or cancelling.
b) Can be done only after giving an opportunity of being heard.
c) The tribunal may within 5 years from the date of its order, may amend any order passed by it
d) An amendment which enhances the amount due- can be passed only after giving a notice
e) Shall send a copy of every order to the parties to the appeal.
f) Any order passed by a tribunal shall not be questioned in any court.

Provisions authorising certain employers to maintain a provident fund account.

a) Large establishments employing at least 100 employees- the accounts can be maintained by the
employer.
b) C.G. may, on an application, authorise the employer to maintain a provident fund account.
c) Will be given subject to terms & conditions.
d) If the employer committed any default or had committed any other offence during the 3 years
immediately preceding the date of making the application, no permission will be given.
e) Such establishment shall pay inspection charges.
f) Any permission given may be cancelled by the CG if the employer fails to comply.
g) Before cancellation- shall be given an opportunity of being heard.

cognizable offences under the Act.

Cognizable offence (Section 14AB):


1. The offences relating to default in payment of contribution by the employer is a cognizable offence.
2. A cognizable offence is one where the police can arrest a person without warrant.

Copy Rights Reserved

To MASTER MINDS, Guntur

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Penalty Provisions under the EPF Act, 1952..

Nature of Offence Penalty


False statement /representation for avoiding Imprisonment upto 1 year and / or Fine up to
payment by any person. Rs.5,000.
Default in payment of Contribution by the Imprisonment upto 1 year for default in making
Employer. contribution (6 months for other cases) subject
to maximum of 3 years, and
Fine up to Rs.10,000 for default in making
contribution (Rs.5,000 in any other case).
Default in complying with provision relating EDLI Imprisonment upto 1 year not less than 6
by an employer. months, and
Fine up to Rs.5,000.
Default in complying with provision relating to Imprisonment upto 1 year, and / or Fine upto
EDLI by any other person. Rs.4,000.
Default in relation to condition subject to which Imprisonment upto 6 months, but not less than
the exemption was granted. 1 month.
Fine upto Rs.5,000.
For commitment of same offence subsequently. For every subsequent offence
Imprisonment upto 5 years, but not less than 2
years.
Fine upto Rs.25,000.

NOTES
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16. NEGOTIABLE INSTRUMENTS ACT, 1881
Negotiable instrument act, 1881.

Negotiable instrument: negotiable - transferable from one person to another in return for
consideration. Instrument- written document by which a right is created in favour of some person.

Scope & Extent of NI Act: Whole of India except the state of Jammu & Kashmir & came into force from
01-03-1882.

Applicability of the Act: Bill of Exchange, Promissory Note and Cheque

Document of title to goods not negotiable instruments.

Characteristics of a negotiable instrument.

a) In writing. e) Free and innumerable transfers.


b) Unconditional promise or order. f) The holder in due course not affected by
any defects in the title of the transferor.
c) The signature: By maker.
g) Recovery.
d) A sum certain in money: in legal tender
money.

Presumptions as to negotiable instruments.

a) Consideration: Every negotiable instrument was made or drawn for consideration.


b) Date: made or drawn on such date.
c) Time of acceptance: Accepted within a reasonable time after its date and before maturity.
d) Time of transfer: Made before its maturity.
e) Order of endorsement: Presumed to be made in order in which they appear on it.
f) Stamp: duly stamped.
g) Every holder is a holder in due course.
h) Protest.

Promissory note and its essential features

Definition: An instrument in writing containing an unconditional undertaking signed by the maker.

Essentials of a valid promissory note:


a) It must be in writing. f) The maker of the note must be certain.
b) It must contain an express promise to pay. g) The payee of the note must be a certain
person.
c) The promise to pay must be unconditional.
h) It must be signed by the maker.
d) It must contain a promise to pay in terms of
money only. i) Must be delivered to the payee
e) It must contain a promise to pay a definite j) Must be stamped.
sum of money.

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Bill of exchange and its essential features.

Def: An instrument in writing containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money, only to, or to the order of a certain person or to the bearer of the
instrument.

Parties:
a) Drawer Copy Rights Reserved

b) Drawee To MASTER MINDS, Guntur


c) Payee
d) Drawee in case of need: The law gives an option to name an additional. This additional drawee is called
drawee in case of need.
e) Acceptor for honour: When a drawee becomes insolvent- the holder gets the bill protested - if any
person accepts the bill for honour of the drawer, such person is called acceptor for honour.
f) Payer for honour: A person who pays a bill for the honour of any other person is called as payer for
honour

Essentials
a) It must be in writing. e) Parties to the bill must be certain.
b) It must contain an order to pay: f) It must be signed by the drawer.
c) Must be unconditional. g) It must be delivered.
d) In terms of money only.

Different types of bills of exchange.

Documentary bill and clean bill: Invoices, marine Insurance policies, etc. are annexed to a bill, the bill
is called documentary bill. When no documents relating to goods represented by the bill are attached, it
is called clean bill.

Escrow: When a negotiable instrument is delivered conditionally or for a special purpose as a collateral
security or for safe custody only.

Ambiguous Instrument: When an Instrument, because of its fault drafting, may be interpreted either
as a promissory note or a bill of exchange.

If the amount is stated differently in figures and in words, the amount stated in words is the amount
undertaken or ordered to be paid.

Inchoate Instrument (Sec.20): An Inchoate instrument is an incomplete.


Undated bills and notes: A negotiable instrument is not invalid by reason that it is undated.

Fictitious bill: The word fictitious denotes (i) non-existing person or (ii) pretended person. Generally, a
fictitious bill is issued when:
a) A dishonest employee deceives the employer t or
b) The dishonest employee or agent has the authority to issue the instrument on behalf of the drawer.

Bill in sets: A bill of exchange drawn in parts is known as bill in sets.

Essentials of such bills are:


a) Must be numbered.
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b) Each part must contain a reference to the others.
c) Each part must provide that it shall be payable only as long as the other parts remain unpaid.

Accommodation bill:
a) A bill which is drawn, accepted or endorsed without any consideration.
b) The party who accommodates is termed as accommodating party and the party who is
accommodated is termed as accommodated party.
c) In general, accommodating parties are liable.
d) An accommodation bill may also be drawn for accommodation of both drawer and acceptor.

Bank draft: A bank draft is a bill of exchange drawn by one bank on another bank.

Different types of negotiable instruments.

Bearer Instruments: Payable to bearer when:


a) It is expressed to be so payable or
b) Endorsement in blank.

Order instruments: Payable to order when:


a) When it is expressed to be payable to order.
b) When it is expressed to be payable to a particular person.

Inland and foreign Instruments:


a) Inland Instruments:
 Both drawn or made in India and made payable in India or
 drawn upon any person resident in India.
b) Foreign instruments: which is not an inland instrument.

Instruments payable on demand:


a) A cheque
b) A promissory note or bill is payable on demand when
 no time for payment is specified in it or
 When it is expressed to be payable on demand or at sight or on presentment.

Time Instruments: A bill or note which is payable:


a) After a fixed period or
b) After sight or Copy Rights Reserved

c) On a specified day or To MASTER MINDS, Guntur


d) On the happening of an event.

Capacity and Authority of a person to be a party to a negotiable instrument.

Position of Minor [Sec 26]: A minor cannot make himself liable as drawer, acceptor or endorser, but
where the instrument is drawn or endorsed by him, the holder can receive payment from any other party
thereto.

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Agents authority [Sec 27]: Every person, capable of incurring liability, may bind himself or be bound
by a duly authorised agent acting in his name.
Liability of Agent [Sec 28]: An agent, who signs his name on an instrument without indicating that he
signs as agent, is personally liable, but this rule does not apply where any one induces him to sign upon
the belief that principal only would be held liable.

Maturity and days of grace for negotiable instruments.

Date of Maturity On which it falls due+3grace days


The instruments which are entitled to days of grace are:
a) A bill or note payable on a specified day,
b) A bill or note payable after sight,
c) A bill or note payable at a certain period after date, and
d) A bill or note payable at a certain period after the happening of a certain event.
Rules for finding out date of maturity:
a) It becomes payable 3 days after the stated number of months.
b) If the month has no corresponding day the period is held to terminate on the last day of such month. Three
days of grace is added.
c) In the above cases, the day on which the instrument is drawn or presented for acceptance or sight,
or the day on which the event happens is to be excluded.
d) Public holiday- preceding business day.
e) An emergency holiday- succeeding business day.

Cheque and its essential features.

Def: It is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand.

Essentials:
a) It must have all the essentials of a bill of exchange.
b) It must be drawn on a specified banker.
c) It must be payable on demand.

Crossing of cheque and different types of crossing.

Said to be crossed when 2 parallel transverse lines, with or without any words, are drawn across the
face of a cheque.
General crossing:
a) General crossing with two parallel lines: Has to deposit it with his banker in order to get payment.
b) General crossing containing words & co. within two parallel lines.
c) General crossing containing words not negotiable along with two parallel lines: The only difference
is that the endorsee does not get a better title than that of the endorser.
d) General crossing containing the words not negotiable & co. within two parallel lines: Same as that of
the not negotiable crossing.
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Special crossing:
a) Special crossing containing the name of banker: Cheque is payable through that banker only.
b) Special crossing containing the words not negotiable in addition to the name of banker: The
endorsee does not get a better title than that of transferor. Two crossings with the names of two
branches of the same bank are allowed.

Not negotiable crossing: It cant give to its transferee a better title than that of its transferor.

Restrictive crossing: A/C payee or A/C payee only are added-restrictive crossing.

The effect of Account payee crossing is that the banker is supposed to collect the cheque on behalf of
that payee only whose name appears on the face of the cheque.

Opening or cancellation of a crossing:


a) Uncrossed by the drawer only.
b) By writing please pay cash within the cross lines.
c) Drawer may also cancel crossing on the cheque.
d) Opening or cancellation by any person other than the drawer- material alteration.

Marking of cheques

Meaning: Marking of a cheque refers to writing / marking on the chaque as good for payment.
a) A cheque need not be presented for acceptance.
b) The banker, however, will be liable to his customer (drawer), if he wrongly refuses to honour the
cheque.
c) In such a case, action can be taken by the customer against the banker for the loss of his reputation.
d) In certain cases, however, a cheque is marked or certified by the banker on whom it is drawn as
good for payment.
e) This protects the person to whom the cheque is issued against the cheque being refused for
payment subsequently.
In India no such practice of getting cheques marked

Payment in due course.

Means payment in accordance with the apparent tenor of the instrument, in good faith and without
negligence to any person in possession thereof
a) Payment before maturity is not payment in due course.
b) Good faith and without negligence.
c) Must be made to the person in possession of the instrument.
d) Under circumstances which do not afford a reasonable ground for belief that he is not entitled to
receive payment.
e) Must be made in money only.

Copy Rights Reserved

To MASTER MINDS, Guntur

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Holder and conditions to be satisfied to become a holder.

Def: Any person, entitled in his own name, to the possession thereof and to receive or recover the
amount due thereon from the parties thereto.

1. He is entitled to possess the instrument in his own name.


a. Payee b. Endorsee. c. Bearer.
d. The legal heir of a deceased holder.

2. He is entitled to receive or recover the amount due thereon.

Status of holder: A holder has the legal power to transfer the instrument.

Who is not a holder?:


a) A person who finds or steals a bearer instrument or takes forged endorsement
b) A beneficial holder claiming through BENAMIDAR is not a holder.
c) An agent holding an instrument for his principal.
d) A payee prohibited by an order of court.

Holder in due course and its privileges.

Def: Any person who, for consideration, became the possessor of a promissory note, bill of exchange or
cheque, if payable to the bearer, or the payee or endorsee thereof, if payable to the order, before the
amount mentioned in it became payable, and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title.

Essentials to become holder in due course:


a) He must be holder.
b) The holder must have paid valuable consideration:
c) The holder must be possessor in case of bearer instrument:
d) The holder must be payee or endorsee in case of order instrument:
e) He must become holder before the amount of the instrument became payable:
f) The holder must have obtained the instrument without sufficient cause to believe that any defect
existed in the title of the person from whom he has derived his title:
g) Estoppel against denying capacity of the payee to endorse: Not permitted to deny the Payees
capacity to endorse the same as at the date of the Note of Bill Maker of a Promissory Note,
Acceptor of a Bill of Exchange payable to order.
h) The instrument must be complete and regular on the face of it.

Privileges of being a holder in due course:


a) Better title than that of transferor. Copy Rights Reserved

b) Instrument cured of all defects. To MASTER MINDS, Guntur


c) Right to recover money covered by stamp in case of an inchoate instrument.
d) No effect of conditional delivery.
e) Liability of prior parties [Sec.36]: Every prior party to a negotiable instrument is liable to a holder in
due course until the instrument is duly satisfied.

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f) Estoppel against denying the original validity of the instrument [Sec.120]: Not permitted to
deny the validity of the instrument as originally made or drawn.
g) Negotiable instrument made without consideration: He can recover from any prior party.
h) Instrument obtained by unlawful means or for unlawful consideration [Sec.58]: Even then it
can be enforced by him or by any holder thereafter.

Different modes of transferring a negotiable instrument.

1. Transfer by negotiation: Transferred in such a way that the transferee becomes holder.
a) Negotiation by delivery:
b) Negotiation by endorsement & delivery:

2. Transfer by assignment: Transferred by means of a written and registered document under the
provisions of the Transfer of Property Act, 1882.

Negotiation Vs. Assignment.

Distinction Negotiation Assignment


1. Meaning Transferred so as to constitute An instrument transfers it to another
that person the holder thereof.

2. Consideration Presumed. Proved.


3. How to effect I by mere delivery Written and registered document.
4. Where to Negotiable instruments only. Other documents also.
effect
5. Notice Not necessary. Debtor in turn expressly or impliedly has
assented.

Endorsement, features and different types of endorsement.

Writing of a persons name on the face or back of a negotiable instrument or on a slip of paper.

Essentials: Copy Rights Reserved

a) Must be on the instrument itself. To MASTER MINDS, Guntur


b) Must be signed by the endorser.
c) He may additionally specify the person to whom or to whose order the instrument is payable.
d) Must be completed by the delivery of the instrument.
e) The endorsement must be of the entire instrument.

Kinds:

1. Blank or general endorsement: Signs his name only on the face or back of the instrument.

2. Full or special endorsement: Signs his name and adds a direction to pay the amount to a specified
person.
Conversion of endorsement in blank into endorsement in full: Holder does not incur the
responsibility of endorser.

3. Restrictive Endorsement: It prohibits or restricts the further negotiability of the Instrument.

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4. Partial endorsement: If the instrument has been paid in part, the fact of part payment may be endorsed
on the instrument and it may be further negotiated for that residue amount.

5. Conditional endorsement: An endorsement is conditional or qualified if it limits or negatives the


liability of the endorser.
a) Sans recourse endorsement: In such a way that he does not incur the liability of an endorser to
the endorsee.
Here if the instrument is dishonoured the subsequent holder or endorsee cant claim the endorser
for payment of the same.
b) Liability dependent on contingency: In such a way that his liability depends upon the happening
of a specified event which may or may not happen.
c) Facultative endorsement: Where an endorser by express words abandons some right or
increases his liability.
d) Sanc Frais endorsement in such a way that no expenses should be incurred.

Cancellation of endorsement: Endorser is discharged from liability to the holder to the same extent as
if the instrument had been paid at maturity (Sec.40).

Provisions relating to material alteration.

Meaning of Material Alteration: If it alters or attempts to alter the character of the instrument and
affects or is likely to affect the contract.

Material Alteration Non-material alteration


1. Alteration of date of instrument 1. Conversion into bearer instrument.
2. Alteration of time of payment 2. Conversion of bearer instrument into order instrument.
3. Alteration of place of payment 3. Elimination of the words or order from an
endorsement.
4. Alteration of amount payable 4. Addition of the words on demand to a note in which
no time or payment is expressed.

Material Alterations Authorised by Act [Section 20, 49, 125]:


a) Filing blanks of inchoate instrument.
b) Conversion of a blank endorsement into an endorsement in full.
c) Crossing of cheques.

Effect of Material Alteration [Section 87 and 88]: Becomes void against all persons who were parties
to it at the time of alteration.

Person Effect
1. Person who were parties at the time of alteration and did Such persons are altogether
not consent to alteration. discharged
2. Persons who were parties at the time of alteration and Such persons continue to be liable
persons who became parties to the instrument under the instrument.
subsequent to the alteration.

Copy Rights Reserved

To MASTER MINDS, Guntur

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Provisions relating to presentment of a bill for acceptance.

The essentials of a valid acceptance are as follows:


a) It must be written on the bill.
b) It must be signed by the drawee personally or through a duly authorised agent.
c) The accepted bill must be delivered to the holder.

In the following cases, a bill must be presented for acceptance:


a) A bill payable some period after sight or after presentment.
b) There is an express stipulation that it shall be presented for acceptance before it is presented for
payment.
Modes of acceptance:
a) General acceptance: When the drawee does not attach any condition or qualification to it.
b) Qualified acceptance: It is given subject to some condition or qualification.

Presentment for acceptance to whom?


a) The drawee or
Copy Rights Reserved
b) All or some of several drawees or
To MASTER MINDS, Guntur
c) Drawee in case of need or
d) All drawees, if there are several drawees, unless they are partners or agents of one another or
e) Duly authorised agent of the drawee or
f) If drawee has died, his legal representative or
g) His Official Receiver or Assignee, if drawee has been declared an insolvent.

When? Specified in the bill, otherwise presented at any time before payment.

Where? At the place which is specified for presentment. If no place-at the drawees place

Legal provisions relating to presentment for sight.

In case of promissory note- no question of acceptance. In case of note payable after sight, presentment
to maker is compulsory.

The presentment should be made during business hours on business day. In default of such presentment,
no party thereto is liable thereon to the person making such default (Sec. 62).

Legal provisions relating to presentment for payment.

Promissory notes, bills of exchange and cheques must be presented for payment.

Presentment for payment not necessary:


a) The maker intentionally prevents presentment.
b) The instrument is payable at the place of business and such place is closed on due date.
c) Payer cannot be found even after due search.
d) Promise to pay notwithstanding non-presentment.
e) Waived either expressly or impliedly
f) The drawer could not suffer damage for want of presentment.

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g) Dishonoured by non-acceptance.
h) The drawee is fictitious person or the one incompetent to contract.
i) The drawer and the drawee is the same person.
j) Presentment becomes impossible.

Rules regarding presentment for payment:


a) Must be made during usual hours of business & in case of cheque during banking hours.
b) A promissory note or bill payable after date or sight must be presented for payment.
c) On the third day after the date fixed for payment of each installment.
d) Presentment for payment must be made:
 At the place of payment specified in the instrument.
 If no place is specified, at the place of business.
 In any other case) wherever the maker, drawee or acceptor can be found.
e) Instrument may be presented to the duly authorised agent of the drawee, maker, or acceptor
f) Delay is excused if it is caused-beyond the control of the holder

Notice of dishonour.

Dishonoured either by non-acceptance or by non-payment-must give a notice to all prior parties.

Notice by whom?
a) Notice by holder or any prior party:
b) Chain method of giving notice of dishonour: Must give notice of dishonour to such prior party within a
reasonable time-But if the notice is given by a stranger it is a nullity.
c) Notice by principal or agent: Notice may be given either by agent or by the principal himself.

Notice to whom?
a) Must be given to all the parties whom the holder wants to make liable.
b) To the party liable or his duly authorised agent.

Form of notice:
a) May be oral or written..
b) May be in any form but it must clearly indicate that the instrument has been dishonoured.
c) Must be given within a reasonable time.

When notice of dishonour not necessary:


a) When it is dispensed with by the party entitled thereto
b) When drawer has countermanded payment
c) When the party charged could not suffer damage even if notice is not given
d) When the party entitled to notice cannot be found even after due search
e) If acceptor is drawer
f) When the party entitled to notice promises unconditionally to pay the due amount.

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Noting and protesting.

Noting-recording of the fact of dishonour.

Noting must contain the following particulars:


a) The fact of dishonour. d) The reason why the holder treats it as
dishonoured; and
b) The date of dishonour.
e) The Notarys charges
c) The reasons or,

Protest: Dishonoured by non-acceptance or non-payment- the holder may within a reasonable time,
cause such dishonour & certified by a Notary Public.

Contents of Protest (Section 101):


a) Either the instrument itself, or a literal transcript of the instrument.
b) The name of the person for whom and against whom the instrument has been protested;
c) A statement that payment or acceptance has been demanded by the Notary Public
d) The place and time of dishonour
e) The subscription of the Notary Public making the protest;
f) In the event of acceptance for honour or of a payment for honour- the name of the person.

Time: Only after noting is done

When does a negotiable instrument gets discharged?

Discharge-two senses:
a) Discharge of the instrument, and
b) Discharge of one or more of the parties from their liability.

Discharge of the instrument:


a) By payment in due course.
b) Primarily liable becoming holder: If the maker becomes its holder-instrument gets discharged.
c) By express waiver: The renunciation must be in writing.
d) By cancellation: Intentionally cancelled by the holder & the cancellation is apparent.
e) By discharge as a simple contract: In the same way as any other contract.

When does the parties to a negotiable instrument get discharged?

a) By payment.
b) By cancellation.
c) By release: Where the holder of a negotiable instrument releases any party.
d) By allowing drawee more than forty-eight hours: - all previous parties not consenting to such
allowance are discharged from liability to such holder.
e) By non-presentment of cheque: Within a reasonable time and the drawer suffers actual damage -
he is discharged from liability to the extent of such damage.
f) Parties not consenting discharged by qualified acceptance:- All the previous parties whose
consent is not obtained to such acceptance are discharged from liability (Sec.86).
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g) By operation of law:
 By an order of Insolvency Court: Discharges the insolvent.
 By merger.
Copy Rights Reserved
 By lapse of time. To MASTER MINDS, Guntur
 By material alteration.

Provisions regarding instruments obtained by unlawful means.

1. Stolen instruments: Neither enforce payment nor can he retain it.

2. Instruments obtained by coercion or fraud: The person defrauding cant recover anything.
3. Instruments obtained for unlawful consideration: It is void and creates no

4. Forged Instruments:
a) Fraudulently writing the name of an existing person.
b) Signing the name of a fictitious or a non-existing person or.
c) Signing ones own name.

Banker and customer and their relationship.

Who is a banker? includes any person acting as a Banker and any post office savings bank

Who is a customer? Who keeps an account with the bank.

Legal relationship between a banker and a customer The bank becomes a debtor to the customer
(creditor). Therefore, money becomes property of the bank.

Legal provisions relating to clearing of cheques by clearing house.

Clearing of cheque: Persons holding cheques deposit the same with bankers. If the cheque is on the
same bank, it will be passed by the Bank itself.
Instead of presenting cheques to hundreds of individual banks and collecting them, all the cheques
deposited with Bank for collection are presented for payment to drawers bank through clearing house
.
Amount payable by each bank: All cheques are sorted bank wise and collect equal amount from
banks.
Return of dishonoured cheques:
Net amount adjusted through clearing house: Instead of paying and receiving gross amounts,
receive the Net Amount.

Electronic cheques and Truncated Cheques.

Electronic Cheque: a cheque which contains the exact mirror image of a paper cheque, and is
generated, written and signed by a secure system ensuring the minimum safety standards with the use
of digital signature.
Truncated Cheque: which is truncated during the course of clearing cycle immediately on generation of
an electronic image for transmission.
The collecting bank- instead of sending physical cheque - will send its electronic image for clearance.
Who will truncate the cheque? Either by bank receiving payment or by clearing house.
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Stale cheque

a) A cheque does not remain valid for an indefinite period of time.


b) cheque can be claimed within a period of 3 months from the date
c) If the payment is not claimed within the above specified period, it becomes a stale cheque.

Circumstances under which the banker refuses payment on his customers cheques.

a) Stop payment: When the banker receives instructions from the customer not to honour
b) Garnishee order: Prohibiting order by any court attaching the money in the customers account.
c) Death.
Copy Rights Reserved
d) Insolvency.
To MASTER MINDS, Guntur
e) Insanity.
f) Assignment: Notice of assignment of his credit balance from a customer.
g) Defect in title: When the banker suspects or has reason to believe that the title of the person.
h) Loss of Cheque. k) Notice of closure.
i) Material alteration. l) Irregular endorsement.
j) Different signature.

Cases in which a Banker may Refuse to Honour a Customers Cheque:


a) Insufficient funds. e) Stale cheque.
b) Funds not applicable. f) Post dated cheques.
c) Presentment at different branch. g) Undated cheques.
d) Presentment after banking hours.

Liability of a banker for wrongful dishonour of a cheque.

Liability towards the drawer of the cheque: He is in breach of contract & liable to pay damages.

Liability towards the payee (or holder) of the cheque: Banker is liable to the drawer and not to the
payee -There are two cases when a holder can take action against the banker
a) Where a banker pays a generally crossed cheque over the counter.
b) Where the holder does not present the cheque with the banker within a reasonable time.

Obligations of the drawer of a cheque.

a) Must take reasonable precautions to prevent the forgery or alteration.


b) If he has knowledge of forgery or alteration-inform the banker within a reasonable time.
c) When a drawer gives any information to the banker, he must check its genuineness.
d) General obligation to keep sufficient funds in his account.

Penalties in case of dishonour of a cheque for insufficiency of funds.

When an offence under Sec.138 is constituted:


a) Cheque issued to discharge any legally enforceable debt or other liability.

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b) The cheque should have been presented within the period of its validity.
c) Returned because of insufficiency of funds.

Penalty:
a) Required to give notice to drawer of cheque within 30 days from receiving information from bank.
b) The drawer should make payment within 15 days of receipt of notice.
c) The penalty can be upto 2 years imprisonment or fine upto twice the amount of cheque or both.
d) Even if penalty is imposed-he is still liable to make payment.

Notice to drawer:
a) Cheque cannot be presented again after issue of notice.
b) Notice may include other demand also.
c) Notice by fax.
d) Presumption if notice sent by registered post.

Compounding of offence:
a) Offence punishable under the Act is compoundable.
b) Compounding is essentially a compromise arrangement.

Rules regarding liability of various parties to a negotiable instrument.

a) Drawer of a bill of exchange; is bound to make payment to the holder of the instrument- the liability
of the drawer is primary.
b) Drawer of a Cheque: is bound to pay the holder in case it gets dishonoured- liability of the drawer of
a cheque is primary.

Liability of a banker as a drawee [Sec 31 & 77]: If wrongfully refuses to make payment- liable to
compensate for any damage.

Liability of maker of note and acceptor of bill [Sec 32]: primary in nature.

Liability of endorser [Sec 35]: liable to all the parties who are subsequent to him.

Liability of prior parties [Sec 36 joint and several.

Extent of liability of the company and the person(s) incharge of the company in respect of an
offence for dishonour of cheques.

Where a company committed an offence under Section 138, then


a) Not only the company, but also every person who was in charge of and was responsible to the
company, shall be deemed to be guilty of the offence and
b) Liable to be proceeded against.

Dishonour by non-acceptance & dishonour by non-payment.

Dishonour by non-acceptance:
a) Drawee does not accept the bill within 48 hours.
b) If there are several drawees (who are not partners) and all of them do not accept.
c) When presentment for acceptance is excused, and the bill is not accepted.
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d) Drawee is incompetent to contract.
e) Drawee gives a qualified acceptance.
f) Drawee is a fictitious person or
g) Drawee cant be found after reasonable search.

Dishonour by non-payment:
a) When the primarily liable - makes default in payment, when required to pay the same. (Sec.92).
b) When presentment for payment is excused and the instrument remains unpaid on the due date.
(Sec.76).

Rules of Compensation payable in case of dishonor of a Negotiable Instrument.

The compensation payable in case of dishonour Negotiable instrument is as under:


a) The holder is entitled to the amount due and interest, together with the expenses
b) When the person charged and such endorser reside at different places, the endorser is entitled to
receive such sum at the current rate of exchange between the two places.
c) An endorser, who has paid the amount due under the instrument, is entitled to the amount so paid
with interest at 6% per annum.
d) The party entitled to compensation may draw a bill upon the party liable to compensate him.

NOTES
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THE END

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