AL AMEEN COLLEGE OF LAW

SUBJECT: CONTRACT-II
SYLLABUS:
UNIT 1:
Contract of Indemnity- Definition, Nature and Scope- Rights of Indemnity holder-
commencement of the indemnifier’s liability.
Contract of Guarantee- Definition, Nature and Scope- Differences between Contract of
indemnity and guarantee- Rights of surety- Discharge of surety- extent of surety’s liability-
Co- Surety.
UNIT 2
Contract of Bailment- Definition- kinds- Duties of Bailer and Bailee- Rights of Finder of
Goods as Bailee- Liability towards true owner- Rights to dispose of the goods.
Contract of Pledge- Definition- Comparison with Bailment- Rights and Duties of Pawnor and
Pawnee.
UNIT 3
Agency- Definition- Creation of Agency- Kinds of Agents- Distinction between Agent and
Servant- Rights and Duties of Agent- Relation of Principal with third parties- Delegation-
Duties and Rights of Agent- Extent of Agents authority- Personal liability of Agent-
Termination of Agency.
UNIT 4
Indian Partnership Act- Definition- Nature, Mode of Determining the existence of
Partnership- Relation of Partner to one another- Rights and duties of partners- Retirements-
Expulsion- Dissolution of Firm- Registration of Firms.
UNIT 5
Sale of Goods Act- The contract of sale- Conditions and Warranties- Passing of Property-
Transfer of title- Performance of the Contract- Rights of Unpaid Seller against goods-
Remedies for Breach of Contract.

UNIT 1
INTRODUCTION
The Contracts of Indemnity has been defined as: "A Contract whereby one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by the
conduct of any other person, is called a contract of indemnity."
The term is often used in business contracts and in insurance.
Indemnity, in simple words, is protection against future loss.
The person who promises to save the other is called the Indemnitor or Indemnifier and the
person who is compensated is the Indemnitee, Indemnified or the indemnity-holder. An
indemnity can be defined as a sum paid by A to B by way of compensation for a particular
loss suffered by B. A, the indemnitor may or may not be responsible for the loss suffered by
the B, the indemnitee. Forms of indemnity include cash payments, repairs, replacement, and
reinstatement.
Contract of Indemnities should all satisfy the conditions of a valid contract.
All Contracts of Insurance are Contracts of Indemnity except life insurance.
What Is Indemnity?
Indemnity is a comprehensive form of insurance compensation for damages or loss and, in
the legal sense, it may also refer to an exemption from liability for damages.

1
Indemnity is considered to be a contractual agreement between two parties whereby one party
agrees to pay for potential losses or damages caused by another party. A typical example is
an insurance contract; the insurer or the indemnitor agrees to compensate the other (the
insured or the indemnitee) for any damages or losses in return for premiums paid by the
insured to the insurer. With indemnity, the insurer indemnifies the policyholder - that is,
promises to make whole the individual or business for any covered loss.

According to Section 124 of Indian Contract Act 1872:

“A contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract
of Indemnity’.
This provision incorporates a contract where one party promises to save the other from
loss which may be caused, either
(i) By the conduct of the promisor himself, or,
(ii) By the conduct of any other person.
Acts of Indemnity
An act of indemnity protects those who have acted illegally from being subject to penalties.
This exemption typically applies to public officers, such as police officers or government
officials, who are compelled to break the law to carry out the responsibilities of their jobs.
Often, such protection is granted to a group of people who committed an illegal act for the
common good, such as the assassination of a known dictator or terrorist leader.

History of Indemnity
Although indemnity agreements have not always had a name, they are not a new concept as
they are a necessary part of ensuring cooperation between individuals, businesses, and
governments. In 1825, Haiti was forced to pay France what was then called an "independence
debt." The payments were intended to cover the losses that French plantation owners suffered
in terms of land and slaves. While the indemnity described in this article was unjust, it is one
example of many historical cases that show the ways indemnity has been applied worldwide.

Essentials for Contract of Indemnity

1. The contract of indemnity must have all the essentials of the valid contract like free
consent, consideration, and object should be lawful etc. etc.
2. The second essential is that the contract of indemnity can be expressed or implied.
3. Another essential of contract of indemnity is the loss should be caused to the indemnity
holder because of the behaviour of the promisor or the third party.
4. The last but not the least is that promisor is promising with the promisee who is
Indemnity holder in this contract to save him from the loss. The indemnifier is entering
into the contract with the indemnity holder to save him from the loss.

5. Enforcement
1. A contract of indemnity can be enforced according to its terms.
2. Claim of Indemnity holder can include: damages, legal costs of adjudication, amount
paid under the terms of compromise
6.
3. The measure of damages is the extent to which the promisee has been indemnified.
4. Indemnifier should ideally be informed of the legal proceedings or should be joined
as third party. There is no onus to show breach or actual loss.

Nature and Scope of Contract of Indemnity:

2
English Law:
Under English law, the word indemnity carries a much wider meaning than given to it
under the Indian Contract Act. According to English Law “an indemnity is a contract, express
or implied to keep a person, who has entered into or who is about to enter into, a contract or
incur any other liability, indemnified against loss. Thus under English law the term
“indemnity” “includes promises to save the promisee harmless from loss caused by events or
accidents which do not or may not depend on the conduct of any person or by liability arising
from something done by the promise at the request of the promisor. Under English law promise
to indemnity may be express or implied.
A leading case on the point is Dugdale v/s Lovering in this case; certain trucks were in
possession of the plaintiff. The defendant as well as a company claimed them on the demand
of delivery of trucks by the defendants, the plaintiff demanded an indemnity bond, but no reply
was received, yet they delivered the trucks to the defendants. Subsequently, the said company
sued the plaintiff for conversion of property and succeeded in the suit. It was held that the
defendants were liable to indemnify bond led to the creation of an implied promise.
Indian Law:
The definition of contract of indemnity as given in the Indian Contract Act is not
exhaustive. It includes: (a) express promise to indemnity, and (b) cases were the loss is caused
by the conduct of the promisor himself or by the conduct of any other person. But it does not
include: (a) implied promises to indemnify, and (b) cases where loss arises from accidents and
events not depending on the conduct of the promisor or any other person.
The scope of section 124 is narrower than the concept of “indemnity” under English
Law. In Gajanan Moreshwar v/s Moreshwar Madan, the Bombay High Court observed that
section 124 deals with one particular kind of indemnity which arises from a promise made by
the indemnifier to save the indemnified from the loss caused to him by the conduct of
indemnifier himself, or by the conduct of any other person or from loss caused by events or
accidents which do not or may not depend upon the conduct of the indemnifier or any other
person, or by reason of liability incurred by something done by the indemnified at the request
of the indemnifier”.
Thus we see that while in England, nature of loss is not restricted to the some person
but also include events and accident not connected with the conduct of any party; in India it is
restricted to the conduct of some person. It may however noted that section 124 is not
exhaustive and it has been held that the “courts would apply the same principles that the courts
in England do”.
A contract of Indemnity is a contract which one party promises to save the other from
loss caused to him by the conduct of the promisor or by the conduct of any other person, as
contemplated by section 124 of the Indian Contract Act. It does not cover a promise to
compensate for loss not arising due to human agency. Therefore, a contract of insurance is not
covered by the definition of section 124. But indemnity as applicable to marine insurance must
not be an indemnity, as contemplated by the Indian Contract Act, as the loss in such contract
is covered by the contract itself and such loss it not caused to the assured by the conduct of the
insurer nor by the conduct of any other person. The contract of indemnity is a species of the
general contract. As such it must have all the essential elements of a valid contract.

Rights of Indemnity Holder Section-125:

As per the section 125 the rights of indemnity holder are

1. Damages. In a contract of indemnity the indemnity holder is entitled to recover from the
promise and indemnifier all damages for which he may be compelled to pay in any suit as of

3
any matter to which the promise the indemnity applies while acting within the scope of his
authority.
2. Costs. Any person with indemnity holder and indemnified or promise is entitled to recover
from promisor all costs which he may be compelled to pay in any suit in bringing or
defending it if he does not go against the order of the promisor and if he has acted in absence
of any contract as would have been prudent for him to do.
3. Sums. An indemnity holder is entitled to recover from indemnified all sums which he has
paid under the term of compromise of any suit and compromise was not against the order of
the promisor and the compromiser was not against the order of the promisor and the
compromise was such that it was to be done (prudent) in absence of any contract of
indemnity.

Explanation of Rights of Indemnity Holder

If any person has agreed to indemnity a person against a particular claim and debt, demand
and an action is brought on that demand the indemnity holder i.e. the defendant have to give
notice to the indemnifier to come and defend the action if he does not come and refuses to do
as he asked. Thus he has to compromise on best term and can bring an action under contract
of indemnity.

Commencement of indemnifiers liability

Section 125 of Indian Contract Act does not specify the time of commencement of
indemnifier’s liability. Different High Courts have made differing observations and given
different verdicts. Kolkata, Allahabad and Patna High Court have held that the indemnity-
holder can claim such indemnity as has been promised to him when he called upon to
perform an act or pay the damages against which he has been indemnified. In other words
indemnifier’s liability is concurrent with that of indemnity holder’s. for eg: S gives a stolen
item to A for auction and A asks for indemnity if he is sued by the owner of that item. A is
entitled to claim damages as soon as he is sued by the owner-he need not wait till he makes
payment of such damages.
But the Mumbai, Lahore and Nagpur High Courts have given contrary verdicts. The Courts
have held that the indemnifier’s obligation arises only when the indemnity holder has actually
performed his obligations. In other words the indemnity is only a reimbursement of the loss
suffered by the indemnity holder.

In the case of parker v. Levis the Court observed that if a person expressly indemnifies
somebody and the suit is filed in the court of law then the indemnity holder can ask the
indemnifier to protect him. If the indemnifier does not do so then the holder of indemnity is
entitled to make a settlement on his own terms and later sue the indemnifier under the
contract of indemnity. Justice Chagla made a similar observation in the case of Ganjan v.
Moreshwar when he said that “ if the indemnified has incurred a liability and it is absolute
he is entitled to call upon the indemnifier to save him from that liability and pay it off.”
Justice Backely has commented on this in the words “ Indemnity is not given by repayment
after payment. Indemnity requires that party to be indemnified should never be called upon to
pay.”

Conclusion
Indemnity is a legal exemption from the penalties or liabilities incurred by any course of
action. An insurance payout is often called an in indemnity, or it can be insurance to avoid

4
any expenses in case of a lawsuit. Indemnification is a promise, usually as contract provision,
protecting one party from financial loss. This is something stated as a requirement that one
party hold harmless the other.(Hold harmless does not imply indemnification.

The first says I wont make any claims against you and the second says I will pay the claims
against and/or your costs, etc.) Indemnification is a type of insurance which protects the one
party from the expenses of other. Indemnification clause cannot usually be enforced for
intentional tortious conduct of the protected party.

Corporate officers, board members and public officials often require an indemnity clause in
their contracts before they perform any work. In addition indemnification provisions are
common in intellectual properties. Licenses in which the licensor does not want to be liable
for misdeeds of the licensee. A typical license would protect the licensor against product
liability and patent infringement.

CONTRACT OF GUARANTEE

INTRODUCTION

The Indian Contract Act , 1872

Section 126 of Indian Contract Act defines Contract of guarantee. It defines a contract of
guarantees a contract to perform the promise or discharge the liability of a third person in case
of his default.

The person who gives the guarantee is called “surety”. The person of whose default the
guarantee is given is called the “Principal debtor”. The person to whom the guarantee is given
is called the creditor.

Contract of guarantee can be of two types. It can be oral or written. However, for a contract to
form in between the parties there should be meeting of minds that means all three parties should
be privy to the contract. Contract of guarantee is a promise to answer for the payment of the
debt that the principal debtor takes from the creditor or the performance of some duty. IN case
the principal debtor fails who is in the first instance liable to pay or perform. Therefore, the
primary liability to pay is of the principal debtor. Whereas, the secondary liability is of the
Surety i.e. when the principal debtor fails to pay, the surety comes into role.

5
BASIS FOR
INDEMNITY GUARANTEE
COMPARISON

Meaning A contract in which one party A contract in which a party

promises to another that he
will compensate him for any
loss suffered by him by the act
of the promisor or the third
party.
promises to another party that he
will perform the contract or
compensate the loss, in case of the
default of a their person, it is the
contract of guarantee.

Defined in Section 124 of Indian Contract Section 126 of Indian Contract Act,
Act, 1872 1872

Parties Two, i.e. indemnifier and Three, i.e. creditor, principal

indemnified debtor and surety

Number of One Three

Contracts

Degree of Primary Secondary

liability of the
promisor

Purpose To compensate for the loss To give assurance to the promisee

Maturity of When the contingency occurs. Liability already exists.

Liability

Section 127 of Indian Contract Act

This section basically talks about the consideration in a contract of guarantee. The
consideration for the surety’s promise may move from either the creditor or the Principal
Debtor. The consideration may benefit the surety but it is not necessary that surety should
receive any benefit from the consideration in contract of guarantee. This section speaks of the
consideration i.e any benefit that is received by the principal debtor or creditor at the surety’s
request.

The word “done” in this section is the past benefit to the principal debtor that can be considered
as good consideration.

6
Surety’s Liability

Under section 128 of ICA, the liability of surety is co-extensive that of the principal debtor that
means the surety is liable to the same extent as the principal debtor. For example if the principal
debtor is not liable for debt for some reason, then surety is also not liable for the same. Also,
the principal debtor is discharged from his debt by the creditor for some reason then surety will
be discharged too. This section depends on the contract as well. Therefore, the surety’s liability
depends on the terms of the contract and is not liable to pay more than the principal debtor has
taken.

Example- “A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and
charges which may have become due on it. A guarantees to B the payment of a bill of exchange
by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill,
but also for any interest and charges which may have become due on it.”

The liability of the surety is joint and connected with the principal debtor. It is the choice of
the creditor to recover the amount either from the principal debtor after his default or from
surety. He may file a suit against both the principal debtor and the surety or may file a suit
against the surety only or the principal debtor only.

In Bank of Bihar v Damodar Prasad it was held that the creditor do not have exhaust all the
remedies against principal debtor before suing the surety. It is the duty of the surety to pay the
debt if principal debtor does not pay. The purpose of contract of guarantee is defeated if the
creditor is asked to postpone his remedies against the surety. The liability of surety is
immediate.

Continuing guarantee

Section 129 of ICA defines continuing guarantee. A guarantee which extends to a series of
transactions is called continuing guarantee. It is not confined to a single transaction. In this
guarantee, surety is liable to pay the creditor for all the transactions. However, it is very
important to find out if the guarantee is a continuing one or not.

7
Difference between continuing guarantee and simple guarantee

• A continuing guarantee can be revoked by the surety any time either by the notice
to the creditor or until the surety’s death. Whereas, simple guarantee can not be
revoked in any circumstances.
• In continuing guarantee, the transaction can go for long period of time therefore the
surety will be held liable for long time as well whereas in simple guarantee the surety
liability is over when the debt is paid or the performance is done.

To understand the nature of a guarantee, you must look at :

• The intention of the parties as expressed by the language in the contract.

o surrounding circumstances to see what was the subject matter which the
parties examine.

Example of a continuing guarantee: A in consideration that B will employ C in collecting the

rents of B’s zamindari, promises B to be responsible to the amount of Rs 5000 for the due
collection and payment by C of those rents. This is a continuing guarantee.

Section 130 of ICA explains the revocation by notice. A continuing guarantee may be revoked
anytime by the surety for the future transactions only by notice to the creditor.

The main ingredients in this section is :

• As to future transactions
• Notice to the creditor

Continuing guarantee extends to a series of transactions, surety has a right to withdraw such
guarantee. As soon as the surety sends the notice of revocation to the creditor, the surety does
not remain liable for any transaction that happens after he has given notice, However, the surety
continues to remain liable for any transactions that has already taken place. if the mode of
revocation by notice is mentioned in the contract, then notice must be given in that mode only
and if no mode is given in the contract then the notice may be given in any form.

8
Section 131 of ICA explains the revocation by death of surety. The liability for any transactions
that took place prior to the death of the surety will be borne by his heirs. This contract could
be implied from the circumstances.

Discharge of Surety

Section 133 -139 explains all the circumstances in which surety is discharged. All these section
can be called the rights of the surety as the surety will not be liable on the guarantee any more.

Contract of guarantee is a contract and can be discharged as a normal contract.

Discharge of surety

§ By notice of revocation
§ By death of surety
§ By novation
§ By variance in terms of contract
§ By release or discharge of principal debtor
§ By arrangement between principal debtor and creditor
§ By impairing surety’s remedy
§ By loss of security, and
§ By invalidation of the contract
§
1. Notice of revocation
Ordinarily a guarantee cannot be revoked if the liability has already been accrued. But Section
130 provides for revocation of continuing guarantee. For example, if A has stood surety for a
Rs 5,00,000 home loan of B from a bank, and the money has been disbursed, A cannot revoke
the guarantee, as the liability has accrued. Accordingly, where a guarantee is a continuing one
and extends to a series of transactions, the surety as to future transactions may revoke it, by
giving notice to the creditor. However, the surety shall remain liable for the acts already acted
upon, i.e., prior to the notice of revocation.

2. Death of Surety
In case of a continuing guarantee, the death of the surety, in the absence of any contract to the
contrary, discharges him from liability as regards future transactions (i.e., transactions after his
death). In other words, the surety’s survivors or legal representatives would not be liable unless
expressly mentioned in the contract.

3. Novation
Novation, i.e., entering into a fresh contract, either between the same parties or between other
parties, constitutes another mode of discharging a surety from the liability. If the parties to a
contract (of guarantee) agree to substitute it with a new contract, the original contract need not
be performed and so the surety stands discharged with regard to the old contract. For the surety,
too, a fresh contract would have to be drafted.

9
4. Variance in terms of contract
Any variance or alteration in the terms of the contract made between the principal debtor and
the creditor, without the surety’s consent, discharges the surety as to the transactions taking
place subsequent to the variance.

The following are some of the examples in this regard.

Example 1
A becomes surety to C for payment of rent by B under a lease. Afterwards B and C contract to
hike the rent, without informing A. A would hence, be discharged from his liability as a surety
for accruing subsequent to the variance in terms of the contract without his consent.

Example 2
C contracts to lend B Rs 5,000 on March 1. A guarantees repayment. C pays Rs 5,000 to B on
January 1, A is discharged from his liability, as the contract has been varied for early release
of loan by the creditor.

5. Release or discharge of principal debtor

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

Example: A contracts with B to build a house for B for a fixed price within a stipulated time,
B supplying the necessary timber. C guarantees A’s performance of the contract. B fails to
supply the timber. C is thus discharged from his surety.

6. Arrangement between principal debtor and creditor

Where the creditor, without the consent of the surety arrives at a settlement with the principal
debtor, or promises to give him more time, or promises not to sue him by a contract between
the creditor and the principal debtor, the surety is absolved from the liability, unless the surety
assents to such contract.

Where, however, a contract to give time to the principal debtor is made by the creditor with a
third person, and not with the principal debtor, the surety is not discharged. For instance, C,
the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B,
contracts with M to give time to B. A is not discharged.

7. Impairing surety’s remedy

If the creditor commits any act, which is inconsistent with the rights of the surety, or fails to
perform any act that his duty to the surety requires him to do, such that the eventual remedy of
the surety himself against the principal debtor is impaired; the surety is discharged.

The following are some of the illustrations in this regard.

Example 1
B contracts to build a ship for C for a given sum, to be paid in installments as the work reaches
certain stages. A becomes surety to C for B’s due performance of the contract. C, without the
knowledge of A, prepays the last two installments to B. A is discharged by the prepayment.

10
Example 2
C lends money to B on the security of a joint and several promissory note made in C’s favour
by B, and by A as surety for B, together with a bill of sale of B’s furniture, which gives power
to C to sell the furniture. Owing to his (C’s) misconduct and wilful negligence, only a small
price is realized. A is discharged from liability on the note.

Example 3
A puts N as an apprentice to B, and gives a guarantee to B for N’s fidelity. B, on his part,
promises that he will, at least once a month, see N deposit the cash collected by him on B’s
behalf. B, however, fails to check up the books as promised, and M embezzles. A is not liable
to B on his guarantee.

8. Loss of security
If the creditor loses, or without the consent of the surety, parts with such security, the surety is
discharged to the extent of the value of the security. It is immaterial whether the surety was or
is aware of such security or not. For instance, C advances to B, his tenant, Rs 2,000 on the
guarantee of A. C has also a further security for Rs 2,000 by a mortgage of B’s furniture. C,
however cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture.

9. Invalidation of the contract

A surety is also discharged upon invalidation of the contract (i.e., between the creditor and the
surety). A contract of guarantee is invalid in the following circumstances.

Guarantee obtained by misrepresentation: Any guarantee, which has been obtained by

means of misrepresentation made by the creditor, or with his knowledge or assent, concerning
a material part of the transaction is invalid.
Guarantee obtained by concealment: Any guarantee, which the creditor has obtained by
means of keeping silence as to the material circumstances, is invalid.
Default on Part of co-surety: Where a person gives a guarantee upon a contract that the
creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is
not valid if that other person does not join.

Section 133 of ICA explains discharge of surety by variance.

“Discharge of surety by variance in terms of contract.—Any variance, made without the

surety’s consent, in the terms of the contract between the principal 1[debtor] and the creditor,
discharges the surety as to transactions subsequent to the variance. —Any variance, made
without the surety’s consent, in the terms of the contract between the principal debtor and the
creditor, discharges the surety as to transactions subsequent to the variance.”

This section essentially the outcome of the general rule that is all the parties should be privy to
the contract. It stated that when a amendment takes place in the contract without taking surety,
the surety is discharged. Surety cannot be bound to something for which he has not contracted.

11
For example: A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards B
and C contract without surety’s consent, that B’s salary sell be raised. In this Surety that is A
is discharged as A did not know about the contract between B and C.

Exception of this Section:

In this if the alteration is made in the agreement without the surety’s consent that is beneficial
to the surety, the surety is not discharged. The alteration should be unsubstantial/immaterial,
then surety is not discharged.

Section 134 – Discharge of surety by release of Principal Debtor

In this section states that if the principal debtor is release because of any contract between
creditor and principal debtor or by any act or omission of the creditor, then the surety is
released. This section is connected with the section 128 of ICA which says that the liability of
the surety is co-extensive with that of principal debtor. The reason for the discharge of surety
is with the principal debtor that this release of the principal debtor extinguishes the principal
obligation, to begin with.

In this section 2 types of release are mentioned.

1. Express release: This is a situation in where an express contract between the credit
and the principal debtor results in discharge/release
2. Implied release: In the section the words “by any act or commission of the creditor,
the legal consequence of which is the discharge of the principal debtor” refers to an
implied release/discharge.

The acts or omissions by this section are referred to in section 39, 53, 54, 55, 67 of ICA.

1. Section 39- when a party to a contract has refused to perform or disabled himself
from performing his promise.
2. Section 53- when a contract contains reciprocal promises and one party to the
contract prevents the other from performing his promise.
3. Section 54- when a contract contain reciprocal promises such that one of them
cannot be performed till the other has been performed.

12
 4. Section 55- When a party to a contract promises to do certain things at or before a
specific time and fails to do any such thing within that time
5. Section 67- If a promisee neglects to afford the promisor, reasonable facilities for
the performance of his promise.

Section 135– A contract between the creditor and the principal debtor without surety
assent to

• to make a composition/compromise with

• promise to give time to
• not to sue the principal debtor
• discharges the surety

“To make composition with”- This essentially mean if the creditor makes any sort of
compromise with the principal debtor with respect to the debt them surety will be discharged.

“Promise to give time to”- where the creditor extends time for the payment of debt without the
consent of surety, then surety will be discharged.

“Not to sue the principal debtor”- If the creditor agrees with the principal debtor to not to ever
sue against him, the surety will be discharged.

Section 136– Where a contract to give time to the principal debtor is made by the creditor with
a third person and not with the principal debtor, then the surety is not discharged.

For example- A agrees with B to supply 500 tons of steel in consideration of Rs 5 Lakhs. C
stands surety to A . A agrees with D (B’s father) to extends the delivery date. C is not
discharged as D is the third party and not the principal debtor.

Section 137– Mere Forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him does not discharge the surety.

Mere forbearance means own its own. When creditor does not sue the principal debtor on its
own then the surety is not discharged.

Section 139– In this section consists of the following elements:

13
 • The creditor either does something which is inconsistent with the rights of the surety
or omits to do his duty towards the surety
• And because of this the eventual remedy of the surety that he had against the
principal debtor is impaired(weakened) , the surety is discharged.

The object of this section is to ensure that no arrangement different from that contained in the
surety’s contract is forced upon him. Duty of care is owned by the creditor.

Section 140– The meaning of this section is that the surety steps into the shoes of the creditor
after he has paid the guaranteed debt or performed whatever he was liable for. This right of the
surety to step into the shoes of the creditor is known as the surety’s right of subrogation.

Automatic subrogation : Once the surety has paid the guarantee amount to the creditor. The
surety is invested with this right automatically without any pre-conditions attached to it.

Section 141– A surety is entitled to every security which the creditor has against the principal
debtor at the time when the suretyship is entered into. Or if the creditor loses or parts with such
security the surety is discharged to the extent of the value of the security. This section is applied
even when the surety’s consent is not there. The words “if the creditor loses security” refer to
deliberate action by the creditor and not a mistaken situation beyond the control of the creditor.

Extent of discharge: if the value of the security is less than the liability undertaken by the surety,
then the surety must be held to be discharged to the extend of the value of the security and that
he will still be required to discharged the liability which exceeds the value of security.
However, if the value of the security given is in far excess of the liability, the surety must be
held to be discharged wholly.

Section 142– Guarantee obtained by misrepresentation. Any guarantee obtained by

misrepresentation made by the creditor is invalid.

Section 143– Any guarantee which the creditor has obtained by means of keeping silence as to
a material circumstance is invalid.

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

14
join. Where a person gives a guarantee upon a contract that the creditor shall not act upon it
until another person has joined in it as co-surety, the guarantee is not valid if that other person
does not join.

Section 145– In every contract of guarantee there is an implied contract of indemnity in

between the surety and principal debtor. Principal debtor has to indemnify the surety later with
the rightfully sum. The surety can sue the principal debtor for the guarantee amount as soon as
his liability becomes absolute. The surety may recover all damages, all costs and all sums in
accordance with section 125 of ICA.

Co-sureties

Section 138– When one co-surety is released does not discharge other co-surety. A release by
the creditor of one of them does not discharge the others neither does it free the surety so
released from his responsibility to the other sureties.

Section 146-This section defines co-sureties. Where 2 or more persons are co-sureties for the
same debt or duty are liable as between themselves to pay each an equal share of the whole
debt or of that part of it which remains unpaid by the principal debtor. contribution of all the
co-sureties should be equal, if not mentioned in the contract. It should be according to the
contract if the proportion is mentioned in the contract.

Section 147– Co-sureties are bond in different sums are liable to pay equally as far s the limits
of their respective obligations permit. For e.g.. – A, B and C are sureties for D enter into 3
several bonds. A in the penalty of Rs.10,000, B in that of Rs. 20,000 and C in Rs 40,000. D
makes a default to the extent of Rs. 40,000. So, the liability of A will be 10,000 , B’s liability
will be 15,000 and C’s liability will be 15,000 as well.

A Contract to perform the promise, or discharge the liability, of a third person in case of his
default is called Contract of Guarantee. A guarantee may be either oral or written.

• The person who gives the guarantee is called the Surety

• The person on whose default the guarantee is given is called the Principal Debtor
• The person to whom the guarantee is given is called the Creditor
• There are three parties in every Contract of Guarantee
• The liability arises right from the beginning. The surety becomes liable when the
principle debtor commits default in meeting the liability.

15
 • Surety has the right to sue the third party (Principle Debtor) directly. The Law puts
him in the position of Creditor. Where as in Contracts of Indemnity, the Indemnifier
cannot sue the third party in his name. He has to sue in the name of the Indemnity-
holder or after obtaining the rights from him.
• Anything done, or any promise made, for the benefit of the principal debtor, may be a
sufficient consideration to the surety for giving the guarantee. The guarantor need not
personally derive any benefit from the guarantee.
• The liability of the surety is co-extensive with that of the principal debtor, unless it is
otherwise provided by the contract.
• The creditor can straightway proceed against the guarantor without first proceeding
against the principal debtor.
• The liability of the surety can never be greater than that of the principal debtor. The
surety can however may restrict his liability to part of the Principal debtor's liability
by contract.
• Surety's liability is distinct and separate

UNIT 2

INTRODUCTION

CONTRACT OF BAILMENT

Contracts of Bailment are a special class of contract. These are dealt within Chap. IX from
S.148 to 181 of the Indian Contract Act, 1872. Bailment implies a sort of one person
temporarily goes into the possession of another. The circumstance in which this happens are
numerous. Delivering a cycle, watch or any other article for repair, delivering gold to a
goldsmith for making ornaments, delivering garments to a drycleaner, delivering goods for
carriage, etc. are all familiar situations which create the relationship of ‘Bailment’.

2) Definition:-

a) Bailment:-Section 148 defines ‘Bailment’ as “the delivery of goods by one person to

another for some purpose, upon a contract that they shall, when the purpose is accomplished
be returned or otherwise disposed off according to the directions of the person delivering
them”.

b) Bailor:- The person delivering the goods is called ‘Bailor’.

c) Bailee:- The person to whom they (goods) are delivered is ‘Bailee’.

3) Duties of Bailor:-

According to Section 150, which deals with the duties of Bailor. Bailor are of two kinds viz;

1) Gratuitous Bailor

2) Bailor for reward

16
1) Gratuitous Bailor:-

A person, who lends his articles or goods without any charge, is called a “Gratuitous Bailor”.
His duty is naturally much less than that of a Bailor for hire or consideration.

Duty of Gratuitous Bailor:-

a) To disclose Known faults:- It is the first and foremost duty of the Bailor to disclose the
known faults about the goods bailed to the Bailee. If he does not make such disclosure, he is
responsible for any damage caused to the Bailee directly from such faults.

i. E.g. ‘A’ lends a horse, which he knows to be vicious, to ‘B’. He does not disclose that the
horse is vicious. The horse runs away and ‘B’ is thrown and injured. ‘A’ is responsible to ‘B’
for damage sustained.

ii. ‘A’ hires a carriage of ‘B’. The carriage is unsafe though ‘B’ is not aware of it, and is
injured. ‘B’ is responsible to ‘A’ for the injury. In Gratuitous Bailment, however, the Bailor
is responsible only for those faults which are known to him and which are not disclosed.

b) To indemnify bailee for loss in case of premature termination of Gratuitous Bailment:-

A Gratuitous Bailment can be terminated by the bailor at any time even though the bailment
was for a specified time or purpose. But in such a case, the loss accuring to the bailee from
such premature termination should not exceed the benefit he has derived out of the bailment.
If the loss exceeds the benefit, the bailor shall have to indemnify the bailee. For example, ‘A’
lends an old discarded bicycle to ‘B’ gratuitously for three months, ‘B’ incurs Rs. 120/- on its
repairs. If ‘A’ asks for the return of bicycle after one month, he will have to compensate ‘B’
for expenses incurred by ‘B’ in excess of the benefit derived by him.

2) Bailor for reward:-

The duty of a bailor for consideration is much greater. He is making profit from his
profession and, therefore, it is his duty to see that the goods which he delivers are reasonably
safe for the purpose of the bailment. It is no defence for him to say that he was not aware of
the defect. Section 150 clearly says that “if the goods are bailed for hire, the bailor is
responsible for such damage, whether he was or was not aware of such faults in the goods
bailed.” He has to examine the goods and remove such defects as reasonable examination
would have disclosed.

Duty of Bailor for reward:-

c) To bear extraordinary expenses of Bailment:-

The Bailee is bound to bear ordinary and reasonable expenses of bailment but for any
extraordinary expenses the bailor is responsible. E.g., ‘A’ lends his horse to ‘B’, a friend, for
two days. The feeding charges are to be paid by ‘B’. But if the horse meets with an accident
‘A’ will have to repay ‘B’ medical expenses incurred by ‘B’.

17
d) To receive back the goods:-

It is the duty of the Bailor to receive back the goods when the Bailee returns them after the
expiry of the term of the Bailment or when the purpose for which Bailment was created has
been accomplished. If the Bailor refuses to receive back the goods, the entitled to receive
compensation from the Bailor for the necessary expenses of custody.

e) To indemnify the Bailee:-

Where the title of the Bailor to the goods is defective and the Bailee suffers as a consequence,
the Bailor is responsible to the Bailee may sustain by reason that the Bailor was not entitled
to make Bailment, or to receive back the goods, or to give directions respecting them.

Duties of a Bailee
Duties of a bailee in respect of goods are as follows:

1. Take proper care of goods

According to section 151, it is the duty of a bailee to take care of goods bailed to him. Bailee
should take care of these goods as an ordinary man will take care of his goods of the same value,
quality, and quantity.

Thus, if the bailee takes due care of goods then he will not be liable for any loss, deterioration of
such goods. Also, the bailee needs to take the same degree of care of goods whether the
bailment is for reward or gratuitous.

However, the bailee is not liable for any loss due to the happening of any act by God or public
enemies though he agrees to take special care of the goods.

2. Not to make unauthorized use

As per section 153, the Bailee shall not make any unauthorized use of goods bailed. In case he
makes any unauthorized use, then bailor can terminate the bailment.

Bailor can also claim for damages caused to goods bailed due to unauthorized use as per Section
154.

3. Keep goods separate

The bailee needs to keep the goods separately from his own goods. He should not mix the goods
under bailment with his own goods. In case bailee mixes the goods with his own goods without
the consent of the bailor, then:

i. Bailor also has an interest in the mixture.

18
 ii. If the goods can be separated or divided, the property in the goods remains with both the
parties. But, the bailee bears the expenses of separation or any damages arising from the
mixture.

iii. If it is not possible to separate the goods, bailee shall compensate the bailor for the loss of
goods.
4. Not set adverse title
A bailee must not set an adverse title to the goods bailed.

5. Return Goods
A bailee is under the duty to return the goods without demand on the accomplishment of the
purpose or the expiration of the time period. In case of his failure to do so, he shall be liable for
the loss, destruction, deterioration, damages or destruction of goods even without negligence.

6. Return increase or profits

A bailee shall return the goods along with any increase or profit accruing to the goods to the
bailor, in the absence of any contract to the contrary.

For example, A leaves a hen in the custody of B. The hen gets a chick. B shall deliver the hen
along with the chick to A.

Duties of a bailor
Duties of a bailor are as follows:

1. It is the duty of a bailor to disclose all faults. If bailor fails to disclose such faults then he
will be responsible for the damage caused to goods or loss suffered by the bailee.

2. Also, bailor is under the duty to pay the extraordinary expenses incurred by the bailee for
such bailment.
3. It is the duty of the bailor to accept the goods after the purpose for which such goods
were bailed is accomplished.
4. It is the duty of the bailor to indemnify the bailee for cost incurred due to the defective
title of goods bailed to the bailee.
5. Indian Contract Act: person who finds goods belonging to another, and takes them
into his custody, is subject to the same responsibility as that of a bailee

Position Finder of Goods under Indian Contract Act

The act of placing property in the custody and control of another person usually by
agreement in which the bailee is responsible for its safe keeping and return is called
bailment. Examples: bonds left with the bank, autos parked in a garage, animals lodged
with a kennel, or a storage facility (as long as the goods can be moved and are under the
control of the custodian).

19
The duties and liability of a finder is treated at par with the bailee. The finder’s position,
therefore, has been considered along with bailment.

As the legal provision in the Indian Contract Act in itself says that responsibility of the
finder of goods would be replica of the responsibility of the finder of goods would be
replica of the responsibility of a bailee in a contract of bailment.

Brief review of quasi contract

There are certain situations wherein certain persons are required to perform an obligation
despite the fact that he hasn’t broken any contract nor committed any tort. For instance, a
person is obligated to restore the goods left at his home, by mistake, and keep it in good
condition. Such obligations are called quasi-contracts.

68 to 72 provide for five kinds of quasi-contractual obligations:

1. Supply of necessities [s.68]
2. Payment by interested persons [s.69]
3. Liability to pay for non-gratuitous acts [s.70]
4. Finder of goods [s.71]
5. Mistake of coercion [s.72]

Supply of necessities [S.68]

When necessities are supplied to a person who is incompetent of contract or to someone
who is legally bound to support, the supplier is entitled to recover the price from the
property of the incompetent person.

Payments by interested persons [S.69]

A person who is interested in the payment of money which another is bound by law to
pay and who therefore pays it is entitled to be reimbursed by the other.

Liability for non-gratuitous act [S.70]

Section 70 creates liability to pay for the benefit of an act which the doer did not intend to
do gratuitously. Where a person does something for another person not intending to do so
gratuitously and such person is entitled to enjoy benefits from it. And then such a person
who has used the thing has to compensate the other or restore or deliver the thing.

Finder of goods [S.71]

Section 71 lays down the responsibility of a finder of goods. The duties and liability of a
finder is treated at par with the bailee. The finder’s position, therefore, has been
considered along with bailment.

Mistake or coercion [S. 72]

Section 72 states that payments or delivery made under mistake or coercion must repay or
return the thing delivered.

Finders are bailee

A finder of good is a bailee there of as such bound by the duty of reasonable care. He
does not have the right to sue the owner for compensation for trouble and expenses
voluntarily incurred by him to preserve the goods and find the owner. Early English cases
disallowed not only compensation, but also right to lien for expenses. Thus where:

20
A finder fed a dog for 20 days and claimed 20s. for the same. The court said he would be
guilty of trover if he refused to deliver unless paid for his keeping. Similarly for another
case:

A quantity of timber, placed in a dock on the bank of a navigable river, being accidently
loosened, was carried by the tide to a considerable distance. The defendant, finding it in
that situation, voluntarily conveyed it to a place of safety.

He was held not entitled to lien on the timber for the trouble or expense, but was liable in
trover for refusing to deliver.

Duties of Bailee:
1. Duty of reasonable care:
Care to be taken by bailee [s. 151]
All care as a man of ordinary prudence is to be taken by the bailee.

Uniform Standard of Care

This section lays down a uniform standard of care for “all cases of Bailment”. Originally
in English law “liability in bailment was absolute. It was no excuse for the bailee to say
that the damage or failure to return was due to no fault of his own; he was liable in any
case”. Thus where goods were delivered to a bailee for safe custody and he was robbed of
them, the court held them liable, saying “it is the delivery which charge him to keep at his
peril”. The first concession was given to gratuitous bailee.

In India, section 151 prescribes a uniform standard of care in all cases of bailment, i.e, a
degree of care which a man of ordinary prudence would takeoff his own goods of the
same type and under same circumstances and if the bailee fails to do so he is held liable
for loss of goods.

Bailee when not liable for loss, etc, of thing bailed [s.152]
The bailee in the absence of any special contract, is not responsible for loss, if he has
taken amount of care required.

Loss by theft
Where the bailor’s goods are stolen from the custody of the bailee, he will be liable if
there has been negligence on his part.

Burden of Proof
The burden of proof is on the bailee to show that he was exercising reasonable care and if
he can prove this he will not be liable.If the bailee places before the court evidence to
show that he had taken reasonable care to avoid damage which was reasonably
foreseeable or had taken all reasonable care to avoid damage which was reasonably
precautious to obviate risks which were reasonably apprehended, he would be absolved of
his liability.

Loss due to act of Bailee’s servant

Where the act has been due to bailee’s servant, he would be liable if the servant ‘s act is
within the scope of his employment. In Chashire v Bailey, it was said that the bailee was
bound to bring reasonable care to the execution of every part of duty accepted.

21
Bailee’s own goods lost with those of Bailor
Where the bailee’s own goods are lost along with those of the bailor, the bailee would
naturally contended that he was taking as much care of the bailor’s goods as of his own.
The fact that the bailee is generally negligent with his own goods is no justification for
his negligence towards the bailee’s goods , unless the bailor is aware is aware of his
habits and, therefore, knew what to expect. Even in such cases the proper inquiry s
whether proper care had been taken.

2. Duty not to make unauthorized use:

Liability of bailee making unauthorized use of goods bailed
If the bailee makes any use of goods bailed which is not according to the conditions of the
bailment, he is liable to make compensation to the bailor for any damage arising to the
goods from or during such use of them.

3. Duty not to mix

The bailee should maintain the separate identity of the bailor’s goods. He should not mix
his own goods with those of the bailor and without his consent. If the goods are mixed
with the consent with the consent of the bailor, both will have a proportionate interest in
the mixture thus produced.

Effect of mixture with bailor’s consent,of his goods with bailee’s

If the bailee with the consent of the bailor, mixes the goods of the bailor with his own
goods, the bailor and the bailee shall have an interest, in proportion to their respective
shares in the mixture thus produced.

Effect of goods, without bailor’s consent when the goods can be separated
If the bailee, without bailor’s consent mixes his good with own’s and when the goods can
be separated; the properties remain with the respective parties but the bailee is bound to
bear the expense of separation and any damage arising from the mixture.

Effect if mixture, without bailor’s consent, when the goods can not be separated
If the bailee, withot the consent of the bailor, mixes the goods of the bailor with his own
goods, in such a manner that it is impossible to separate the goods bailed from other
goods and deliver them back, the bailor is entitled to be compensated by the bailee for the
loss of the goods.

4. Duty to return
Return of goods bailed, on expiration of time or accomplishment of purpose

Is the duty of the bailee to return, or deliver according to the bailor’s direction, the goods
bailed, without demand, as soon as the time for which they were bailed has expired, or the
purpose for which they were bailed has been accomplished.

Bailee’s responsibility when goods are not duly returned

If by the default of the bailee, the goods are not returned, delivered or tendered in proper
time he is responsible to the bailor for any loss of goods at that time.

Termination of gratuitous bailment

22
Where the lending of goods is gratuitous the bailor may at any time require return of
goods even he lent them for a specified time or purpose.

Restoration of goods lent gratuitously

The lender of a thing may at any time require return of goods even he lent them for a
specified time or purpose. But if , on the faith of such loan, the borrower has acted in such
a manner that the return of the thing would cause him loss, the lender must, indemnify the
borrower for the amount in which the loss so occasioned exceeds the benefit so derived.

Termination of gratuitous bailment by death

A gratuitous bailment is terminated by death of either the bailor or the bailee.

Bailment by several joint owners

If joint owners of goods bail them the bailee may deliver them back to, or according to
the directions of, one joint owner without the consent of all, in the absence of any
agreement to the contrary.

Bailee not responsilble on re-delivery to bailor without title

If the bailor has no title of goods, and the bailee in good faith, delivers them back to,
or according to the directions of the bailor, the bailee is not responsible to the owner
in respect of such delivery.

Right of third person claiming goods bailed

If a person other than the bailor, claims goods bailed, he may apply to the court to
stop the delivery of the goods to the bailor, and to decide the title to the goods.

6. Duty to return increase

In absence of any contract to the contrary, the bailee is bound to return to the bailor
natural increases or profit accruing to the goods during the period of bailment.

Bailor entitled to increase or profit from goods bailed

In absence of any contract to the contrary, the bailee is bound to deliver to the bailor,
or according to his directions, any increase or profit which may have accrued from the
goods bailed.

Duties of Finder of goods:

The duties and liability of a finder is treated at par with the bailee. The finder’s
position, therefore, has been considered along with bailment. Sumarising the duties of
finder of goods thus:
1. Duty of reasonable care
Care to be taken by Finder of goods [s. 151]
Finder of goods when not liable for loss, etc, of thing bailed [s.152]

2. Duty not to make unauthorized use

Liability of Finder of goods making unauthorized use of goods bailed[s154]
Termination of bailment by Finder of good’s act inconsistent with conditions[s153]

3. Duty not to mix

23
 Effect of mixture with owner’s consent, of his goods with Finder of good’s[s.155]
Effect of goods, without owner’s consent when the goods can be separated[s.156]
Effect if mixture, without owner’s consent, when the goods can not be
separated[s167]

4. Duty to return
Return of goods found, on expiration of time or accomplishment of purpose[s.160]
Finder of good’s responsibility when goods are not duly returned[s.161]
Restoration of goods lent gratuitously[s.159]
Termination of gratuitous bailment by death[s.162]
Bailment by several joint owners[s.165]

5. Duty not to set up jus tertii

Finder of goods not responsilble on re-delivery to owner without title[s.166]
Right of third person claiming goods found[s.167]

6. Duty to return increase

Owner entitled to increase or profit from goods found[s.163]

Rights of finders
Rights to dispose of the goods.

Sections 168 and 169 protect the interest of a finder in two ways. Section 168 allows the finder
retain the goods against the owner until he receives compensation for trouble and expense.
Further where the owner has offered a specific reward for the return of the goods lost, the finder
may sue for reward and may retain the goods until he receives it.

Section 169 allows the finder to sell the goods in certain circumstances. Where a thing which
is commonly the subject of sale is lost, if the owner cannot be found with reasonable diligence,
or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell the
goods in the following cases:

When the thing is in danger of perishing or losing the greater part of its value, or
When the lawful charges of the finder, in respect of the thing found amount to two-thirds of its
value.

Sections 168 and 169 (FINDER)

s.168 May sue for specific reward offered.

The finder of goods has no right to sue the owner for compensation for trouble and expense
voluntarily incurred to him to preserve the goods and to find out the owner; but he may retain
the goods against the owner until he receives such compensation; and where the owner has
offered a specific reward for the return of the goods lost, the finder may sue for reward and
may retain the goods until he receives it.

s.69When the finder of thing commonly on sale may sell it.

When a thing which is commonly the subject of sale is lost, if the owner cannot with
reasonable diligence be found, or if he refuses, upon demand, to pay the lawful charges of the
finder, the finder may sell it:

24
When the thing is in danger of perishing or losing the greater part of its value, or

When the lawful charges of the finder, in respect of the thing found amount to two-thirds of
its value.

Conclusion:-
From the above discussion it can be seen that bailment is a contract whereby a delivery of
possession is given of specific goods to another for some purpose with the direction that the
goods shall be return or dispose off on fulfillment of the purpose. Bailment is different from
licence and sale. There are five important duties of bailor as we have discussed above. A
contract of bailment may be terminated by act of parties or by operation of Law.

CONTRACT OF PLEDGE:

Pledge

Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under section 172 of
the Indian Contract Act, 1892. By pledge, we mean bailment of goods as a security for the
repayment of debt or loan advanced or performance of an obligation or promise. The person
who pledges the goods as security is known as Pledger or Pawnor and the person in whose
favour the goods are pledged is known as Pledgee or Pawnee.

Essentials of Pledge

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the
essentials of the pledge. Apart from that, the other essentials of the pledge are:

• There shall be a bailment for security against payment or performance of the

promise,
• The subject matter of pledge is goods,
• Goods pledged for shall be in existence,
• There shall be the delivery of goods from pledger to pledgee,
• There is no transfer of ownership in case of the pledge.

Rights of Pawnor

As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. By
this, we mean that on the repayment of the debt or the performance of the promise, the Pawnor
can redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual

25
sale. The right of redemption is extinguished once the actual sale is done by the Pawnee as per
his right under section 176 of the Indian Contract Act, 1872

DUTIES OF PAWNOR

DUTIES OF THE PAWNOR :-

Following are the duties of Pawnor :

1. Meet the Obligations :-

Pawnor must meet the obligations regarding the contract with in specified time.

2. Pay Extra Expenditure :-

He should also pay the extra ordinary charges.

Rights of a Pawnee

The rights of the Pawnee as per Indian Contract Act, 1872 are:

• Right to retain the goods: If the Pawnor fails to make the payment of a debt or
does not perform as per the promise made, the Pawnee has the right to retain the
goods pledged as security. Moreover, Pawnee can also retain goods for non-
payment of interest on debt or non-payment of expenses incurred. But Pawnee
cannot retain goods for any other debt or promise other than that agreed for in the
contract. (Section 173-174)
• Right to recover extraordinary expenses: The expenses incurred by Pawnee on
the preservation of goods pledged can be recovered from Pawnor. (Section 175)
• The right of suit to procure debt and sale of pledged goods: On the failure to
make repayment to Pawnee of the debt, the Pawnee has two right: either to initiate
suit proceedings against him or sell the goods. In the former case, the Pawnee retains
the goods with himself as collateral security and initiate the court proceedings. He
need not provide any notice of such proceedings to the Pawnor. And in the latter
case, the Pawnee can sell the goods after giving due notice of sale to the Pawnor. If
the amount received from the sale of goods is less than the amount due then the rest
amount can be recovered from Pawnor. And if the Pawnee gets more amount than
the due amount then such surplus is to be given back to Pawnor. (Section 176)

DUTIES OF PAWNEE :-

26
1. Return of Goods :-

On the receipt of his dues he should return the goods.

2. Reasonable Care :-

He must do the reasonable care of the pledges goods.

3. Comply Terms :-

He should abide by the terms.

4. No Misuse :-

He should not make unauthorized use the pledged goods.

7. No Mixation :-

He should not mix the pledged goods with his own goods beard by the pawnee.

Difference between Bailment and Pledge

Basis Bailment Pledge

Transfer of goods from one person Transfer of goods from one person to
Meaning to another for a specific purpose is another as security for repayment of
known as the bailment. debt is known as the pledge.

It is defined under section 148 of the It is defined under section 172 of the
Defined In
Indian Contract Act, 1872. Indian Contract Act, 1872.

The person who delivers the bailed
goods is known as Bailor and the
Parties
person receiving such goods is
known as Bailee.
The person who delivers the pledged
goods is known as Pledger or Pawnor
and the person receiving such goods
is known as Pledgee or Pawnee.

The consideration may or may not

Consideration Consideration is always there.
be present.

27
 Bailee has no right to sell the goods Pledgee or Pawnee has the right to
Right to Sell
bailed. sell the goods.

Bailee can use the goods only for a

Pledgee or Pawnee cannot use the
Use of Goods specific purpose only and not
goods pledged.
otherwise.

The purpose of pledged goods is to

The purpose of bailed goods is for
Purpose act as security for repayment of debt
safekeeping or repairs etc.
or performance of the promise.

Illustrations

Illustration 1: Mr A gives his watch for repair to Mr B., In this case, Mr A is bailor, Mr B is
Bailee and the goods bailed is watch.

Illustration 2: Harry bailed his bike to David for riding for himself to go to college. David
used it for racing purpose. Now David will be liable for unauthorized use of the bike bailed.

Illustration 3: Mr X gave his cat to Mr Y for looking after over some days. Cat in that while
gave birth to kittens. Now Mr Y is liable to return the cat along the accretions.

Illustration 4: Mr A bailed his carriage for Mr B for hire for a few days. But there was a
default in the carriage of which Mr A was not aware. And subsequently, Mr B suffered
injuries because of the same. Now Mr A is liable to pay damages to Mr B.

UNIT – III
Agency-

Agency- Definition- Creation of Agency- Kinds of Agents- Distinction between Agent and
Servant- Rights and Duties of Agent- Relation of Principal with third parties- Delegation-
Extent of Agents authority- Personal liability of Agent- Termination of Agency.

INTRODUCTION

Fiduciary relationship between two parties in which one (the 'agent') is under the control of
(is obligated to) the other (the 'principal') . The agent is authorized by the principal to perform
certain acts, for and on behalf of the principal. The principal is bound by the acts of the agent,

28
performed in carrying out entrusted duties and within the scope of agent's authority. An
agency can be created by (1) express agreement, whether oral or written, (2) implication,
based on the custom or practice of the trade, or (3) conduct of the principal. Under the legal
doctrine of estoppel, the principal is prohibited from denying the existence of a properly
constituted agency.

Creation of agency is essential to commercial and financial transactions, because an

organization (as a legal entity) can function only through its agents.

In India, the agent and principle share a relationship that is contractual in nature, and
therefore it is governed by the terms and conditions of the contract between them. the Indian
Contract Act, 1872 provides the basic structure of rules and regulations that basically govern
the performance and formation of any type of contract including the agency contract. In
agency contracts, there exists a legal relationship between two people whereby one person
acts on behalf of the other. The person acting on behalf of the other is called an agent, and the
person from whom the agent derives authority to act is called the principal. The law of
agency is based on the Latin maxim “qui facit per alium, facit per se,” which means, “he who
acts through another is deemed in law to do it himself“[i]. Agent and principal are defined
under Section 182 of the Indian Contract Act, 1872. According to the section “an agent is a
person employed to do any act for another or to represent another in dealings with third
persons. The person for whom such act is done, or who is so represented, is called the
principal”.[ii] The competent agent is legally capable of acting for the principal vis-à-vis the
third party. Now who can become an agent? Section 184 answers this question. According to
this section any person can become an agent i.e. there is no need to have a contractual
capacity to become an agent. Therefore, a minor can also act as an agent. But the minor will
not be responsible to his principal.[iii] Different types of commercial agents have been
identified under Indian law like brokers, auctioneers, del credere agents, persons entrusted
with money for obtaining sales and insurance agents.

Creation of an agency

1. By express or implied contract- A principal may implicitly or expressly employ

an agent. The appointment may be expressed in writing or it may be oral.
As per Section 186 of the Indian Contract Act, 1872, an agency may be created by
an express agreement. When an express contract of agency is entered into between
a principal and an agent, the agency is said to be created by express agreement. An
express agreement of agency between a principal and his agent may be in writing
or oral. However, in most cases, an express agreement of agency is created through
the execution of a formal power of attorney on a written and stamped paper,
specifying the scope of the authority of the agent. Again, in certain cases, say, to
execute a deed or sale or purchase of land, an agent, if any, is required to be
appointed by executing a formal power of attorney on a written and stamped paper.
As per section 187 of the Contract Act, 1872, an agency may also be created by an
implied agreement. An agency is said to have been created by an implied
agreement, when there is no express agreement appointing the agent, but the agency
agreement is implied either from the conduct of the parties or from the relationship
between them or may be inferred from the circumstances of the case. Let us discuss
this with an example:
A woman allowed her son to drive a car for her, she paying all the expenses of
maintenance and operation of the car. The son caused an accident injuring his wife.

29
 The son’s wife filed a suit against her mother in law for damages for the injury
caused to her by the son as her agent. It was held by the Court that the son’s wife
could sue the mother in law for the fault of her son, as the son was an implied agent
of the mother. As an implied agency may be created from the conduct, situation or
relationship of the parties. It may be inferred from the circumstances of the case.
Implied agency may take the forms of:
2. By conduct of party or situation– estoppel- Whereby a person allows another to
act for him to such an extent that a third party reasonably believes that an agency
relationship exists between the two.
An implied agency may arise by estoppels. An agency by estoppels is based on the
doctrine of estoppels, which provides that “where a person, by words spoken or written,
or by his conduct, wilfully leads another person to believe that a certain state of affairs
exists; he is stopped or precluded from denying subsequently the fact of that state of
affairs”. Section 237 of the Contract Act which deals with agency by estoppels,
provides that “Where an agent has, without authority. Done acts or incurred obligations
to third persons on behalf of his principal, the principal is bound by such acts or
obligations if he has by his words or conduct induced such third persons to believe that
such acts and obligations were within the scope of the agents authority”.
So, when a person (a principal), by his conduct or by written statements or by spoken
words, wilfully leads others to believe that a certain person is his agent, he is estopped
form denying the agent authority subsequently, although the agent does not, in fact,
possess any such authority, whatsoever. An agency created under such a circumstances
is called agency by estoppel.

3. By ratification- assent is given either to an act done by someone who had no

previous a An agent must have express or implied authority of the principal to
contract on behalf of the principal. Otherwise, the principal is not bound by the
contract entered into by the agent. Sometimes, an agent contracts or acts on
behalf of his principal without his previous permission, but later on the principal
owns or approves the act as if it were done with his authority or instructions. In
such a case, there is said to be an agency by ratification. Agency by ratification
Also known as ex-post facto agency (agency arising after the event)
By ratification we mean an act which the principal confirms unauthorised acts
of the agent. That is to say, even if the agent enters into a contract without the authority,
consent or knowledge of the principal may, if he likes, ratify it and thereby accept the
benefits and obligations arising out of such a contract.
For example: a without having authority of B acts as B’s agent and enters into
a contract with C. the contract will be binding on B, if he ratifies or approves of the
same.
Sections 196-200 lay down the provisions relating to Agency by Ratification.
Section 196 refers to right of persons as to acts done for him without his authority.
Section 197 says that ratification may be expressed or implied. Section 198 speaks
about knowledge requisite for valid ratification. Section 199 deals with effect of
ratifying unauthorised act forming part of a transaction and finally Section 200 provides
for ratification of unauthorised act cannot injure third person.

4. By Necessity- a person acts for another in an emergency situation without

express authority to do so.

30
 KINDS OF AGENTS:
The term agent applies to anyone who by authority performs an act for another, and
includes a great many classes of persons to whom distinctive names are given. There may be
various types of agents whose powers and duties are settled by usage and custom of trade
recognized by the courts of law. The important one are classified as under:
1. Express or Implied Agents: An express agent is one who is appointed verbally or by writing.
An implied agent is one whose appointment is to be inferred from the conduct of the parties.

2. General, Special or Universal Agents: A general agent is one who is employed to transact
generally all the business of the principal in regard to which he is employed. A special agent
has only authority to do some particular act or represent his principal in some particular
transaction. A universal agent is one who is authorized to transact all the business of his
principal of every kind and to do all the acts which the principal can lawfully do and can
delegate.

3. Sub-agent: An agent derives his authority directly from the principal. A sub-agent derives
his authority from the agent who has been appointed to do the act.

4. Mercantile Agent: One broad classification of agents is mercantile or commercial agents. A

mercantile agent is a person who is authorised by a principal to buy or sell the goods or to raise
a loan by using principal goods as a security. A mercantile agent may be classified under the
following heads:
1. Auctioneer:
An auctioneer is an agent who is appointed to sell goods at a public auction for
remuneration. He may or may not be entrusted with the possession or control of the goods
which he sells. He may be agent both for the seller and buyer. The authority vested in him is
to sell the goods only, and not to give warranties on behalf of the seller, unless expressly
authorised in that behalf. An auctioneer is an agent whose business is to sell goods or other
property by auction, i.e., by open sale. He is a mercantile agent within the meaning of Section
2(9) of the Sale of Goods Act. If the owner of the goods puts him in possession of the goods
although the authority to sell has not been conferred in him, a buyer in good faith from such an
auctioneer will get a good title in respect of the goods. An auctioneer has implied authority to
sell the goods without any restriction. Hence a sale by him in violation of the instruction is
binding on the owner. If the owner directs the auctioneer not to sell below a reserve price and
the auctioneer sells it below that price, the sale is even then binding on the owner except in
cases where the buyer knew that there was limitation on the auctioneer’s authority.
2. Factors:
A factor is a mercantile agent who is entrusted with the possession of the goods for
the purpose of sale. He is a person to whom goods are consigned for sale by a merchant
residing abroad. He has also the power to sell goods on credit and also to receive the
price from the buyer. He usually sells the goods in his own name. He cannot barter or
pledge the goods. He has a general lien for the balance of account as between himself
and the principal. If the owner has put a factor in possession of the goods or the
document of title but without authorising him to sell the goods, the sale of goods by
him will convey a good title to a bona fide buyer.
3. Brokers:
A broker is an agent who has an authority to negotiate the sale or purchase of
goods on behalf of his principal, with a third person. A broker is a mercantile agent
who is employed to make contracts for the purchase and sale of goods for a
commission called brokerage. Unlike a factor, he himself has no possession of the

31
 goods. He merely makes the two parties to enter into a contract. He gets his
commission whenever any transactions materialises through his efforts. His
business is to find purchasers for those who wish to sell, and sellers for those who
wish to buy. His duty is to bring parties together to bargain for them in various
matters. He makes contracts in the name of his principal and not in his own name.
He is a mere negotiator or in senses a middleman.

4. Del Credere Agents:

A Del Credere (Italian word which means belief or trust) agent, is one who,
selling goods for his principal on credit, undertakes for an additional commission
to sell only to persons who are absolutely solvent. Generally, the function of an
agent is over after a contract is established between his principal and a third person.
He is not answerable to his principal for the failure of the third person to perform
the contract. A del Credere agent constitutes an exception to this rule. He is a
mercantile agent, who, on the payment of some extra commission, known as del
Credere commission, guaranteed the performance of the contract by the third
person. If in such a case the third person, for instance, fails to pay for the goods
supplied to him, the principal can bring an action against the del Credere agent for
the same. The liability of the del Credere agent, like that of a surety is secondary
and the same arises if the third person fails to pay to the principal what is due under
the contract.
5. Commission Agent:
A commission agent is a mercantile agent who in consideration of a certain
commission engages to purchase or sell goods for his principal. He buys and sells goods
in the market on the best terms and in his own name. His only interest in the transaction
is his commission. All profits and losses accrue to the principal. A commission agent
may or may not be in actual possession of the goods. His position is very similar to that
of the broker.
Agency Coupled with an Interest

An agent whose reimbursement depends on his continuing to have the authority to act as an
agent is said to have an agency coupled with an interest if he has a property interest in the
business. A literary or author’s agent, for example, customarily agrees to sell a literary work
to a publisher in return for a percentage of all monies the author earns from the sale of the
work. The literary agent also acts as a collection agent to ensure that his commission will be
paid. By agreeing with the principal that the agency is coupled with an interest, the agent can
prevent his own rights in a particular literary work from being terminated to his detriment.

Subagent

To carry out her duties, an agent will often need to appoint her own agents. These
appointments may or may not be authorized by the principal. An insurance company, for
example, might name a general agent to open offices in cities throughout a certain state. The

32
agent will necessarily conduct her business through agents of her own choosing. These agents
are subagents of the principal if the general agent had the express or implied authority of the
principal to hire them. For legal purposes, they are agents of both the principal and the
principal’s general agent, and both are liable for the subagent’s conduct although normally
the general agent agrees to be primarily liable.

Servant

The final category of agent is the servant. Until the early nineteenth century, any employee
whose work duties were subject to an employer’s control was called a servant; we would not
use that term so broadly in modern English. The Restatement (Second) of Agency, Section 2,
defines a servant as “an agent employed by a master [employer] to perform service in his
affairs whose physical conduct in the performance of the service is controlled or is subject to
the right to control by the master.”

Independent Contractor

Not every contract for services necessarily creates a master-servant relationship. There is an
important distinction made between the status of a servant and that of an independent
contractor. According to the Restatement (Second) of Agency, Section 2, “an independent

contractor is a person who contracts with another to do something for him but who is not
controlled by the other nor subject to the other’s right to control with respect to his physical
conduct in the performance of the undertaking.” As the name implies, the independent
contractor is legally autonomous. A plumber salaried to a building contractor is an employee
and agent of the contractor. But a plumber who hires himself out to repair pipes in people’s
homes is an independent contractor. If you hire a lawyer to settle a dispute, that person is not
your employee or your servant; she is an independent contractor. The terms “agent” and
“independent contractor” are not necessarily mutually exclusive. In fact, by definition, “… an
independent contractor is an agent in the broad sense of the term in undertaking, at the
request of another, to do something for the other. As a general rule the line of demarcation
between an independent contractor and a servant is not clearly drawn.”1. Flick v. Crouch,
434 P.2d 256, 260 (OK, 1967).

33
This distinction between agent and independent contractor has important legal consequences
for taxation, workers’ compensation, and liability insurance. For example, employers are
required to withhold income taxes from their employees’ pay checks. But payment to an
independent contractor, such as the plumber for hire, does not require such withholding.
Deciding who is an independent contractor is not always easy; there is no single factor or
mechanical answer. But the state workmen’s compensation board ruled against him, citing a
variety of factors. The claimant sold canned meats, making rounds in his car from his home.
The company did not establish hours for him, did not control his movements in any way, and
did not reimburse him for mileage or any other expenses or withhold taxes from its straight
commission payments to him. He reported his taxes on a form for the self-employed and
hired an accountant to prepare it for him. The court agreed with the compensation board that
these facts established the salesman’s status as an independent contractor.

The factual situation in each case determines whether a worker is an employee or an

independent contractor. Neither the company nor the worker can establish the worker’s status
by agreement. As the North Dakota Workmen’s Compensation Bureau put it in a bulletin to
real estate brokers, “It has come to the Bureau’s attention that many employers are requiring
that those who work for them sign ‘independent contractor’ forms so that the employer does
not have to pay workmen’s compensation premiums for his employees. Such forms are
meaningless if the worker is in fact an employee.”

In addition to determining a worker’s status for tax and compensation insurance purposes, it
is sometimes critical for decisions involving personal liability insurance policies, which
usually exclude from coverage accidents involving employees of the insureds.

Creation of the Agency Relationship

The agency relationship can be created in two ways: by agreement (expressly) or by

operation of law (constructively or impliedly).

Capacity

34
A contract is void or voidable when one of the parties lacks capacity to make one. If both
principal and agent lack capacity—for example, a minor appoints another minor to negotiate
or sign an agreement—there can be no question of the contract’s voidability. But suppose
only one or the other lacks capacity. Generally, the law focuses on the principal. If the
principal is a minor or otherwise lacks capacity, the contract can be avoided even if the agent
is fully competent. There are, however, a few situations in which the capacity of the agent is
important. Thus a mentally incompetent agent cannot bind a principal.

Agency Created by Operation of Law

Most agencies are made by contract, but agency also may arise impliedly or apparently.

Implied Agency

In areas of social need, courts have declared an agency to exist in the absence of an
agreement. The agency relationship then is said to have been implied “by operation of law.”
Children in most states may purchase necessary items—food or medical services—on the
parent’s account. Long-standing social policy deems it desirable for the head of a family to
support his dependents, and the courts will put the expense on the family head in order to
provide for the dependents’ welfare. The courts achieve this result by supposing the
dependent to be the family head’s agent, thus allowing creditors to sue the family head for the
debt.

Implied agencies also arise where one person behaves as an agent would and the “principal,”
knowing that the “agent” is behaving so, acquiesces, allowing the person to hold himself out
as an agent. Such are the basic facts in Weingart v. Directoire Restaurant, Inc. in Section
25.3.1 "Creation of Agency: Liability of Parent for Contracts Made by “Agent” Child".

Duties of an agent

1. Duty to execute mandate

2. Duty to follow instructions or customs
3. Duty of reasonable care and skill
4. Duty to avoid conflict of interest
5. Duty not to make secret profit
6. Duty to remit sums
7. Duty to maintain accounts

35
 8. Duty not to delegate

Rights of an agent

1. Right to remuneration– an agent is entitled to get an agreed remuneration as

per the contract. If nothing is mentioned in the contract about remuneration,
then he is entitled to a reasonable remuneration. But an agent is not entitled for
any remuneration if he is guilty of misconduct in the business of agency.
2. Right of retainer– an agent has the right to hold his principal’s money till the
time his claims, if any, of remuneration or advances are made or expenses
occurred during his ordinary course of business as agency are paid.
3. Right of lien– an agent has the right to hold back or retain goods or other
property of the principal received by him, till the time his dues or other payments
are made.
4. Right to indemnity– an agent has the right to indemnity extending to all expenses and
losses incurred while conducting his course of business as agency.
5. Right to compensation– an agent has the right to be compensated for any injury suffered
by him due to the negligence of the principal or lack of skill.

The table draws a distinction between an agent and a servant:

Agent Servant

An agent is authorized to act on behalf of his A servant does not have the authority to create
principal and create contractual obligations between contractual obligations between the principal and a
the principal and a third party. third party.

The principal has the authority to direct the agent as

The master can direct a servant as to what has to be
to what he has to do but he cannot direct how it is to
done and also how it should be done
be done.

An agent is paid in terms of commission A servant gets his salary or wages.

An agent can work for different principals at the A servant usually works under one master at a given
same time point of time.

The agent offers and accepts new proposals from

the third party on behalf of his principal and thus A servant cannot create any such legal relations
new legal relations are created in law of agency.

36
 6. Section 191 of the Indian Contract Act, 1872 defines sub-agent. According to
this section “a sub-agent is a person employed by, and acting under the control
of, the original agent in the business of the agency.”[v]The appointment of an
agent may be done properly or improperly, which determines the relationship
between the principal and the sub-agent.

The table shows a distinction between an agent and a sub-agent:

Agent Sub-agent

An agent is appointed by a principal and is A sub-agent is appointed by an agent and as such

under his control. is under the control of the agent.

An agent acts under the principal. A sub-agent acts under an agent.

A privity of contract exists between a principal No privity of contract exists between a principal and
and an agent. a sub-agent.

An agent can ask for remuneration from the A sub-agent cannot ask for remuneration from the
principal. principal.

RELATION OF PRINCIPAL WITH THIRD PARTIES

It has been noted above that when an agent acts on behalf of the principal, he creates
relationship between the principal and the third person. For contracts entered into through an
agent, the principal becomes bound towards a third person as if he entered into the contract
himself. Section 226 makes the following provisions regarding the enforcement and
consequences of contracts entered into through an agent:
Section 226- Effect of Agency on Contracts with Third Persons:- “ Contracts entered
into through an agent and obligations arising from the acts done by an agent, may be enforced
in the same manner, and will have the same legal consequences, as if the contracts had been
entered into and the acts done by the principal in person”.
For example: (a) A buys goods from B, knowing that he is an agent for their sale but
not knowing who the principal is. B’s principal is the person entitled to claim from A the price
of the goods and A cannot, in a suit by the principal, set off against that claim a debt due to
himself from B.
(b)A being B’s agent, with authority to receive money on his behalf, receives from C a sum of
money due to B. C is discharged of his obligation to pay the sum in question to B.
Authorised and Unauthorised Acts:

37
 It has already been noted that the principal is liable for such acts of the agent for which
the authority has been conferred upon him. Such authority may be express or implied. The
principal’s liability also arises for acts done in a situation of emergency. Principal can also be
made liable towards third person on grounds of estoppel. Even if the acts are done without the
principal’s authority, he becomes bound when there is ratification of such acts by him. Apart
from that, there is a presumption of agency in ‘husband and wife’ relationship so as to make
the husband liable for the acts of his wife.
In addition to the kind of acts mentioned above for which, as it has already been
discussed earlier, herein below are being discussed various other aspects of principal’s liability
towards the third person:-
1. When agent exceeds authority;
2. When agent receives notice on principal’s behalf;
3. When agent commits a fraud or some other wrong against a third person.

1. Principle’s liability when agent exceeds authority:

A principal is bound only for such acts of the agent which are within the
authority of the agent. If the agent’s act is in excess of the authority, the principal is not
liable for the same. Sometimes a part of the act done by the agent may be within the
authority and the other part outside it. If the two parts can be separated, then the
principal is bound by such part only as is within the authority, and he is not liable for
the part of the act which is outside the authority. If the two parts cannot be separated,
then the principal is not bound to recognise the transaction.
In Ahammed v/s Mamad Kunhi: In this case, an agent was authorised by power
of attorney to sell half right over certain property. He however, entered into an
agreement with purchaser-plaintiff to sell the entire property. The authorised and the
unauthorised portions were separable. It was held that specific performance of that half
portion of the property could be claimed by the purchaser under the Specific Relief Act,
in respect of which the authority for sale was given to the agent.
2. Principal’s liability for notice to the agent:
According to Section 229,any notice given to, or information obtained by the
agent, provided it be given or obtained in the course of the business transacted by him
for the principal, shall, as between the principal and third person have the same legal
consequences as if it had been given to or obtained by the principal.
3. Principal’s liability for agents fraud, misrepresentation and torts:
When an agent, acting in the course of the principal’s business, makes
misrepresentation or commits a fraud, it has the same effect on agreements made by
such agent as if such misrepresentation or fraud had been made, or committed by the
principal. If the agent acts in the course of the principal’s business that entitles the third
person to avoid the contract on grounds of fraud or misrepresentation.
For example: A being B’s agent for the sale of goods, induces C to buy them by
misrepresentation, which he was not authorised by B to make. The contract is voidable,
as between B and C, at the option of C.

DELEGATION OF AUTHORITY:

DELEGATUS NON PROTEST DELEGARE.-The appointment of an agent in any particular

case is made, as a title, because he is sup- posed by his principal to have some fitness for the
performance of the duties to be undertaken. In certain cases his appointment is owing to the
fact that he is considered, to be especially and particularly fit. The undertaking demands
judgment and discretion, which he is supposed to possess; or it requires the skill and learning

38
of an expert, which he assumes to be; or personal force and influence are desirable, and these
the agent is thought to be able to exercise. Here is the delectus personce, and it is obvious that
unless the principal has expressly or impliedly consented to the employment of a substitute,
the agent owes to the principal the duty of a personal discharge of the trust. that in the
absence of any authority, either express or implied, to employ a subagent, the trust committed
to the agent is presumed to be exclusively personal and cannot be delegated by him to
another so as to affect the rights of the principal.1

The principal may, of course, expressly authorize the appointment of subagents, the
delegation of the authority or the substitution of another in the place of the agent named; and
formal powers of attorney quite frequently expressly confer "full power of subsitiution and
revocation," and in terms confirm whatever the attorney named "or his substitute" may
lawfully do in the premises.

The general rule is, also, as will be seen, subject to be modified by the peculiar circumstances
ahd necessities of each particular case, from which or from the usage of trade, a power to
delegate the authority may be inferred ;2 but in the absence of such express author- it or such
circumstances the general rule is fixed, imperative and inflexible, resting upon ample
foundation and constantly enforced by the courts.

The same rule applies to a servant as to an agent.

SAME SUBJECT-JUDGMENT AND DISCRETION NOT TO B, DEL- EGATED.-The

reasons for this rule are particularly applicable to those cases where the performance of the
agency requires, upon the part of the agent, the exercise of special skill, judgment or
discretion. Such relations are obviously created because the principal places special
confidence in the particular agent -selected, and there is abundant reason. why the trust
should. not be transferred to another of whose fitness or capacity the principal may' have no
knowledge, without the latter's express consent.

Thus where an agent had been entrusted with the general administration of the affairs of a
trading company, but no power to substitute others in his place had been given him, it was
held that no such power could be implied, because there was evidently a confidence reposed
in him which the company might not be willing to repose in others. And so where one was
appointed general agent to conduct the sale of subscription books in a certain territory under
circumstances showing that the principal "depended upon the experience, skill and energy, as
well as the resources and facilities of the general agent," it was held' that his powers and
duties could not be assigned or delegated without the principal's consent. For the same
reasons the agent who has been given the important

Delegation is the process of giving permission by the head of a department to the

subordinates to do work or to make decisions. Although the subordinates are authorized to
do the work, the responsibility still remains with the he ad or the superior. Delegation is
important as without it, it would be very difficult for a director/head to complete all of his/her
tasks.

Similarly administrative agencies can also delegate their functions or powers both under
federal and state laws. Delegation of powers by an administrative agency to its subordinates
is sub-delegation because powers of administrative agencies are already delegated to it by
other branches of government. An administrative agency cannot delegate those powers

39
which are characterized as legislative or judicial and they should be performed solely by
the agency/individual who is identified in the legislation. If the legislation provides wide
discretionary power to the administrative agency then that agency can use that discretion for
delegation when specific circumstances arise.

Administrative functions can be delegated by the agency without any hindrance. But only
those persons on whom powers are directly vested can exercise the function of
delegation.[i] An agency has the power to delegate those powers which are expressly
mentioned in the statute or which can be implied from the nature of that particular agency or
department. Further, the person or agency responsible for delegation must take sufficient
safeguards against capricious exercise of power by the subordinates.[ii] The delegation of
powers and functions to subordinates is deemed to be unconstitutional if the delegation is not
within the range of authority of the delegating agency.

Exception: Section-190 provides that an agent may appoint a sub-agent and delegate the work
to him if-
(a) There is a custom of trade to that effect, or
(b) The nature of work is such that a sub-agent is necessary
(c) Where the ‘principal is aware of the intention of the agent to appoint a sub-agent but
does not object to it.
(d) Where unforeseen emergencies arise rendering appointment of a sub-agent but does not
object to it.
(e) Where the act to be done is purely ministerial not involving confidence or use of
discretion.
(f) Where power of the agent to delegate can be inferred from the conduct of both the
principal and the agent.
(g) Where the principal permits appointment of a sub-agent

CONTRACT LIABILITY OF AGENT Disclosed Principal

• Authorized Contracts the agent is not normally a party to the contract she makes with
a third person if she has actual or apparent authority or if the principal ratifies an
unauthorized contract
• Unauthorized Contracts if an agent exceeds her actual and apparent authority, the
principal is not bound but the agent may be liable to the third party for breach of
warranty or for misrepresentation
• Agent Assumes Liability an agent may agree to become liable on a contract between
the principal and the third party

Unidentified (Partially Disclosed) Principal an agent who acts for a partially disclosed
principal is a party to the contract with the third party unless otherwise agreed
Undisclosed Principal an agent who acts for an undisclosed principal is personally
liable on the contract to the third party

Non existent or Incompetent Principal a person who purports to act as agent for a
principal whom the agent knows to be non existent or completely incompetent is
personally liable on a contract entered into with a third person on behalf of such a
principal

40
 TORT LIABILITY OF AGENT
Authorized Acts the agent is liable to the third party for his own torts Unauthorized
Acts the agent is liable to the third party for his own torts

RIGHTS OF AGENT AGAINST THIRD PERSON

Disclosed Principal the agent usually has no rights against the third party
Unidentified (Partially Disclosed) Principal the agent may enforce the contract against
the third party Undisclosed Principal the agent may enforce the contract against the
third party

EXTENT OF AGENTS AUTHORITY:

No man can become an agent of another person except by the will of that person. His
will be manifested in writing or orally, or simply by placing another in a situation in which that
other is understood to represent and act for the person who has so placed him; but in every
case, it is only by the will of the principal that an agency may be created. The authority of an
agent means his right or capacity to bind the principal. According to Sec-226, the acts of an
agent within the scope of his authority bind the principal. The authority of the agent to bind the
principal may be-

1. Actual or Real Authority, or

2. Ostensible or Apparent Authority, or
3. Agent’s Authority in an Emergency .

1. ACTUAL AUTHORITY: Actual authority of an agent is the authority conferred on

him by the principal. It may be expressed or implied.
a) Express Authority: An authority is said to be express, when it is given by words
spoken or written. Express authority is that which the principal directly grants to
the agent and includes all such powers as are proper and necessary for achieving
the purposes for which the agency was created. A power of attorney given to an
agent is an example of express authority.
b) Implied Authority: An authority is said to be implied when it is to be inferred from
the circumstances of the particular case, the usage of trade or business or the
conduct of the principal. It is an authority which the principal intends his agent to
possess or which is proper, usual and necessary to the exercise of the authority
actually grated. For example: (a) A is employed by P, residing in London, to
recover at Mumbai a debt due to P. A may adopt any legal process necessary for
the purpose of recovering the debt, and may give a valid discharge for the same.

2. OSTENSIBLE AUTHORITY: When an agent is employed for particular business,

persons dealing with him can presume that he has authority to do all such acts as arte
necessary or incidental to such business. Such authority of the agent is called ostensible
or apparent authority as distinguished from actual or real authority. The scope of an
agent’s authority is determined by his ostensible authority. If the act of an agent is in
excess of his actual authority, but is within the scope of his ostensible authority, the
principal will be bound by the act of the agent. It is a well established principle that if
a person employs another as an agent in a character which involves a particular
authority, he cannot by secret reservation divest him of that authority. But if the third
party knows of the limitation of the agents ostensible authority, the principal will not
be liable for such act of the agent.

41
 3. AGENT’S AUTHORITY IN AN EMERGENCY: An agent has authority in an
emergency; to do all such acts for the purpose of protecting his principal from loss as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances.

Personal liability of the agent

Generally an agent is not personally responsible for the contracts made by him on behalf of
his principal. But he incurs personal liability in the following cases:
1. Foreign principal: When the contract is made by the sale or purchase of goods for a
merchant resident abroad, in case of breach of contract the third party can make the agent
personally liable.
2. Undisclosed principal: When the agent does not disclose the name of the principal the third
party can make the agent personally liability if he has relied upon the responsibility of the
agent.
3. Principal cannot be sued: Whether the principal though disclosed cannot be sued, e.g.
foreign sovereign, ambassador, etc., or the principal is disqualified from contracting though
otherwise competent to contrast and this inability of the principal was not communicated to the
third party at the time of contracting, he can hold the agent personally liable.
4. Personal liability by agreement: When the agent expressly by agreement or impliedly by
conduct undertakes personal liability of the contract.
5. Agent’s liability for breach of warranty: When the agent acts without or beyond his
authority and in this was commits a breach of warranty of authority, he can be hold personally
liable.
If the agent knows that he is exceeding his authority, the breach of warranty will amount to
deceit (Polhill V. Walter (1832) 3 B & Ad. 114).
6. Agent signs the contract in his own name: An agent who signs a Negotiable Instrument
e.g. Bills of Exchange, Promissory Notes etc., his own name without making it clear that he is
signing as an agent, will be held, personally liable.
7. Agency coupled with interest: Where the contract of agency relates to a subject matter in
which the agent has a special interest, agent shall be personally liable to the extent of his interest
since he shall be a principal for that interest.
8. Non-existent principal: If an agent acts for a non-existent principal, he shall be held
personally liable as if he had contracted on his own account, e.g., promoters entering into
contracts on behalf of a company yet to come into existence.

Termination of Agency

When Termination takes Effect

Termination of an agency takes its effect when it becomes known to an agent. When the
principal revokes the agency, it comes into effect only when it is known to the agent. However,

42
in the case of third parties, termination comes into effect only when such termination of agency
comes to their knowledge.

According to Section 210 of Indian Contract Act, 1872 termination of an agent’s authority also
terminates the sub-agents authority appointed by the agent. A per Section 209 of
Indian Contract Act, 1872 it is the duty of an agent to protect his principal’s interest in case his
principal becomes of unsound mind or dies.

It is the duty of an agent that on the termination of an agency due to death of the principal or his
becoming insane, to take all the reasonable steps on behalf of his late principal or dying
principal to protect the interest that the latter entrusts to him.

An agent is a person employed to do any act or enter into a contractual relationship with others
(third parties) on behalf of his principal. An agent acts as a connecting link between his principal
and third parties.

While representing his principal, an agent acts in the same capacity as of his principal. An agent
is authorized by his principal to act on his behalf. An agent binds his principal legally in
business transactions with third parties due to their agency relationship.

According to Section 201 of Indian Contract Act, 1872, Termination of agency takes place in
the following circumstances: –

in agent’s authority can be terminated at any time. If the trust between the agent and the
principal has broken down, it is not reasonable to allow the principal to remain at risk in any
transactions that the agent might conclude during a period of notice.

Agency can be terminated by the following ways:

By Agreement

On the basis that agency relationship is created by agreement between the principal and the
agent, such a relationship can also be brought to an end by mutual agreement between the
parties, either in writing or orally[i] .

Termination by agreement may also occur if the agency relationship is terminated pursuant to
the provisions of the agreement itself. The following situations may arise in this context:

If the agreement provides for the appointment of the agent for a specified period of time, the
agency will come to an end automatically when that period of time expires.

If the agreement provides for the agency to terminate upon the occurrence of a specified
event, the agency will come to an end upon the happening of the specified event.

By the Act of Parties

43
An agency may be terminated by the acts of either the principal or the agent as illustrated
below:-

Performance by the agent

If an agent is appointed to accomplish a particular task or for a specific purpose, when the task
is accomplished by the agent or the specific purpose is attained, the agency will terminate.

Revocation by the principal

The authority of an agent may be revoked at any time by the principal. However unilateral
revocation otherwise than in accordance with the provisions of the agency agreement may
render the principal liable to the agent for the breach of an agency agreement.

Any word or conduct of the principal inconsistent with the continued exercise of the authority
by the agent may operate as a revocation of the agency.

Revocation’s of the agent’s power by the principal may not automatically discharge the
principal from liability to a third party who is entitled to rely from liability to a third party
who is entitled to rely from liability to a third party who is entitled to rely from liability to a
third party who is entitled to rely on the apparent authority of the agent on ground’s of
representation by the principal of previous course of dealing with the agent’s before notice of
revocation is given to the third party. Therefore notice of revocation of an agent’s power
should be given to the third party as soon as possible.

Renunciation by agent

An agent is entitled to renounce his power by refusing to act or by notifying the principal that
he will not act for the principal[ii].

Unilateral termination of the agency by the agent before he has fulfilled the obligations to the
principal under the agency agreement will render the agent liable to the principal for the breach
of the agency agreement such as payment of damages for the loss suffered by the principal.

By Notice

If the agency agreement provides that the agency may be terminated upon either party serving
on the other written notice of a specified duration.

However, if the agency agreement does not contain any termination provision, the general rule
is that reasonable notice has to be given to the other party to terminate the agency.

By Operation Of Law:-

An agency may terminate by the operation of law upon the occurrence of particular events:-

Where the party concerned is an individual:

• By death
• By insanity
• By bankruptcy

44
Where the party concerned is a limited company:

• Winding up
• Receivership

The frustration of the contract of agency.

When Termination takes Effect

Termination of an agency takes its effect when it becomes known to an agent. When the
principal revokes the agency, it comes into effect only when it is known to the agent. However,
in the case of third parties, termination comes into effect only when such termination of agency
comes to their knowledge.

According to Section 210 of Indian Contract Act, 1872 termination of an agent’s authority also
terminates the sub-agents authority appointed by the agent. A per Section 209 of
Indian Contract Act, 1872 it is the duty of an agent to protect his principal’s interest in case his
principal becomes of unsound mind or dies.

It is the duty of an agent that on the termination of an agency due to death of the principal or his
becoming insane, to take all the reasonable steps on behalf of his late principal or dying
principal to protect the interest that the latter entrusts to him.

UNIT- IV
Indian Partnership Act

Meaning
What is a Partnership?
A partnership is a form of business where two or more people share ownership, as well as the
responsibility for managing the company and the income or losses the business generates.
That income is paid to partners, who then claim it on their personal tax returns – the business
is not taxed separately, as corporations are, on its profits or losses.

Nature of Partnership

When two or more persons join hands to set up a business and share its profits and losses it is
called Partnership. Section 4 of the Indian Partnership Act 1932 defines partnership as the
‘relation between persons who have agreed to share the profits of a business carried on by all or
any of them acting for all’.

Partners are the persons who have entered into partnership individually with one another.
Partners collectively are called ‘firm’. The essential features of the partnership are as follows.

Two or More Persons

There should be at least two persons coming together to form the partnership for a common
goal. In other words, the minimum number of partners in a partnership firm can be two.

45
Indian Partnership Act, 1932 has put no limitations on maximum numbers of partners in a firm.
But however, Indian Companies Act, 2013 puts a limit on a number of the partners in a firm as
follow:

• For Banking Business, Partners must be less than or equal to 10.

• For Any Other Business, Partners must be less than or equal to 20.

• If the number of partners exceeds the limits, the partnership becomes illegal.
Agreement
The partnership is an agreement between two or more persons who decided to do business and
share its profits and losses. To have a legal relationship between the partners, the partnership
agreement becomes the basis. The agreement can be in written form or oral form. An oral
agreement is equally valid. But, preferably the partners should have a written agreement, in
order to avoid disputes in future.

Business
To carry on some business there should be an agreement. Mere co-ownership of a property does
not amount to the partnership. The business must also be legal in nature, a partnership to carry
out illegal business is not valid.

Mutual Agency
The business of a partnership firm may be carried on by all the partners or any of them acting for
all. This statement has two important implications. First, to participate in the conduct of the
affairs of its business, every partner is entitled. Second that a relationship of mutual agency
between all the partners exists.

For all the other partners, each partner carrying on the business is the principal as well as the
agent. He can bind other partners by his acts. And also is bound by the acts of other partners
with regard to the business of the firm.

Sharing of Profit
The agreement between partners must be to share profits and losses of a business. Sharing of
profits and losses is important. The partnership is not for the purpose of some charitable activity.

Liability of Partnership
Each partner is liable jointly with all the other partners. And also when is a partner, severally
liable to the third party for all the acts done by the firm. Liability of the partner is not limited.
This implies that for paying off the firm’s debts, his private assets can also be used.

Partnership Deed

46
Agreement to carry on a business between the partners, partnership comes into existence. The
partnership agreement can be either oral or written. The Partnership Act does not require that the
agreement must be in writing. But when the agreement is in written form, it is called
‘Partnership Deed’. Partnership deed should be duly signed by the partners, stamped &
registered.

Partnership deed generally contains the following details:

• Names and Addresses of the firm and its main business;

• Names and Addresses of all partners;

• A contribution of the amount of capital by each partner;

• The accounting period of the firm;

• The date of commencement of partnership;

• Rules regarding an operation of Bank Accounts;

• Profit and loss sharing ratio;

• The rate of interest on capital, loan, drawings, etc;

• Mode of auditor’s appointment, if any;

• Salaries, commission, etc, if payable to any partner;

• The rights, duties, and liabilities of each partner;

• Treatment of loss arising out of insolvency of one or more partners;

• Settlement of accounts on the dissolution of the firm;

• Method of a settlement of disputes among the partners;

• Rules to be followed in case of admission, retirement, a death of a partner; and

• Any other matter relating to the conduct of business. Normally, all the matters affecting
the relationship of partners amongst themselves are covered in partnership deed.

Mode of Determining the existence of Partnership-

The Indian Partnership Act 1932 clearly defines a partnership. But how can we decide
if a given association of persons is truly a partnership or not? So the Act has also
given us a litmus test to determine if a firm is a partnership. This is known as the True
Test of a Partnership.

True Test of a Partnership

The true test of a partnership is a way for us to determine whether a group or association of
persons is a partnership firm or not. It also helps us recognize the partners of the firm and

47
separate them from the third parties. The idea behind such a true test is to examine the
relevant facts and determine the real relations between parties and conclude about the
presence of a partnership.

Let us take a look at the three important aspects of a true test of a partnership, namely
agreement, profit sharing and mutual agency.

1] Agreement/Contract between Parties

For there to be a partnership between two or more persons there has to be an agreement of
partnership between them. The partnership cannot arise family status or any operation of law.
There has to be a specific agreement between the partners. So if family members of a HUF
are running a business together this is not a partnership. Because there is no agreement of
partnership between them. The members of HUF are born into the HUF, so they cannot be
partners.

2] Profit Sharing

Sharing of profits is an aspect of the true test of a partnership. However, profit sharing is only
a prima facie evidence of a partnership. The Act does not consider profit sharing as a
conclusive evidence of a partnership. This is because there are cases of profit sharing that are
still contradictory to a partnership. Sharing of profits/ gross receipts from a property that two
or more persons own together or have a joint interest in is not a partnership. A share of profits
given to an agent or servant does not make him a partner. If a share of the profit is given to a
widow or child of a deceased partner does not make them partners. Part of the profits shared
with the previous owner as a part of goodwill or as a form of consideration will not make him
a partner. Now ascertaining this motive becomes difficult if there is no express agreement
between the concerned parties. In such a case we will consider the cumulative effect of all
relevant facts. This will help us to determine the true relationship between the parties.

3] Mutual Agency

True Test of Partnership: Mutual Agency. This is the truest test of a partnership, it I the
cardinal principle of a partnership. So if a partner is both the principle as well as an agent of
the firm we can say that mutual agency exists. This means that the actions of any partner/s
will bind all the other partners as well. So whenever there is a confusion about the existence
of a partnership between people we check for the presence of a mutual agency. If such an
agency exists between the parties who run a business together and share profits it will be
deemed that a partnership exists.

DURATION OF PARTNERSHIP:
Duration of the Partnership firm can be analysed under the following heads:
1. Partnership at will:
Where the partners have not provided in their deed, for the duration of
partnership or for the termination of partnership, the partnership is called “partnership
at will”. A partner may retire to dissolve the partnership at his will, by giving a notice
to other partners, of his intention to do so.
According to Section 7- “Where no provisions are made by contract between
the partners for the duration of their partnership or for the determination of their
partnership, the partnership is ‘Partnership at Will’”. It may be dissolved by any partner

48
 by giving a notice in writing to all other partners of his intention to dissolve the firm.
When such a notice is given, the firm is dissolved as from the date mentioned in the
notice as the date of dissolution or, if so mentioned as from the date of communication
of the notice. The notice should be an unambiguous intimation of a final intention to
dissolve the partnership, and should be served on all the other partners; Notice once
given cannot be withdrawn unless all the other partners agreed to it.
In M.O.H. Uduman v/s M.O.H. Aslum (AIR 1991 SC 1020): The partnership
deed contained a clause to the effect that “the partnership shall continue between the
remaining partners unless all the partners mutually agree to determine the relationship”.
Considering this clause, the Court held that the partnership was not ‘At Will’ and that
it could not be dissolved by a partner by giving notice to the remaining partners.
2. Particular partnership:
According to Section-8 “a person may become a partner with another person
in particular adventures or undertakings, such a partnership is known as Particular
Partnership”. Thus, persons can be partners in the working out of a coal-mine or the
production of a film because although that may be a single adventure but the same
requires a series of transactions and continuous relationship. It comes to an end as soon
as that adventure is completed. If it is continued after the completion of that adventure
for which it was entered into, it becomes partnership-at-will. In such a case, rights and
liabilities of the partners in respect of the other adventures are the same as those in
respect of the original adventure or undertaking.
In K. Jaggaiah v/s Kokumanu: The plaintiff and the two defendants joined
together and obtained a contract for the maintenance of a road. There was held to be
partnership in the road building activity. Such activity though arising out of a single
contract was spread over a particular period and the firm had to employ certain workers,
supervise the work, prepare the bills and finalise the work and get the approval from
the Government and finally receive the bills, and all that meant carrying on of business.
3. Partnership for a fixed term:
Where the partners fix the definite period or duration of partnership, it is called
a partnership for a fixed term. Partners are free to decide as to how long partnership
between them shall continue. It may be a partnership for a fixed term, say 2 years
or 5 years, or it may be until the completion of certain adventure or undertakings,
for example, until the production of a firm. Sometimes the agreement may stipulate
about the determination (end) of the partnership on the happening of certain event
e.g., if the business runs into loss for consecutively five years. When the partners
have not decided about the duration of partnership, such a partnership is known as
partnership at will.

Relation of Partner to one another-

Relationship of Partners to Each Other

Each partner has a right to share in the profits of the partnership. Unless the partnership agree
ment states otherwise,partners share profits equally. Moreover, partners must contribute equal
ly to partnership losses unless a partnershipagreement provides for another arrangement. In s
ome jurisdictions a partner is entitled to the return of her or his capitalcontributions. In jurisdi
ctions that have adopted the RUPA, however, the partner is not entitled to such a return.
In addition to sharing in the profits, each partner also has a right to participate equally in the
management of the partnership.In many partnerships a majority vote resolves disputes relatin

49
g to management of the partnership. Nevertheless, somedecisions, such as admitting a new pa
rtner or expelling a partner, require the partners' unanimous consent.
Each partner owes a fiduciary duty to the partnership and to copartners. This duty requires th
at a partner deal with copartners in Good
Faith, and it also requires a partner to account to copartners for any benefit that he or she rece
ives whileengaged in partnership business. If a partner generates profits for the part-
nership, for example, that partner must hold theprofits as a trustee for the partnership. Each p
artner also has a duty of loyalty to the partnership. Unless copartners consent,a partner's duty
of loyalty restricts the partner from using partnership property for personal benefit and restric
ts the partnerfrom competing with the partnership, engaging in self-
dealing, or usurping partnership opportunities.
Relationship of Partners to Third Persons
A partner is an agent of the partnership. When a partner has the apparent or actual authority a
nd acts on behalf of thebusiness, the partner binds the partnership and each of the partners for
the resulting obligations. Similarly, a partner'sadmission concerning the partnership's affairs
is considered an admission of the partnership. A partner may only bind thepartnership, howev
er, if the partner has the authority to do so and undertakes transactions while conducting the u
sualpartnership business. If a third person, however, knows that the partner is not authorized t
o act on behalf of the partnership,the partnership is generally not liable for the partner's unaut
horized acts. Moreover, a partnership is not responsible for apartner's wrongful acts or omissi
ons committed after the dissolution of the partnership or after the dissociation of the partner.
A partner who is new to the partnership is not liable for the obligations of the partnership that
occurred prior to the partner'sadmission.
Liability
Generally, each partner is jointly liable with the partnership for the obligations of the partners
hip. In many states each partneris jointly and severally liable for the wrongful acts or omissio
ns of a copartner. Although a partner may be sued individually forall the damages associated
with a wrongful act, partnership agreements generally provide for indemnification of the part
nerfor the portion of damages in excess of her or his own proportional share.
Some states that have adopted the RUPA provide that a partner is jointly and severally liable
for the debts and obligations ofthe partnership. Nevertheless, before a partnership's creditor c
an levy a judgment against an individual partner, certainconditions must be met, including the
return of an unsatisfied writ of execution against the partnership. A partner may alsoagree th
at the creditor need not exhaust partnership assets before proceeding to collect against that pa
rtner. Finally, a courtmay allow a partnership creditor to proceed against an individual pa
rtner in an attempt to satisfy the partnership's obligations.
Partnership Property
A partner may contribute Personal
Property to the partnership, but the contributed property becomes partnership propertyunless
some other arrangement has been negotiated. Similarly, if the partnership purchases property
with partnership assets,such property is presumed to be partnership property and is held in the
partnership's name. The partnership may convey ortransfer the property but only in the name
of the partnership. Without the consent of all the partners, individual partners maynot sell or
assign partnership property.

50
In some jurisdictions the partnership property is considered personal property that each partn
er owns as a "tenant inpartnership," but other jurisdictions expressly state that the partnership
may own property. The tenant in partnership concept,which is the approach contained in the
UPA, is the result of adopting an aggregate approach to partnerships. Because theaggregate th
eory is that the partnership is not a separate entity, it was thought that the partnership could n
ot own propertybut that the individual partners must actually own it. This approach has led to
considerable confusion, and the RUPA hasexpressly stated that the partnership may own part
nership property.

KINDS OF PARTNERS:

1. Active or managing partner:

A person who takes active interest in the conduct and management of the business of the firm

is known as active or managing partner.

He carries on business on behalf of the other partners. If he wants to retire, he has to give a

public notice of his retirement; otherwise he will continue to be liable for the acts of the firm.

2. Sleeping or dormant partner:

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the

management of the business. Such a partner only contributes to the share capital of the firm,
is bound by the activities of other partners, and shares the profits and losses of the business.
A sleeping partner, unlike an active partner, is not required to give a public notice of his

retirement. As such, he will not be liable to third parties for the acts done after his retirement.

3. Nominal or ostensible partner:

A nominal partner is one who does not have any real interest in the business but lends his
name to the firm, without any capital contributions, and doesn’t share the profits of the
business. He also does not usually have a voice in the management of the business of the

firm, but he is liable to outsiders as an actual partner.

Sleeping vs. Nominal Partners:

It may be clarified that a nominal partner is not the same as a sleeping partner. A sleeping

partner contributes capital shares profits and losses, but is not known to the outsiders.

51
A nominal partner, on the contrary, is admitted with the purpose of taking advantage of his
name or reputation. As such, he is known to the outsiders, although he does not share the
profits of the firm nor does he take part in its management. Nonetheless, both are liable to

third parties for the acts of the firm.

4. Partner by estoppel or holding out:

If a person, by his words or conduct, holds out to another that he is a partner, he will be
stopped from denying that he is not a partner. The person who thus becomes liable to third

parties to pay the debts of the firm is known as a holding out partner.

There are two essential conditions for the principle of holding out : (a) the person to be held
out must have made the representation, by words written or spoken or by conduct, that he
was a partner ; and (6) the other party must prove that he had knowledge of the representation

and acted on it, for instance, gave the credit.

5. Partner in profits only:

When a partner agrees with the others that he would only share the profits of the firm and

would not be liable for its losses, he is in own as partner in profits only.

6. Minor as a partner:
A partnership is created by an agreement. And if a partner is incapable of entering into a
contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a
person who has not attained the age of 18 years) cannot be one of the parties to the contract.
But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the
benefits of partnership’, with the consent of all partners. A minor partner is entitled to his
share of profits and to have access to the accounts of the firm for purposes of inspection and

copy.

He, however, cannot file a suit against the partners of the firm for his share of profit and
property as long as he remains with the firm. His liability in the firm will be limited to the

extent of his share in the firm, and his private property cannot be attached by creditors.

52
On his attaining majority, he has to decide within six months whether he will become regular
partner of withdraw from partnership. The choice in either case is to be intimated through a
public notice, failing which he will be treated to have decided to continue as partner, and he
becomes personally liable like other partners for all the debts and obligations of the firm from
the date of his admission to its benefits (and not from the date of his attaining the age of
majority). He also becomes entitled to file a suit against other partners for his share of profit

and property.

Case Note: Mohori Bibee v. Dharmodas Ghosh (1903) 30 Cal. 539

Brief Facts:
The plaintiff, Dharmodas Ghose, while he was a minor, mortgaged his property in favour of
the defendant, Brahmo Dutt, who was a moneylender to secure a loan of Rs. 20,000. The
actual amount of loan given was less than Rs. 20,000. At the time of the transaction the
attorney, who acted on behalf of the money lender, had the knowledge that the plaintiff is a
minor.

The plaintiff brought an action against the defendant stating that he was a minor when the
mortgage was executed by him and, therefore, mortgage was void and inoperative and the
same should be cancelled. By the time of Appeal to the Privy Council the
defendant, Brahmo Dutt died and the Appeal was prosecuted by his executors.

The Defendant, amongst other points, contended that the plaintiff had fraudulently
misrepresented his age and therefore no relief should be given to him, and that, if mortgage is
cancelled as requested by the plaintiff, the plaintiff should be asked to repay the sum of Rs.
10,500 advanced to him.

Judgement:
The Privy Council was held that the minors contract is void and not merely voidable on the
basis of section 10, 11, 183, 184 and old sections 246 and 247(now section 30 of the
Partnership Act). The combine effect of these sections and particularly section 10 and 11
renders the minor contact completely void . According to the Privy Council section 11 should
be literally construed and that only a person who is of the age of the majority is competent to
contract. A minor’s contract is, therefore, ab initio and wholly void. In the view of the Privy
Council, this was also in accordance with the Hindu Notion of a minor’s incompetence to
contract

Rights and duties of partners

Rights of Partners

Partners can exercise the following rights under the Act unless the partnership deed states
otherwise:

53
 1. Right to participate in business: Each partner has an equal right to take part in the
conduct of their business. Partners can curtail this right to allow only some of them to
contribute to the functioning of the business if the partnership deed states so.

2. Right to express opinions: Another one of the rights of partners is their right to freely
express their opinion. Partners, by a majority, can determine differences with respect to
ordinary matters connected with the business. Each partner can express his opinion to
decide such matters.
3. Right to access books and accounts: Each partner can inspect and copy books of
accounts of the business. This right is applicable equally to active and dormant partners.

4. Right to share profits: Partners generally describe in their deed the proportion in which
they will share profits of the firm. However, they have to share all the profits of the firm
equally if they have not agreed on a fixed profit sharing ratio.
5. Right to be indemnified: Partners can make some payments and incur liabilities through
their decisions in the course of their business. They can claim indemnity from each other
for these decisions. Such decisions must be taken in situations of emergency and should
be of such nature that an ordinarily prudent person would resort to under similar
conditions.
6. Right to interest on capital and advances: Partners generally do not get an interest on
the capital they contribute. In case they decide to take an interest, such payment must be
made only out of profits. They can, however, receive interest of 6% p.a. for other
advances made subsequently towards the business.

Duties of Partners

Now that we have seen the rights of partners let us see the duties the Act has prescribed,

1. General duties: Every partner has the following general duties like carrying on the
business to the greatest common good, duty to be just and faithful towards each other,
rendering true accounts, and providing full information of all things affecting the firm. etc

2. Duty to indemnify for fraud: Every partner has to indemnify the firm for losses caused
to it by his fraud in the conduct of business. The Act has adopted this principle because
the firm is liable for wrongful acts of partners. Any partner who commits fraud must
indemnify other partners for his actions.
3. Duty to act diligently: Every partner must attend to his duties towards the firm as
diligently as possible because his not functioning diligently affects other partners as well.
He is liable to indemnify others if his willful neglect causes losses to the firm.

4. Duty to use the firm’s property properly: Partners can use the firm’s property
exclusively for its business, and not for any personal purpose, because they all own it
collectively. Hence, they must be careful while using these properties.
5. Duty to not earn personal profits or to compete: Each partner must function according
to commonly shared goals. They should not make any personal profit and must not

54
 engage in any competing business venture. They should hand over personal profits made
to their firm.

DIFFERENCE BETWEEN PARTNERSHIP AND OTHER ASSOCIATIONS

PARTNERSHIP AND CO-OWNERSHIP:

Co-ownership means joint ownership of some property which does not necessarily result
in partnership. In partnership the partners are necessarily co-owners of the property of the firm,
but in co-ownership the co-owners are not necessarily partners. The followings are the points
of differences between the two:
1. Mode of Creation: Partnership is necessarily the result of an agreement. Co-ownership
may or may not arise from agreement, it may also arise by status.
2. Business: Business is necessary for the existence of partnership. Co-ownership can
exist without it.
3. Nature of Interest: Partnership involves community of interest whereas co-ownership
may not necessarily involve any such interest.
4. Transfer of Interest: A partner cannot transfer his share to a stranger without the consent
of the other partners. A co-owner can. When a co-owner transfers his share, the
transferee becomes vis-a-vis the other co-owner who transfer his share.
5. Number of Members: In partnership, the number of members cannot exceed the
statutory limit. In co-ownership there is no limit on maximum number of members.
6. Authority of Members: A partner is the agent of his co-partners. A co-owner is not the
agent of the other co-owners.
7. Partition of Property: A partner cannot sue for the partition of partnership property but
he can sue his co-partners for the dissolution of the firm and accounts. A co-owner can
sue for the partition of the property.
8. Lien for Expenses: A partner has a lien on the partnership property for expenses
incurred by him on such property on behalf of the firm. A co-owner has no such lien.

PARTNERSHIP AND COMPANY:

1. Separate Legal Entity: In a Partnership the persons who have entered into partnership
are individually called partners and collectively a firm. A Partnership firm, therefore,
is merely a collective name of the partners. A partnership firm does not have a separate
legal personality. A Company is a legal entity different from its members.
2. Perpetual Succession: A partnership firm means all the partners put together, if all the
partners ceases to be partners, e.g., all of them die or become insolvent, the partnership
firm gets dissolved. A company being a person different from the members of the
company, the members may come and members may go but the company goes on
forever, its life cannot be affected thereby.
3. Transfer of Shares: The shareholders of a company can transfer his share to anybody
he likes but a partner cannot substitute another person in his place unless all the partners
agree to the same. Similarly, on the death of the member of a company his legal
representatives will step into his shoes for the purpose of the rights in the company, but
on the death of a partner his legal representatives do not get substituted in his place in
partnership.
4. Number of Members: The minimum number of members in a partnership is two and
maximum in case of partnership carrying on banking business is 10 and in case of any
other business is 20. In the case of a Private Company minimum number of member is

55
 2 maximum is 200 whereas in the case of a Public Company the minimum number of
members is 7 maximum is unlimited.
5. Liability: The liability of the members of a company is limited but the liability of the
partnership is unlimited.

Admission of a Partner
When a firm requires additional capital or managerial help it can admit a new partner in its
business. As per the Partnership Act, 1932, a new partner can only be admitted unanimously
unless otherwise provided in the partnership deed. When a new partner is admitted a new
agreement is formed and thus the firm is reconstituted.

The new partner acquires the right to share the assets of the firm for which he brings in the
capital and the right to share the future profits of the firm for which he brings Goodwill. On
admission of a new partner, the profit sharing ratio changes, the assets and liabilities are
revalued and goodwill is calculated and distributed among the old partners in their sacrificing
ratios.

RETIREMENT – MEANING, CALCULATION OF NEW PROFIT SHARING RATIO

AND GAINING RATIO

When one or more partners leaves the firm and the remaining partners continue to do the
business of the firm, it is known as retirement of a partner. Amit, Sunil and Ashu are partners
in a firm. Due to some family problems, Ashu wants to leave the firm. The other partners
decide to allow him to withdraw from the partnership. Thus, due to some reasons like old
age, poor health, strained relations etc., an existing partner may decide to retire from the
partnership. Due to retirement, the existing partnership comes to an end and the remaining
partners form a new agreement and the partnership firm is reconstituted with new terms and
conditions. At the time of retirement the retiring partner’s claim is settled.

A partner retires either :

1. with the consent of all partners,

2. As per terms of the agreement;

3. at his or her own will.
4. Insolvency

Section 34: Insolvency of a partner

When a partner of a partnership firm is adjudicated an insolvent, the partner ceases to be a
partner on the date of the order of adjudication regardless if the firm is dissolved or not. The
partner’s estate ceases to be liable for any action of the firm taken after the date of the order,
and the firm is also not responsible for action taken by the partner after the said date.The
effects of Insolvency have been listed below.

1. The partner cannot continue as one in the firm after being insolvent.
2. The partner ceases to be a partner from the date on which the order of adjudication is
made.

56
 3. The estate of the insolvent partner shall not be liable for the actions of the firm taken
after the date of the order of adjudication.
4. The firm is similarly not liable for any action taken by the insolvent partner after the
date of the order of adjudication.
5. Generally but not invariably, the partner’s insolvency often results in the dissolution
of the firm. However, the partners are competent to agree among themselves that
adjudication of a partner as an insolvent will not give rise to a dissolution of the firm.

5.Death of a Partner

Section 35: Death of a partner

In a case where under a contract that the death of a partner does not dissolve a firm, the
estates of the deceased partner are not liable for any act of the firm after his death. Generally,
the effect of the death of a partner would result in the dissolution of the partnership. Although
the rule in concern to the dissolution of the partnership due to death of a partner is subject to
a contract between the parties and the partners are competent to agree that the death of a
partner will not have the effect of dissolving the partnership. This is applicable unless the
firm consists of just two partners. It is not essential to give any notice either to the public or
the individuals who have dealt with the firm about the estate of the deceased partner may be
absolved from liability from future obligations of the firm.

1. Insanity

The terms and conditions of retirement of a partner are normally provided in the partnership
deed. If not, they are agreed upon by the partners at the time of retirement. At the time of
retirement the following accounting issues are dealt :

1. (a) New profit sharing ratio and gaining ratio.

2. (b) Goodwill
3. (c) Adjustment of changes in the value of Assets and liabilities
4. (d) Treatment of reserve and accumulated profits.
5. (e) Settlement of retiring partners dues,
6. (f) New capital of the continuing partners.

Section 33: Expulsion of a partner

There are various reason why a partner may be expelled from a partnership firm. A partner of
a firm may not be dismissed from a partnership firm by a majority of the partner except in
exercise, in good faith, of powers conferred by contract between the partners. An expulsion is
not deemed to be in a proper interest of the business of the firm if the conditions below are
not fulfilled.

1. The power of expulsion must be stated in a contract between the partners.

2. A majority of the partners must exercise the power.
3. It has to be exercised in good faith.

The test of good faith as required for expulsion as stated under Section 33(1) includes three
aspects.

57
 1. The expulsion must be in the best interest of the partnership.
2. The partner that is to be expelled must be served with a notice.
3. The partner has to be given the opportunity of being heard.

If a partner is expelled without fulfilling these conditions, the expulsion is considered null
and void. The only solution, when a partner is involved in misconduct in the business of the
firm, is to seek judicial dissolution. It should be noted that the expulsion of partners does not
always result in the dissolution of the firm. An invalid expulsion of a partner does not bring
the partnership to an end even if the partnership is at will and it will be deemed to continue as
before.

REGISTRATION OF FIRMS

The fundamental premise of understanding of the statutory provisions associated with the area
of partnership is principally derived from the understanding of the Indian Partnership Act
1932. This was one of the earlier precedent set in the Indian statutory history which
fundamentally evaluates and analyses the critical junctures associated with the process of
partnership in India. However this is essentially a relic of our colonial past which is
undoubtedly a no forged one. The fundamental notion of partnership as an act of mutual trust
is essentially not codified.

However, the principle notion associated with the development of such is act is critically
evaluated as major milestone in the statutory history of Indian jurisprudence which
undoubtedly requires major changes in its modus operandi. Although many judicial precedents
have been in resolute, however none of them have critically made a justification. The
fundamental notion of this understanding is based on the fact that partnership as an act is
invariably based on the fact that partnership as an act requires a factor of mutual trust and
dignity in an amicable manner which is needed in an amicable manner and can’t be forfeited.
However a codification of such a document requires an invariable amount of flexibility as it
necessitates a laudable amount of combination of statutory compliance and values. However
the law of the land necessarily needs a value phase but in a case of fact value conjectures the
fact and the matter of compliance always presides over the value. However in a rapidly
changing business environment where the impersonal business entity such as a company are in
prominence, the concept of partnership as a business needs much modification to gain
legitimacy and value in changing business environment.

Having said that, among the number of pros and cons, the legitimacy of the partnership as a
business entity needs particular speculation and analysis of the business environment as a new

58
form of business known as the “Limited Liability Partnership” has evolved into a mainstream
business establishment model where the concerned business developers can opt for a relative
term of risk and liability which was fundamentally missing in the partnership agreement and
was a much needed change, which is particularly appreciated by the business communities
across the world for the amount of flexibility it provides for the new business commodities
such as startups and other ventures. However an exclusive understanding of the registration of
the firms under the Indian Partnership Act, 1932.

Partnership firms in India are administered by the Indian Partnership Act, 1932. While it is not
necessary to enter one’s partnership firm as there are no fines for non-registration, it is
appropriate since the certain rights are denied to an unregistered firm.

Problems Faced By Not Registering a Firm

The following can be understood as the principle disadvantages faced by a partner if he/she
does not register the firm under Indian Partnership Act, 1932:

(1) A partner is not entitled to file a suit in any court of law against the other partners or the
firm for the execution of any right emerging from any undertaking or right bestowed by the
Partnership Act.

(2) A right evolving from an undertaking cannot be implemented in any Court of law by or in
support of one’s firm against any other firm.

(3) Moreover, the firm or any of its associates cannot assert a set off (i.e. fundamental
negotiation of debts possessed by the argufied parties to one another) or other actions in a
disagreement with a third party.

The Process of Registering a Partnership under Indian Partnership Act, 1932

The primary initiative regarding the process of registration or incorporation of partnership firm
is to forward an application filling Form No. 1. As per the provision of section 58 it should
include following details:

1. The name of the firm.

59
 2. The full names and permanent resident address of the partners.
3. The timespan of the firm.
4. Business the date when each partner effuse to the firm.
5. The principal place of business transaction of the firm.
6. The names of any other places where the firm carries its functional obligations.

This undertaking is needed to be signed by all the associate partners, or by their respective
agents principally given authority in their behalf.

Secondly, all partners should necessarily solicit their signature application form or their
authorised agents in their behalf in the occupancy of a witness who must be Advocate, Gazetted
Officer, Vakil or Magistrate of Registered Accountant. If a partner declines to sign the
application form, registration cannot happen unless that partner’s name is dribbled.

The application as mentioned above has to be sent to the Registrar at the enumerated address
along with the prescribed fees. As per section 71 of Indian Partnership Act, states are authorized
to make their own regulations with respect to prescribe the fee structure for registration or
incorporation of partnership. However, Schedule I of Indian Partnership act states the at most
or maximum prescribed fees that can be charged by the states. As per Schedule I, the maximum
registration fees for a statement under section 58 is Rs.525.

When is Partnership Registered

As provided in the Section 59, a partnership is said to be registered when a registrar is well
pleased with the fidelity of application filed according to section 58 and an entry of statement
in the register known as Register of Firms is recorded.

Proof of Registration

According to Rule 9 under Indian Partnership Act, a documented proof of registration or

incorporation for that matter is a registration certificate signed by Registrar.

60
Business Name of the Firm

Alteration of Particulars

Whenever an amendment or change is made in any of the understated particulars then it should
be conveyed to the Registrar of firms and a satisfactory alteration is rendered in the register.
The change to be rendered is sent in a stipulated form and with the stipulated fees. Following
amendments or alterations are to be sent to the Registrar:

1. Any alteration in the name of the firm.

2. Any alteration in the principle place of business transaction. The alteration in name
or principle place of business transaction almost requires a fresh new registration.
These alterations should be sent in a stipulated form and should be rendered
signature by all the partners.
3. Whenever the constitution of the firm is altered i.e., an old partner may retire or a
new partner may be added.
4. Any alteration in the name of a partner or his residential/official address.
5. When a minor partner gains the age of maturity and he is left to the discretion
whether to elect to become or not to become a partner.
6. When the firm is subjected to dissolution.

Advantages of Registration

The registration of a firm is done not only towards the benefit of the firm but also for those
who deal with it. The following benefits are obtained from the registration of a firm:

(i) Benefits to the Firm

The firm gets an unmitigated right towards the third parties in civil suits for getting its rights
discharged. In the non-existence of registration, the firm is not entitled to sue outside partners
in courts.

61
(ii) Benefits to Creditors

A creditor can employ any partner for recuperating his money due from the firm. All partners
whose names are set in the registration are personally accountable to the unknowns. So,
creditors can restore their money from any partner of the firm.

(iii) Benefits to Partners

The partners can seek the help of a court of law against each other in case of disagreement
among partners. The partners can sue external parties also for restoring their amounts, etc.

(iv) Benefits to Incoming Partners

A new partner can contest for his rights in the firm if the firm is registered. If the firm is not
registered then he will have to rely upon the trustworthiness of other partners.

(v) Benefits of Outward-bound Partners

The registration of a firm acts as an advantage to the outward-bound partners in numerous

ways. The outward-bound partners may be divided into two categories:

(i) On the demise of a partner,

(ii) On the superannuation of a partner.

On the demise of a partner his heirs are not accountable for the obligations acquired by the firm
after the date of his demise. In case of a superannuation partner, he remains to be accountable
up to the time he does not give public notice. The public notice is not recorded with the
Registrar and he terminates his liabilities from the date of this notice. So, it is vital to get a firm
registered for getting this benefit.

REGISTRATION OF FIRMS
Sections 56 to 71 deals with the registration of Partnership Firms. The Partnership Act does
not provide for the compulsory registration of firms. And it does not impose any penalties for
non-registration. It has left it to the option of the firms to get themselves registered. But
indirectly, by creating certain disabilities from which an unregistered from suffers, it has made
the registration of firms compulsory. These disabilities are such that, sooner or later, every firm
has to get itself registered. However, registration does not create partnership; it is only a reliable

62
evidence of the existence of partnership. It also affords protection to outsiders dealing with the
firm
PROCEDURE FOR REGISTRATION Sections-58 and 59
The registration of a firm may be affected at any time by filling an application in the
form of a statement, giving the necessary information, with the Registrar of Firms of the area.
Section 57 empowers a State Government to appoint Registrars of Firms for the purposes of
the Partnership Act and define the areas within which they shall exercise their powers and
perform their duties.
The application for registration of a firm shall be accompanied by the prescribed fee. It
shall state:
(a) the name of the firm
(b) the place or principal place of business of the firm
(c) the names of other places where the firm carries on business
(d) the date when each partner joined the firm
(e) the names in full and permanent address of the partners
(f) the duration of the firm.

• The statement shall be signed by all the partners or by their agents specially authorized
in this behalf. Each partner signing the statement shall also verify it in the manner
prescribed. It shall also be verified by them in the prescribed manner [Sec. 58(2)].
• When the Registrar is satisfied that the above provisions have been duly compiled with,
he shall record an entry of the statement in the Registrar of Firms (maintained by
Registrar of Firms in respect of each registered firm for recording the necessary
information relating to that firm) and file the statement (Sec. 59).
• He shall then issue under his hand a certificate of registration. Registration is effective
from the date when the Registrar files the statement and makes entries in the Register
of Firms.
• Name of the firm should not contain any words which may express or imply the
approval or patronage of the government except where the government has given its
written consent for the use of such words as part of the firm name.
• Under Section 59 of the Act, when the Registrar of Firms is satisfied that the provisions
of section 58 have been duly complied with, he shall record an entry of the statement
in the Register of Firms and issue a Certificate of Registration.

Time of Registration:
A firm may get registered at any time after the creation of partnership. It is not necessary
that it should be registered at the time of its formation, moreover, the Act does not lay down
any time limit within which the firm should be registered. Therefore, there is no period of
limitation either for the original registration, or recording of subsequent changes as
contemplated in Section 63 of the Act. Thus, the concept of any limitation period or that of
reasonable time cannot be introduced either for original registration or for subsequent
changes in a firm. Hence, any legislation by the State Government laying down any time
limit either for original registration or for recording of subsequent changes will be ultra
virus the Partnership Act and therefore, bad in law. The Registrar of Firms cannot reject an
application for recording changes in the constitution of the firm on the ground of inordinate
delay in submitting the application.
Penalty for furnishing false particulars Section 70
Any person who signs any statement, amending statement, notice or intimation under
this Chapter containing any particular which he knows to be false or does not believe to be true
or containing particulars which he knows to be incomplete or does not believe to be complete,

63
shall be punishable with imprisonment which may extend to three months, or with a fine or
with both.
Any alterations, subsequent to Registration shall be notified to the registrar
• Change in firm name and principal place of business Section 60 shall require sending
of a new application form along with the prescribed fee, duly signed and verified by all
the partners.
• Change relating to opening and closing of branches. Section 61
• When a registered firm discontinues business at any place or begins to carry on business
at any place, such place not being its principal place of business, any partner or agent
of the firm may send intimation thereof to the Registrar.
• Change in the name and permanent address of any partner Section 62
• When any partner in a registered firm alters his name or permanent address, an
intimation of the alteration may be sent by any partner or agent of the firm to the
Registrar
• Change in the constitution of the firm and its dissolution
• When change occurs in the constitution of the firm, any of the new, continuing or the
outgoing partner, while when a registered firm is dissolved , any person who was a
partner immediately before the dissolution or the agent of any such partner or person
specially authorized on his behalf, may give notice of such a change to the Registrar,
specifying the date thereof.
• when a minor who has been admitted to the benefits of partnership in a firm attains
majority and elects to become or not to become a partner, he or his agent specially
authorized in this behalf, may give notice to the Registrar that he has or has not become
a partner.

EFFECTS OF NON-REGISTRATION (SEC. 69)

Consequences of Non-Registration of Firm

While the English Law makes registration of firms compulsory and levies a fine for non-
registration, the Indian Partnership Act, 1932 has no such compulsions for firm registration and
no fines for non-registration either. However, under Section 69 of the Act, certain disabilities are
imposed on non-registered firms. These disabilities have a persuasive pressure on firms for
registration. In this article, we will discuss these aspects in detail.

Consequences of Non Registration of Firm

Section 69 of the Indian Partnership Act, 1932 offers a detailed explanation of the consequences
of not opting for firm registration. These are:

1] No suit in a civil court by the firm or other co-partners against any third party
If the firm registration is not done, then the firm or any other person on its behalf cannot file a
suit against a third party for breach of contract which the firm has entered into. Further, the
person filing the suit on behalf of the firm should be in the register of the firm as a partner.

64
2] No relief to partners for set-off of claim
Without firm registration, any action brought against the firm by a third party having a value of
more than Rs. 100 cannot be set-off by the firm or any of its partners. Pursuance of other
proceedings to enforce rights arising from the contract cannot be done either.

3] An aggrieved partner cannot bring legal action against other partner or the firm
A partner of the firm or any person on his behalf cannot bring legal action against the firm or
against any partner (or alleged to be a partner) if firm registration is not done. However, if the
firm is dissolved, then such a person can sue the firm for dissolution it accounts and realization
of his share in the firm’s property.

4] A third party can sue the firm

Even if the firm registration is not done a third party can bring legal action against the firm.

It is also, important to note that despite these disabilities, the non-registration of a firm does not
affect the following rights:

1. The right of a third party to sue the firm or any partner

2. Partners’ right to sue the firm for dissolution or settlement of accounts (in case of
dissolution)
3. The power of the Official Assignees, Receiver of Court to release the property of the
insolvent partner and bring an action
4. The right of the firm and partners to sue or claim set-off of the value of the suit does not
exceed Rs. 100.

RECONSTITUTION OF A FIRM
Often times the partnership firm goes through a restructure. This could be on account of
admission of a partner, retirement of a partner or simply a change of terms between partners.
This is known as reconstitution of a partnership firm.

The partnership is an agreement between two or more persons for sharing the profits of a
business carried on by all or any one of them acting for all. Any change in the existing
agreement is known as reconstitution of the partnership firm. Thus, the existing agreement ends
and a new agreement is formed with the changed relationship among the members of the
partnership firm and its composition.

Reconstitution of a partnership firm takes place whenever there is a change in the profit sharing
ratio among the partners, admission of a new partner, retirement of a partner and death or
insolvency of a partner.

Forms of Reconstitution of a Partnership Firm

65
1. Change in the profit sharing ratio among the Existing Partners
Sometimes the partners may decide to change their profit sharing ratio due to factors like change
in their roles in the firm, change in their capital contribution ratio, etc. Any change in the old
profit sharing ratio will amount to a reconstitution of the partnership firm.

For example, A, B, and C were partners in a firm sharing equal profits. Due to some reasons, C
shifts to another city and is therefore unable to take part in the business actively. Thus, it is
decided that now the new profit sharing ratio shall be 2:2:1. This amounts to the reconstitution
of a firm.

2. Admission of a Partner
When a firm requires additional capital or managerial help it can admit a new partner in its
business. As per the Partnership Act, 1932, a new partner can only be admitted unanimously
unless otherwise provided in the partnership deed. When a new partner is admitted a new
agreement is formed and thus the firm is reconstituted.

The new partner acquires the right to share the assets of the firm for which he brings in the
capital and the right to share the future profits of the firm for which he brings Goodwill. On
admission of a new partner, the profit sharing ratio changes, the assets and liabilities are
revalued and goodwill is calculated and distributed among the old partners in their sacrificing
ratios.

3. The Retirement of an Existing Partner

A partner may decide to retire or withdraw from the firm due to reasons such as his age, his bad
health, change in firm’s nature of a business, etc. In case of Partnership at Will, a partner may
retire at any time. Retirement amounts to a reconstitution of a firm where the number of
partners, their capital contribution ratio and also the profit sharing ratio changes. The retiring
partner is paid his share of capital, goodwill and revaluation profit or loss.

For example, X, Y, and Z are partners in the firm sharing profits in the ratio of 3:2:1. X chooses
to retire and Y and Z decide to share the future profits equally. This is a reconstitution of the
firm where the number of partners and their profit sharing ratio both have changed.

4. Death or Insolvency of a Partner:

Death or insolvency of a partner also results in the reconstitution of the firm when the remaining
partners wish to continue the firm. In case of insolvency, all dues are paid to the insolvent
partner and partnership agreement is aborted because as per the law an insolvent is incompetent
to enter into a contract or an agreement.

In case of death, all dues are paid to the legal heir of the deceased partner.

DISSOLUTION OF FIRMS

66
A Partnership Firm May Be Dissolved Under the Following Circumstances

The dissolution of a firm means discontinuance of its activities. When the working of a firm
is stopped and the assets are realised to pay various liabilities it amounts to dissolution of the
firm. The dissolution of a firm should not be confused with the dissolution of partnership.
When a partner agrees to continue the firm under the same name, even after the retirement or

death of a partner, it amounts to dissolution of partnership and not of firm.

The remaining partners may purchase the share of the outgoing or deceased partner and
continue the business under the same name; it involves only the dissolution of partnership.
The dissolution of firm includes the dissolution of partnership too. The partners have a
contractual relationship among themselves. When this relationship is terminated it is an end

of the firm.

A firm may be dissolved under the following circumstances:

(a) Dissolution by Agreement (Section 40):
A partnership firm can be dissolved by an agreement among all the partners. Section 40 of
Indian Partnership Act, 1932 allows the dissolution of a partnership firm if all the partners
agree to dissolve it. Partnership concern is created by agreement and similarly it can be

dissolved by agreement. This type of dissolution is known as voluntary dissolution.

(b) Dissolution by Notice (Section 43):

If a partnership is at will, it can be dissolved by any partner giving a notice to other partners.
The notice for dissolution must be in writing. The dissolution will be effective from the date
of the notice, in case no date is mentioned in the notice, and then it will be dissolved from the
date of receipt of notice. A notice once given cannot be withdrawn without the consent of all

the partners.

(c) Compulsory Dissolution (Section 41):

A firm may be compulsorily dissolved under the following situations:

(i) Insolvency of Partners:

67
When all the partners of a firm are declared insolvent or all but one partner are insolvent,

then the firm is compulsorily dissolved.

(ii) Illegal Business:

The activities of the firm may become illegal under the changed circumstances. If
government enforces prohibition policy, then all the firms dealing in liquor will have to close
down their business because it will be an unlawful activity under the new law. Similarly, a
firm may be trading with the businessmen of another country. The trading will be lawful

under present conditions.

After some time a war erupts between the two countries, it will become a trading with an
alien enemy and further trading with the same parties will be illegal. Under new
circumstances the firm will have to be dissolved. In case a firm carries on more than one type
of business, then illegality of one work will not amount to dissolution of the firm. The firm

can continue with the activities which are lawful.

(d) Contingent Dissolution (Section 42):

In case there is no agreement among partners regarding certain contingencies,
partnership firm will be dissolved on the happening of any of the situations:
(i) Death of a Partner:

A partnership firm is dissolved on the death of any of the partner.

(ii) Expiry of the Term:

A partnership firm may be for a fixed period. On the expiry of that period, the firm
will be dissolved.

(iii) Completion of Work:

A partnership concern may be formed to carry out a specified work. On the completion of
that work the firm will be automatically dissolved. If a firm is formed to construct a road,

then the moment the road is completed the firm will be dissolved.

68
(iv) Resignation by a Partner:
If a partner does not want to continue in the firm, his resignation from the concern will

dissolve the partnership.

(e) Dissolution through Court (Section 44):

A partner can apply to the court for dissolution of the firm on any of these grounds:
(i) Insanity of a Partner:
If a partner goes insane, the partnership firm can be dissolved on the petition of other
partners. The firm is not automatically dissolved on the insanity of a partner. The court will

act only on the petition of a partner who himself is not insane.

(ii) Misconduct by the Partner:

When a partner is guilty of misconduct, the other partners can move the court for dissolution
of the firm. The misconduct of a partner brings bad name to the firm and it adversely affects
the reputation of the concern. The misconduct can be in business or otherwise. If a partner is
jailed for committing a theft, it will also affect the good name of the firm though it has

nothing to do with the business.

(iii) Incapacity of a Partner:

If a partner other than the suing partner becomes incapable of performing his duties, then

partnership can be dissolved.

(iv) Breach of Agreement:

When a partner wilfully commits breach of agreement relating to business, it becomes a
ground for getting the firm dissolved. Under such a situation it becomes difficult to carry on

the business smoothly.

69
(v) Transfer of Share:
If a partner sells his share to a third party or transfers his share to another person

permanently, other partners can move the court for dissolving the firm.

(vi) Regular Losses:

When the firm cannot be carried on profitably, then the firm can be dissolved. Though there
may be losses in every type of business but if the firm is incurring losses continuously and it

is not possible to run it profitably, then the court can order the dissolution of the firm.

(vii) Disputes among Partners:

Partnership firm is based on mutual faith. If partners do not trust each other, then it will not
be possible to run the business. When the partners quarrel with each other, then the very basis

of partnership is lost and it will be better to dissolve it.

SALE OF GOODS ACT 1930

The Sale of Goods Act, 1930 governs the contracts relating to sale of goods. The contacts for
sale of goods are subject to the general principles of the law relating to contracts i.e. the
Indian Contact Act. A contract for sale of goods has, however, certain peculiar features such
as, transfer of ownership of the goods, delivery of goods rights and duties of the buyer and
seller, remedies for breach of contract, conditions and warranties implied under a contract for
sale of goods, etc. These peculiarities are the subject matter of the provisions of the Sale of
Goods Act, 1930.

FORMATION OF CONTRACT OF SALE

70
CONTRACT OF SALE OF GOODS

A contract of goods is a contract whereby the seller transfers or agrees to transfer the
property to goods to the buyer for a price. There may be a contract of sale between one part-
owner and another [Sec. 4(1)]. A contract of sale may be absolute or conditional [Sec 4(2)].

The term ‘contract of sale’ is a generic term and includes both a sale and an agreement to sell.

Sale and agreement to sell: when under a contract of sale, the property in the goods is
transferred from the seller to the buyer, the contract is called a ‘sale’, but where the transfer
of the property in the goods is to take place at a future time or subject to some conditions
thereafter to be fulfilled, the contract is called an ‘agreement to sell’ [Sec. 4(3)]. An
agreement to sell becomes a sale when time elapses or the conditions, subject to which the
property in the goods is to be transferred are fulfilled [Sec. 4(4)].

ESSENTIAL ELEMENTS OF A CONTRACT OF SALE

Two parties: there must be 2 distinct parties i.e. a buyer and a seller, to affect a contract of
sale and they must be competent to contract. ‘Buyer’ means a person who buys or agrees to
buy goods [Sec. 2(1)]. ‘Seller’ means a person who sells or agrees to sell goods [Sec. (13)].

Goods: there must be some goods the property in which is or is to be transferred from the
seller to the buyer. The goods which form the subject-matter of the contract of sale must be
movable. Transfer of immovable property is not regulated by the Sale of Goods Act.

Price: Price is an essential ingredient for all transactions of sale and in the absence of the
price or the consideration, the transfer is not regarded as a sale. The transfer by way of sale
must be in exchange for a price. It has been held that price normally means money. The price
can be paid fully in cash or it can be partly paid and partly promised to be paid in future. The
price can be fixed by the agreement between the parties before the conveyance of the
property

Transfer of general property: There must be a transfer of general property as distinguishes

from special property in goods from the seller to the buyer. For e.g. if A owns certain goods
he has general property in the goods. If he pledges them with B, B has special property in the
goods.

Sale of commodities constitutes one of the important types of contracts under the law in India.
India is one of the largest economies and also a great country where and thus has adequate
checks and measures to ensure the safety and prosperity of its business and commerce
community. Here we shall explain The Sale of Goods Act, 1930 which defines and states terms
related to the sale of goods and exchange of commodities.

Sale of Goods Act, 1930 – Important Terms

The Sale of Goods Act, 1930 herein referred to as the Act, is the law that governs the sale of
goods in all parts of India. It doesn’t apply to the state of Jammu & Kashmir. The Act defines
various terms which are contained in the act itself. Let us see below:

71
I. Buyer And Seller

As per the sec 2(1) of the Act, a buyer is someone who buys or has agreed to buy goods. Since a
sale constitutes a contract between two parties, a buyer is one of the parties to the contract.

The Act defines seller in sec 2(13). A seller is someone who sells or has agreed to sell goods.
For a sales contract to come into existence, both the buyers and seller must be defined by the
Act. These two terms represent the two parties of a sales contract.

A faint difference between the definition of buyer and seller established by the Act and the
colloquial meaning of buyer and seller is that as per the act, even the person who agrees to buy
or sell is qualified as a buyer or a seller. The actual transfer of goods doesn’t have to take place
for the identification of the two parties of a sales contract.

II. Goods

One of the most crucial terms to define is the goods that are to be included in the contract for
sale. The Act defines the term “Goods” in its sec 2(7) as all types of movable property. The sec
2(7) of the Act goes as follows:

“Every kind of movable property other than actionable claims and money; and includes stock
and shares, growing crops, grass, and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale will be considered goods”

As you can see, shares and stocks are also defined as goods by the Act. The term actionable
claims mean those claims which are eligible to be enforced or initiated by a suit or legal action.
This means that those claims where an action such as recovery by auction, suit, refunds etc.
could be initiated to recover or realize the claim.

We say that goods are in a deliverable state when their condition is such that the buyer would,
under the contract, be bound to take delivery of these goods. Goods may be further understood
in the following subtypes:

72
1. Existing Goods
The goods that are referred to in the contract of sale are termed as existing goods if they are
present (in existence) at the time of the contract. In sec 6 of the Act, the existing goods are those
goods which are in the legal possession or are owned by the seller at the time of the formulation
of the contract of sale. The existing goods are further of the following types:

A) Specific Goods
According to the sec 2(14) of the Act, these are those goods that are “identified and agreed
upon” when the contract of sale is formed. For example, you want to sell your mobile phone
online. You put u an add with its picture and information. A buyer agrees to the sale and a
contract is formed. The mobile, in this case, is specific good.

B) Ascertained Goods:
This is a type not defined by the law but by the judicial interpretation. This term is used for
specific goods which have been selected from a larger set of goods. For example, you have 500
apples. Out of these 500 apples, you decide to sell 200 apples. To sell these 200 apples, you will
need to separate them from the 500 (larger set). Thus you specify 200 apples from a larger group
of unspecified apples. These 200 apples are now the ascertained goods.

C) Unascertained Goods:
These are the goods that have not been specifically identified but have rather been left to be
selected from a larger group. For example, from your 500 apples, you decide to sell 200 apples
but you don’t specify which ones you want to sell. A seller will have the liberty to choose any
200 apples from the lot. These are thus the unascertained goods.

2. Future Goods
In sec 2(6) of the Act, future goods have been defined as the goods that will either be
manufactured or produced or acquired by the seller at the time the contract of sale is made. The
contract for the sale of future goods will never have the actual sale in it, it will always be an
agreement to sell.

For example, you have an apple orchard with apples in it. You agree to sell 1000 apples to a
buyer after the apples ripe. This is a sale that has to occur in the future but the goods have been
identified already and the agreement made. Such goods are known as future goods.

3. Contingent Goods
Contingent goods are actually a subtype of future goods in the sense that in contingent goods the
actual sale is to be done in the future. These goods are part of a sale contract that has some
contingency clause in it. For example, if you sell your apples from your orchard when the trees
are yet to produce apples, the apples are a contingent good. This sale is dependent on the
condition that the trees are able to produce apples, which may not happen.

73
Delivery of Goods

The delivery of goods signifies the voluntary transfer of possession from one person to another.
The objective or the end result of any such process which results in the goods coming into the
possession of the buyer is a delivery process. The delivery could occur even when the goods are
transferred to a person other than the buyer but who is authorized to hold the goods on behalf of
the buyer.

There are various forms of delivery as follows:

• Actual Delivery: If the goods are physically given into the possession of the buyer, the
delivery is an actual delivery.
• Constructive delivery: The transfer of goods can be done even when the transfer is
effected without a change in the possession or custody of the goods. For example, a case
of the delivery by attornment or acknowledgment will be a constructive delivery. If you
pick up a parcel on behalf of your friend and agree to hold on to it for him, it is a
constructive delivery.
• Symbolic delivery: This kind of delivery involves the delivery of a thing in token of a
transfer of some other thing. For example, the key of the godowns with the goods in it,
when handed over to the buyer will constitute a symbolic delivery.

The Document of Title to Goods

From the Sec 2(4) of the act, we can say that this “includes the bill of lading, dock-warrant,
warehouse keeper’s certificate, railway receipt, multimodal transport document, warrant or order
for the delivery of goods and any other document used in the ordinary course of business as
proof of the possession or control of goods or authorizing or purporting to authorize, either by
endorsement or by delivery, the possessor of the document to transfer or receive goods thereby
represented.”

Mercantile Agent [Section 2(9)]

Mercantile agent is someone who has authority in the customary course of business, either to
sell or consign goods under the contract on behalf of the one or both of the parties. Examples
include auctioneers, brokers, factors etc.

Property [Section 2(11)]

In the Act, property means ‘ownership’ or the general property i.e. all ownership right of the
goods. A sale constitutes the transfer of ownership of goods by the seller to the buyer or an
agreement of the same.

Insolvent [Section 2(8)]

74
The Act defines an insolvent person as someone who ceases to pay his debts in the ordinary
course of business or cannot pay his debts as they become due, whether he has committed an act
of insolvency or not.

VIII. Price [Section 2(10)]

In the Act, the price is defined as the money consideration for a sale of goods.

IX. Quality of Goods

In Sec 2(12) of the Act, the quality of goods is referred to as their state or condition.

Ascertainment of Price

Ascertainment of Price is critical while formulating a contract. The Ascertainment of Price is a

very crucial step in the and can sometimes even determine the nature of the contract. But what
does the law say about the price? How is price defined in The Sale of Goods Act, 1930? Let us
find out below!

Ascertainment of Price

The Sale of Goods Act, 1930 has two sections, that discuss the ascertainment of a price.
Ascertainment of price means to specify without ambiguity the price of a commodity. The Act
has two sections that discuss this – sec 9 and sec 10. Let us see each of these separately and try
to understand what provisions exist herein.

The sec 9 of the Act states the following:

• The price in a contract of sale may be fixed by the contract, or it may be left to be fixed in
manner thereby agreed or it can be determined by the course of dealing between the
parties to the contract

• Where the price is not determined in accordance with the said provisions, the buyer shall
pay the seller a reasonable price. Reasonable price will depend on the individual case or
circumstance.
If you look at the first part, the term price has to be defined. The Section 2 (10) of the Act
defines price as the monetary consideration or value decided for a sale of goods. Thus we see
that for a price to come into existence, a sale has to come into existence.

Price of a Contract
Also, from the Section 9 (1), we can see that the price in the contract of sale may be determined
or stated by:

75
 i. the contract, i.e. the price is explicitly mentioned or decided within the contract of sale
itself or

ii. the contract has some clause(s) that has the or defines the authority that will eventually
ascertain the price. For example, the contract asks for a valuer to be commissioned for the
purpose of the ascertainment of price.
iii. the price may also be determined by the course of dealings. For example, if the two
parties have a long history of dealing with each other, then the price if not specified
clearly can be ascertained from the previous history of dealings and prices. Clearly, this
portion of the section is only applicable if the parties have a tradition or history of similar
deals.
Similarly, the Sec 9 (2) says that if the price is not determined through either of the methods
discussed in sec 9 (1) then the buyer will have to pay the seller a reasonable price. This price
will be decided in accordance with the market value.

For example, if the Government of your State has been purchasing its electricity from a
neighboring state at a given price. If they enter into a new contract, then the price will either be:

i. explicitly mentioned in the contract.

ii. fixed by the two parties after due consideration with each other.
iii. or the price will be the same as was traditionally accepted by the two parties.
Transfer of Title and Property

A Latin maxim says: ‘Nemo dat quod non habet’ which means that no one can give what he
doesn’t have. This is the ground principle regarding the transfer of title. Sections 27 to 30 of the
Sale of Goods Act, 1930 specify these laws about the transfer of title. Let us take a look.

Transfer of Title

Section 27 deals with the sale by a person who is not the owner. Imagine a sale contract where
the seller –

• Is not the owner of the goods

• Does not have consent from the owner to sell the goods

• Has not been given authority by the owner to sell the goods on his behalf
In such cases, the buyer acquires no better title to these goods than the seller had, provided the
conduct of the owner precludes the seller’s authority to sell.

Let us see an example. Peter steals a mobile phone from his office and sells it to John, who buys
it in good faith. However, John will get no title to the phone and will have to return it to the
owner when he demands, i.e. there is no transfer of title.

76
Now, this seems to be a really straight-forward rule. However, enforcing this rule can mean that
innocent buyers might suffer losses in most cases. Therefore, to protect the interest of the
buyers, certain exceptions are provided.

Exceptions to Section 27

In the following scenarios a non-owner of goods can transfer a better title to the buyer:

1] Sale by a Mercantile agent (Proviso to Section 27)

Consider a mercantile agent, who is in possession of the goods or a document to the title of the
goods, with the consent of the owner. Such an agent can sell the goods when acting in the
ordinary course of business of a mercantile agent. The sale shall be valid provided the buyer acts
in good faith and has no reason to believe that the seller doesn’t have any right to sell the goods.
The transfer of title is valid in such a case.

2] Sale by one of the Joint Owners (Section 28)

Many times goods are purchased in joint ownership. In many cases, the goods are kept in the
possession of one of these joint owners by the permission of the co-owners. If this person (who
has the sole possession of the goods) sells the goods, the property in the goods is transferred to
the buyer. This is provided the buyer acts in good faith and has no reason to believe that the
seller does not have a right to sell the goods.

Example: Peter, John, and Oliver are three friends to buy a 42-inch television set to watch the
upcoming cricket World Cup. They unanimously decide to keep the television set at Oliver’s
house. Once the World Cup is over, the TV is still at his house.

One day, Oliver’s office colleague Julia visits his house and he sells the TV to her. She buys it in
good faith and has no knowledge about the fact that it was purchased jointly. In this case, she
gets a good title to the TV.

3] Sale by a Person in Possession of Goods under a Voidable Contract (Section 29)

Consider a person who acquires possession of certain goods under a contract voidable on
grounds of coercion, misrepresentation, fraud or undue influence. If this person sells the goods
before the contract is terminated by the original owner of the goods, then the buyer acquires a
good title to the goods.

Example: Peter fraudulently obtains a gold diamond ring from Olivia. Olivia can void the
contract whenever she wants. Before she realizes the fraud, Peter sells the ring to Julia – an
innocent buyer. In this case, Olivia cannot recover the ring from Julia since she didn’t void the
contract before the sale was made.

77
4] Sale by a Person who has already sold the Goods but Continues to have Possession
[Section 30 (1)]
Consider a person who has sold goods but continues to be in possession of them or of the
documents of title to them. This person might sell the goods to another buyer. If this buyer acts
in good faith and is unaware of the earlier sale, then he will have a good title to the goods even
though the property in the goods was passed to the first buyer. A pledge or other disposition of
the goods or documents of title by the seller in possession are valid too.

5] Sale by Buyer obtaining possession before the Property in the Goods has Vested in
him [Section 30 (2)]
Consider a buyer who obtains possession of the goods before the property in them is passed to
him, with the permission of the seller. He may sell, pledge or dispose of the goods to another
person. If the second buyer obtains delivery of the goods in good faith and without notice of the
lien or any other right of the original seller, he gets a good title to them.

This rule does not hold true for a hire-purchase agreement which allows a person the possession
of the goods and an option to buy unless the sale is agreed upon.

Example: Peter takes a car from John under the conditions that he will pay Rs. 5,000 every
month as rent of the vehicle and that he can choose to purchase it for Rs. 100,000 to be paid in
24 equal installments. Peter pays Rs. 5,000 for three months and then sells the car to Oliver. In
this case, John can recover his car from Oliver since Peter had neither purchased the car nor
agreed to purchase it. He only had an option to buy the car.

6] Estoppel
If an owner of goods is stopped by the conduct from denying the seller’s authority to sell, the
buyer gets a good title. However, to get a good title by estoppel, it needs to be proved that the
original owner had actively suffered or held out the seller in question as a person authorized to
sell the goods.

Let us see an example. Peter, John, and Oliver are having a conversation. Peter tells John that he
owns the BMW car parked nearby which actually belongs to Oliver. However, Oliver remains
silent. Subsequently, Peter sells the car to John.

In this case, John will get a good title to the car even though the seller is Peter who has no title to
it. This is because, Oliver, by his conduct, did not deny Peter’s authority to sell the car.

7] Sale by an Unpaid Seller [Section 54 (3)]

If an unpaid seller exercises his right of lien or stoppage in transit and sells the goods to another
buyer, then the second buyer gets a good title to the goods as against the original buyer. So in
such a case transfer of title will occur.

78
8] Sale under the Provisions of other Acts

• Sale by an Official Receiver or Liquidator of the Company will give the purchaser a valid
title.

• Purchase of goods from a finder of goods will get a valid title under circumstances
[Section 169 of the Indian Contract Act, 1872]
• A sale by a pawnee can convey a good title to the buyer [Section 176 of the Indian
Contract Act, 1872]

Rights of Unpaid Seller Against Goods

An unpaid seller has certain rights against the goods and the buyer. In this article, we will refer
to the sections of the Sale of Goods Act, 1930 and look at the rights of an unpaid seller against
goods namely rights of lien, rights of stoppage in transit etc.

Rights of Lien

Seller’s Lien (Section 47)

According to subsection (1) of Section 47 of the Sale of Goods Act, 1930, an unpaid seller, who
is in possession of the goods can retain their possession until payment. This is possible in the
following cases:

1. He sells the goods without any stipulation for credit

2. The goods are sold on credit but the credit term has expired.
3. The buyer becomes insolvent.
Subsection (2) specifies that the unpaid seller can exercise his right of lien notwithstanding that
he is in possession of the goods acting as an agent or bailee for the buyer.

Part-delivery (Section 48)

Further, Section 48 states that if an unpaid seller makes part-delivery of the goods, then he may
exercise his right of lien on the remainder. This is valid unless there is an agreement between the
buyer and the seller for waiving the lien under part-delivery.

Termination of Lien (Section 49)

According to subsection (1) of Section 49 of the Sale of Goods Act, 1930, an unpaid seller loses
his lien:

• If he delivers the goods to a carrier or other bailee for transmission to the buyer without
reserving the right of disposal of the goods.

• When the buyer or his agent obtain possession of the goods lawfully.

79
 • By waiver.
Further, subsection (2) states that an unpaid seller, who has a lien, does not lose his lien by
reason only that he has obtained a decree for the price of the goods.

Right of Stoppage in Transit

This right is an extension to the right of lien. The right of stoppage in transit means that an
unpaid seller has the right to stop the goods while they are in transit, regain possession, and
retain them till he receives the full price. If an unpaid seller has parted with the possession of the
goods and the buyer becomes insolvent, then the seller can ask the carrier to return the goods
back. This is subject to the provisions of the Act.

Duration of Transit (Section 51)

Goods are in the course of transit from the time the seller delivers them to a carrier or a bailee
for transmission to the buyer until the buyer or his agent takes delivery of the said goods.

Some scenarios of the transit ending:

• The buyer or his agent obtain delivery before the goods reach the destination. In such
cases, the transit ends once the delivery is obtained.
• Once the goods reach the destination and the carrier of bailee informs the buyer or his
agent that he holds the goods, then the transit ends.
• If the buyer refuses the goods and even the seller refuses to take them back the transit is
not at an end.

• In some cases, goods are delivered to a ship chartered by the buyer. Depending on the
case, it is determined that if the master is functioning as an agent or carrier of the goods.
• If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his
agent, the transit ends.
• If a part-delivery of the goods has been made and the unpaid seller stops the remaining
goods in transit, then the transit ends for those goods. This is provided that there is no
agreement to give up the possession of all the goods.
How Stoppage is Affected (Section 52)
There are two ways of stopping the transit of goods:

1. The seller takes actual possession of the goods

2. If the goods are in the possession of a carrier or other bailee, then the seller gives a notice
of stoppage to him. On receiving the notice, the carrier or bailee must re-deliver the goods
to the seller. The seller bears the expenses of the re-delivery.

80
Effect of Stoppage
Even if the unpaid seller exercises his right of stoppage in transit, the contract stays valid. The
buyer can ask for delivery of the goods after making the payment.

Right of Lien vs. Rights of Stoppage in Transit

Rights of Stoppage in
Right of Lien
Transit

Essence Retain possession Regain possession

The carrier or other

Who has the possession bailee. The buyer should
The seller.
of the goods? not have received the
goods.

The right can be

Not a mandatory
Buyer insolvent exercised only when the
requirement
buyer becomes insolvent.

In simple words, the right of stoppage in transit begins when the right of lien ends.

Pledge by the Buyer (Section 53)

Unless the seller agrees, the right of lien or stoppage is unaffected by the buyer selling or
pledging the goods. The principle is simple: the second buyer cannot be in a better position that
the seller (first buyer). However, if the buyer transfers the document of title or pledges the goods
to a sub-buyer in good faith and for consideration, then the right of stoppage is defeated.

There are two exceptions to make note of:

81
a. The seller agrees to resale, mortgage or other disposition of the goods
If the seller agrees to the buyer selling, pledging or disposing of the goods in any other way, then
he loses his right to lien.

b. Transfer of the document of title of goods by the buyer

When the seller transfers the document of title of goods to the buyer and the buyer further
transfers it to another buyer who purchases the goods in good faith and for a price, then:

• If the last mentioned transfer is by way of sale, the original seller’s right of lien and
stoppage is defeated.
• If the last mentioned transfer is by way of a pledge, the original seller’s right of lien or
stoppage can be executed subject to the rights of the pledgee.

Right of Resale (Section 54)

The right of resale is an important right for an unpaid seller. If he does not have this right, then
the right of lien and stoppage won’t make sense. An unpaid seller can exercise his right of resale
under the following conditions:

• Goods are perishable in nature: In such cases, the seller does not have to inform the
buyer of his intention of resale.

• Seller gives a notice to the buyer of his intention of resale: The buyer needs to pay the
price of the goods and ask for delivery within the time mentioned in the notice. If he fails
to do so, then the seller can resell the goods. He can also recover the difference between
the contract price and resale price if the latter is lower. However, if the resale price is
higher, then the seller keeps the profits.

• Unpaid seller resells the goods post exercising his right of lien or stoppage: The
subsequent buyer acquires a good title to the goods even if the seller has not given a
notice of resale to the original buyer.
• Resale where the right of resale is reserved in the contract of sale: If the contract of
sale specifies that the seller can resell the goods if the buyer defaults, then the seller
reserves his right of sale. He can claim damages from the original buyer even if he does
not give a notice of resale to him.
• Property in the goods has not passed to the buyer: The unpaid seller can exercise his
right of withholding delivery of goods. This is similar to the right of lien and is called
quasi-lien.

Passing of Property

In our previous article, we learned about the first two rules governing passing of property to the
buyer. Understanding all the rules is important since they help determine the rights and liabilities

82
of both the seller and the buyer. In this article, we will look at the remaining two rules: ‘Goods
sent on approval” and ‘Transfer of property in case of reservation of the right to disposal’.

Passing of Property: Goods Sent on Approval

When a seller sends good to a buyer on approval basis or on terms similar to ‘on sale or return’,
the property passes to the buyer only when:

• The buyer communicates his approval to the seller or does an act which signifies
acceptance of the transaction.
• He does not give his approval or acceptance to the seller but accepts the goods without
giving a notice of rejection. There are two possibilities here:
o A time has been fixed for the return of goods – In this case, if the approved time has
elapsed, then the property is passed to the buyer.

o A time has not been fixed for the return of goods – In this case, the property is
passed to the buyer once a reasonable time has elapsed.
• The buyer does something to the goods which signify acceptance of goods. For example,
he sells the goods or pledges it.
example. Peter is a jeweler. John visits his shop to buy a necklace for his wife Olivia. However,
he is not sure if Olivia will like the necklace he has chosen. Peter agrees to deliver the necklace
to John’s house on a sale or return basis.

If Olivia does not like the necklace, then John can return it to Peter without having to pay for it.
When Peter reaches John’s house, another man called Chris is also present in the house. Olivia
or John don’t express their approval to Peter but John pledges the necklace with Chris for a
certain amount.

In this case, the ownership of the necklace transfers to John since his act of pledging the
necklace shows his unequivocal intention to buy it. Peter can recover the price of the necklace
from John.

Cash Only or Return

In some cases, the terms of sale can be cash or return. This means that the seller will deliver the
goods to the buyer under the condition that the goods continue to remain the property of the
seller unless the buyer pays cash for it. In such cases, the buyer needs to pay cash in order to
transfer the property in his name.

In example 1 above, if Peter agrees to deliver the necklace to John under a cash only or return
basis and John pledges the necklace with Chris before paying cash for it, the pledge is deemed
invalid by law and Peter can recover the necklace from Chris.

Reservation of the Right to Disposal

83
Section 25 of The Sale of Goods Act, 1930 deals with the conditional appropriation of goods. It
has three sub-sections as follows:

Sub-section 1
In case of a contract for the sale of specific goods or where goods are appropriated to the
contract subsequently, then the seller can reserve the right of disposal of goods till certain
conditions are met. These conditions must be specified in the contract or appropriation. Even if
the goods are delivered to the buyer or a carrier or a bailee for transmission to the buyer, the
property in the goods does not pass to the buyer until the conditions are met.

Let us take an example. Peter sends furniture to John’s company by a truck. He instructs the
driver not to deliver the furniture until he confirms receipt of payment from the company. The
truck reaches John’s company and the furniture is unloaded. However, the property passes to the
company only upon receipt of the payment.

Sub-section 2
If the goods are shipped or delivered to the railway administration for carriage by railway and
are deliverable to the order of the seller or his agent by the bill of lading or railway receipts, then
the seller is deemed to have reserved the right of disposal.

Sub-section 3
A seller can draw on the buyer for the price and transmit a bill of exchange along with the bill of
lading/ railway receipt, to secure acceptance or payment of the bill of exchange. If the buyer
does not honor the bill of exchange, then he is liable to return the bill of lading/ railway receipt.
Even if he wrongfully retains it, the property in the goods does not pass to him.

Concept of Condition and Warranty

All of us who have bought electronic items or similar devices, ask about the warranty periods. In
some cases, you may have seen that even the warranty is sold separately as a commodity. But
does the law say about it? Here in this section on the concepts of condition and warranty, we
will see the manner in which we can define these terms and also the manner in which they
derive their legality in the light of The Sale Of Goods Act, 1930.

Warranty And Conditions

In a contract of sale, parties may make certain statements about the stipulation or the course of
trade. These stipulations in the contract of sale are made with reference to the subject matter of
the sale. These stipulations may either be a condition or in the form of a warranty. The
provisions of the conditions and warranty are provided in the sections 11 to 17 of the Act. The
stipulations are the essence of the contract of sale and a breach of these stipulations provides a
remedy to the grieved party.

84
Stipulations As To Time – Sec 11
To understand the concept of warranty and conditions, we need to learn about the stipulation as
to time. The stipulation as to time may be with regards to the delivery of goods or it may be with
regards to the payment of the price. However, it may be noted that stipulations as to the time of
delivery of the goods are usually the essence of the contract. In Section 11 of the Act, the topic
of the stipulation as to time has been discussed. The Sec 11 states the follows:

Stipulations as to time: Unless a different intention can be ascertained from the contract,
stipulations as to the time of payment are not considered to be of the essence of a contract of
sale. Whether any other stipulation as to time is of the essence of the contract or not will
ultimately depend on the terms of the contract.

This means that whether the stipulations as to the time of payment of the price is of the essence
of the contract or not depends on the terms of the contract. Unless the terms of the contract
specify something different than this.

Conditions

A condition is a stipulation essential to the main purpose of the contract, the breach of which
gives the right to repudiate the contract and to claim damages. (Sec 12 (2)). We can understand
this with the help of the following example:

Say ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20 km/lt. ‘Y’ pointing at
a particular vehicle says “This car will suit you.” Later ‘X’ buys the car but finds out later on
that this car only has a top mileage of 15 km/ liter. This amounts to a breach of condition
because the seller made the stipulation which forms the essence of the contract. In this case, the
mileage was a stipulation that was essential to the main purpose of the contract and hence its
breach is a breach of condition.

Warranty

A warranty is a stipulation collateral to the main purpose of the said contract. The breach of
warranty which gives rise to a claim for damages. However, it does give a right to reject the
goods or treat the contract as repudiated. (Sec 12(3)). Let us understand this with the help of an
example below.

A man buys a particular car, which is warranted to be quite to drive and very comfortable. It
turns out that after some days the car starts to make a very unpleasant noise everytime it is
operated. Also sitting inside it is also not very comfortable. Thus the buyer’s only remedy is to
claim damages. This is not a breach of condition but rather a breach of warranty, because the
stipulation made by the seller was only a collateral one.

85
Identification of a Stipulation as a Condition or Warranty

Whether a stipulation is a condition or a warranty is a very important aspect to have the

knowledge about. A stipulation in a contract of sale is either a condition or is a warranty
depending in either case on the construction of the contract. A stipulation may be a condition,
though called a warranty in the contract.

Condition

‘A condition is a stipulation essential to the main purpose of the contract, the breach of which
gives rise to a right to treat the contract as repudiated’ (8).

A condition is referred to as, an essential element attached to the subject matter of an agreement
which is mentioned by the buyer to the seller and is either expressed or implied while entering
into the contract. The buyer can refuse to accept the goods delivered by the seller, in case of
non-compliance with the condition mentioned by the seller in the contract. The condition may
be expres or implied.

If while entering into a contract, the buyer mentions (in words or writing) that the goods are to
be delivered to him before a given date, the date is taken as a condition to the contract since
the buyer expressed it. Whereas, if a buyer contracts to buy a red-coloured saree for her
‘wedding’ which is to be held on a date mentioned to the seller, then the time is the implied
condition for the contract. Even if the buyer doesn’t mention the date of delivery (but has
mentioned the date of the wedding or occasion), it is implied on the part of the seller that the
garment is to be delivered before the mentioned date of the wedding. In this case, the seller is
bound to deliver the garment before the date of the wedding as the delivery of the garment after
the said date of the wedding is of no use to the buyer and the buyer can refuse to accept the
same since the condition to the contract is not fulfilled.

Warranty

‘A warranty is a stipulation collateral to the main purpose of the contract, the breach of which
gives rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated’9.

A warranty is referred to as extra information given with respect to the desired good or its
condition. The warranty is of secondary importance to the contract for its fulfilment. Non-

86
compliance of the seller to the warranty of the contract does not render the contract repudiated
and hence, the buyer cannot refuse to buy the good but can only claim compensation from the
buyer.

CONDITION WARRANTY

A condition is of primary importance. A condition is of secondary importance.

Breach of condition leads to termination of the In case of a breach of warranty, the injured
contract. party is liable to be compensated.

The injured party can refuse to accept the goods as The Injured party can only claim damages
well as claim damages in case of breach of condition. in case of breach of warranty.

The injured party can refuse to accept goods not The Injured party cannot refuse to accept
fulfilling the condition of the contract. the goods not fulfilling the warranty.

A condition can be treated as a warranty on the wish A warranty cannot be treated as a

of the buyer. condition.

Defined in Section 12(2) of the Sale of Goods Act, Defined in Section 12(3) of the Sale of
1930. Goods Act, 1930.

Implied Conditions and warranties

Implied Conditions and Warranties under the Sale of Goods Act

Section 14-17 of the Sale of Goods Act, 1930 deal with the implied conditions and warranties
attached to the subject matter for the sale of a good which may or may not be mentioned in the
contract.

Implied Condition

Condition as to Title [Section 14(a)]

Section 14(a) of the Sale of Goods Act 1930 explains the implied condition as to title as ‘in the
case of a sale, he has a right to sell the goods and that, in the case of an agreement to sell, he
will have a right to sell the goods at the time when the property is to pass’.

87
This means that the seller has the right to sell a good only if he is the true owner and holds the
title of the goods or is an agent of the title holder. When a good is sold the implied condition
for the good is its title, i.e. the ownership of the good. If the seller does not own the title of the
said good himself and sells it to the buyer, it is a breach of condition. In such a situation the
buyer can return the goods to the seller and claim his money back or refuse to accept the good
before delivery or whenever he learns about the false title of the seller.

CASE LAW: Rowland v Divall, 192210 – The plaintiff had purchased a car from the
defendant and was compelled to return it to the true owner after having used it for a while. The
plaintiff then sued the defendant for the purchase money, since the defendant didn’t receive the
consideration as per the condition of the title of ownership.

Sale by Description (Section 15)

Section 15 of the Sale of Goods Act, 1930 explains that when a buyer intends to buy goods by
description, the goods must correspond with the description given by the buyer at the time of
formation of the contract, failure in which the buyer can refuse to accept the goods.

Sale by Sample (Section 17)

When the goods are to be supplied on the basis of a sample provided to the seller by the buyer
while the formation of a contract the following conditions are implied:

• Bulk supplied should correspond with the sample in quality

• Buyer shall have a reasonable opportunity to compare the goods with the sample
• The good shall be free from any apparent defect on reasonable examination by the
buyer.

Sale by sample as well as Description (Section 15)

When the sale of goods is by a sample as well as a description the bulk of the goods should
correspond with both, i.e. description and sample provided to the seller in the contract and not
only sample or description.

88
Condition as to Quality or Fitness (Section 16)

The doctrine of Caveat Emptor is applicable in the case of sale/purchase of goods, which means
‘Buyer Beware’. The maxim means that the buyer must take care of the quality and fitness of
the goods he intends to buy and cannot blame the seller for his wrong choice. However, section
16 of the Sale of Goods Act 1930 provides a few conditions which are considered as an implied
condition in terms of quality and fitness of the good:

• When the buyer specifies the purpose for the purchase of the good to the seller, he
relied on the sound judgment and expertise of the seller for the purchase there is an
implied condition that the goods shall comply with the description of the purpose of
purchase.
• When the goods are bought on a description from a person who sells goods of that
description (even if he doesn’t manufacture the good), there is an implied condition
that the goods shall correspond with the description. However, in case of an easily
observable defect that is missed by the buyer while examining the good is not
considered as an implied condition.

Implied Warranty

Enjoy Possession of the Goods [Section 14(b)]

Section 14(b) of the Act mentions ‘an implied warranty that the buyer shall have and enjoy
quiet possession of the goods’ which means a buyer is entitled to the quiet possession of the
goods purchased as an implied warranty which means the buyer after receiving the title of
ownership from the true owner should not be disturbed either by the seller or any other person
claiming superior title of the goods. In such a case, the buyer is entitled to claim compensation
and damages from the seller as a breach of implied warranty.

Goods are free from any charge or encumbrance in favour of any third party [Section 14(c)]

Any charge or encumbrance pending in favour of the third party which was not declared to the
buyer while entering into a contract shall be considered as a breach of warranty, and the buyer
is be entitled to compensation and claim damages from the seller for the same.

89
Performance of Contract of Sale

There are many rules and definitions governing the law on sales in sections 31 to 40 of the Sale
of Goods Act, 1930. In this article, we will be looking at various definitions and duties of
buyers, sellers, and third parties (wherever applicable).

Definition of Delivery

According to Section 2 (2) of the Sale of Goods Act, 1930, delivery means voluntary transfer of
possession of goods from one person to another. Hence, if a person takes possession of goods by
unfair means, then there is no delivery of goods. Having understood delivery, let’s look at the
law on sales

Law on Sales

1] The Duty of the Buyer and Seller (Section 31)

It is the duty of the seller to deliver the goods and the buyer to pay for them and accept them, as
per the terms of the contract and the law on sales.

2] Concurrency of Payment and Delivery (Section 32)

The delivery of goods and payment of the price are concurrent conditions as per the law on sales
unless the parties agree otherwise. So, the seller has to be willing to give possession of the goods
to the buyer in exchange for the price. On the other hand, the buyer has to be ready to pay the
price in exchange for possession of the goods.

Rules Pertaining to the Delivery of Goods

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

a. Delivery (Section 33)

The delivery of goods can be made either by putting the goods in the possession of the buyer or
any person authorized by him to hold them on his behalf or by doing anything else that the
parties agree to.

b. Effect of part-delivery (Section 34)

If a part-delivery of the goods is made in progress of the delivery of the whole, then it has the
same effect for the purpose of passing the property in such goods as the delivery of the whole.
However, a part-delivery with an intention of severing it from the whole does not operate as a
delivery of the remainder.

90
c. Buyer to apply for delivery (Section 35)
A seller is not bound to deliver the goods until the buyer applies for delivery unless the parties
have agreed to other terms in the contract.

d. Place of delivery [Section 36 (1)]

When a sale contract is made, the parties might agree to certain terms for delivery, express or
implied. Depending on the agreement, the buyer might take possession of the goods from the
seller or the seller might send them to the buyer.

If no such terms are specified in the contract, then as per law on sales

• The goods sold are delivered at the place at which they are at the time of the sale
• The goods to be sold are delivered at the place at which they are at the time of the
agreement to sell. However, if the goods are not in existence at such time, then they are
delivered to the place where they are manufactured or produced.
e. Time of Delivery [Section 36 (2)]
Consider a contract of sale where the seller agrees to send the goods to the buyer, but not time of
delivery is specified. In such cases, the seller is expected to deliver the goods within a
reasonable time.

f. Goods in possession of a third party [Section 36 (3)]

If at the time of sale, the goods are in possession of a third party. Then there is no delivery
unless the third party acknowledges to the buyer that the goods are being held on his behalf. It is
important to note that nothing in this section shall affect the operation of the issue or transfer of
any document of title to the goods.

g. Time for tender of delivery [Section 36 (4)]

It is important that the demand or tender of delivery is made at a reasonable hour. If not, then it
is rendered ineffectual. The reasonable hour will depend on the case.

h. Expenses for delivery [Section 36 (5)]

The seller will bear all expenses pertaining to putting the goods in a deliverable state unless the
parties agree to some other terms in the contract.

i. Delivery of wrong quantity (Section 37)

• Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the

contracted quantity, then the buyer may reject the delivery. If he accepts it, then he shall
pay for them at the contracted rate.
• Sub-section 2 – If the seller delivers a larger quantity of goods as compared to the
contracted quantity, then the buyer may accept the quantity included in the contract and

91
 reject the rest. The buyer can also reject the entire delivery. If he wants to accept the
increased quantity, then he needs to pay at the contract rate.

• Sub-section 3 – If the seller delivers a mix of goods where some part of the goods are
mentioned in the contract and some are not, then the buyer may accept the goods which
are in accordance with the contract and reject the rest. He may also reject the entire
delivery.

• Sub-section 4 – The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
j. Installment deliveries (Section 38)
The buyer does not have to accept delivery in installments unless he has agreed to do so in the
contract. If such an agreement exists, then the parties are required to determine the rights and
liabilities and payments themselves.

k. Delivery to carrier [Section 36 (1)]

The delivery of goods to the carrier for transmission to the buyer is prima facie deemed to be
‘delivery to the buyer’ unless contrary terms exist in the contract.

l. Deterioration during transit (Section 40)

If the goods are to be delivered at a distant place, then the liability of deterioration incidental to
the course of the transit lies with the buyer even though the seller agrees to deliver at his own
risk.

m. Buyers right to examine the goods (Section 41)

If the buyer did not get a chance to examine the goods, then he is entitled to a reasonable
opportunity of examining them. The buyer has the right to ascertain that the goods delivered to
him are in conformity with the contract. The seller is bound to honor the buyer’s request for a
reasonable opportunity of examining the goods unless the contrary is specified in the contract.

Acceptance of Delivery of Goods (Section 42)

A buyer is deemed to have accepted the delivery of goods when:

• He informs the seller that he has accepted the goods; or

• Does something to the goods which is inconsistent with the ownership of the seller; or
• Retains the goods beyond a reasonable time, without informing the seller that he has
rejected them.

Return of Rejected Goods (Section 43)

92
If a buyer, within his right, refuses to accept the delivery of goods, then he is not bound to return
the rejected goods to the seller. He needs to inform the seller of his refusal though. This is true
unless the parties agree to other terms in the contract.

Refusing Delivery of Goods (Section 44)

If the seller is willing to deliver the goods and requests the buyer to take delivery, but the buyer
fails to do so within a reasonable time after receiving the request, then he is liable to the seller
for any loss occasioned by his refusal to take delivery. He is also liable to pay a reasonable
charge for the care and custody of goods.

Remedies for Breach under Sale of Goods Act

The Sale of Goods Act, 1930 was enacted as the law relating to the sale of goods under the
Indian Contract Act was considered to be inadequate. Here a focus has been drawn to the
remedies available to either party for breach of the contract of sale by the other. Chapter VI of
the Sale of Goods Act, 1930 relates to breach of contract and lays down the rights and liabilities
of the seller unto the buyer and vice versa. Sections 55 to 61 deal with this.

Sections 55 and 56 focus on seller’s remedies against the buyer and entitles the seller to either
sue for price of the goods or ask for damages for non-performance of the contract. Sections 57,
58 and 59 lay down the remedies available to the buyer against the seller in the event the latter
breaches the contract. The buyer can seek damages for non-delivery of goods, damages for
breach of warranty or specific performance of the contract. Sections 60 and 61 give rise to
those special situations wherein a remedy for breach is available to both the buyer and seller.”

Introduction

Until July 1930, the law of sale of goods in India was governed by chapter VII of the Indian
Contract Act, 1872 (sections 76 to 123). It was eventually found that the Law contained within
the Indian Contract Act was not adequate to meet the needs of the community and that, in the
light of the new developments made in mercantile laws, some of the provisions of this branch
of law required alterations. Consequently, the Sale of Goods Act was passed in 1930, based
upon the English statute of Sale of Goods, 1893.

This paper focuses on Chapter VI of the Sale of Goods Act, which relates to suits for the Breach
of a Contract. It shall be divided roughly, into 3 parts

• Seller’s Remedies against Buyer – Sections 55 and 56

• Buyer’s remedies against Seller – Sections 57, 58 and 59
• Remedies available to both buyer and seller – Sections 60 and 61

The paper is structured in a section by section format, wherein the sections, as divided under
the various heads are described and explained individually.

Seller’s remedies against buyer

The suits that may be instituted by the seller against the buyer under the Act can be roughly
divided into two types

93
 1. Suit for Price.
2. Damages for non-acceptance

i. Suit for Price

Section 55

(1) Where under a contract of sale the property in the goods has passed to the buyer and the
buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract,
the seller may sue him for the price of the goods.

(2) Where under a contract of sale the price is payable on a day certain irrespective of delivery
and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the
price although the property in the goods has not passed and the goods have not been
appropriated to the contract.

From the above section, it can be seen that except as provided by sub-section (2), the seller can
only sue for the payment when the property has passed to the buyer. The passing of the property
depends upon certain conditions, and if these conditions are not fulfilled, he cannot sue for the
payment under this section.

Where goods are sold for a particular amount and the payment has to be made partly in cash
and partly in kind, the default if made in kind entitles the seller to sue for the remainder of the
price

Where there is a contract for sale wherein the price is payable on a certain date, irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price the seller may sue for
the price even though the property has not been passed and the goods have not been
appropriated to the contract. This can be seen in Dunlop v Grote, according to the facts of the
case, there was a contract for the delivery of Iron between 3rd March and 30th April as per the
requirements of the buyer. The price was to be paid on the 30th of April. However, only a part
of the consignment was received by the buyer on April 30th as he did not require anymore. In
the action brought by the seller, it was held that the seller could recover the whole price and
was not required to show that the goods were appropriated to the contract.

ii. Damages for non-acceptance

Section 56

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

The damages are assessed on the basis of the principles contained in sections 73 and 74 of the
Indian Contract Act, 1872. According to section 73 of the Indian Contract Act, when a contract
has been broken, the party who suffers by the breach is entitled to receive, from the party who
has broken the contract, compensation for any loss caused to him thereby, which naturally
arose, in the usual course of things from such a breach, or which the parties knew when they
entered into the contract, to be likely to result from the breach of it.

94
Furthermore, in estimating the loss or damage caused by a breach of contract, the means which
existed of remedying the inconvenience caused by the non-performance of the contract must
be taken into account.

The date at which the market price is to be ascertained is the day on which the contract ought
to have been performed by delivery and acceptance as fixed by the contract or, where no time
is fixed, at the time of the refusal to perform.

By virtue of the provisions of sections 55 and 63 of the Indian Contract Act, where the time for
the performance is fixed by the contract but it is extended and another date substituted for it by
agreement between the parties, the substituted date must be taken as the date for ascertaining
the measure of damages.

In the case of Suresh Kumar Rajendra Kumar v K Assan Koya & sons[iv], the plaintiff sold,
through the commission agents, the goods and claimed compensation from the buyer who had
rejected them. While doing so the plaintiff had taken all the measures necessary to sell the
goods urgently in the ordinary course of business. In the absence of any records to show that
the sale was conducted in an improper manner, it was held by the court that the plaintiff was
entitled to claim the difference between the price at which the rice was supposed to be sold to
the defendants, and the price at which it was finally sold.

Where the goods are deliverable by instalments and the buyer has to accept one or the other or
all the instalments, the difference in prices is to be reckoned with on the day that a particular
instalment was to be delivered[v]. Where the military authorities refused to accept further
supplies of cots in breach of their contract, the J&K High court allowed Rs. 4 per cot as the
damages to the supplies as the profit which the supplier would have earned under his contract
of supply

It has been seen that the seller has various remedies against both the goods and the buyer
personally, and in many cases where those remedies exist he still has the option of availing
himself of the remedy declared by this section[vii]; but where the property has not passed and
there is nothing in the contract which enables him to resell the goods and charge the buyer with
the difference between the contract price, and the price realized on the resale, or to sue for the
price irrespective of delivery, or the passing of the property, the remedy provided by this
section is the only remedy by which he can recover pecuniary compensation for the buyer’s
breach of contract.

Buyers remedies against the seller

The suits that may be instituted by the buyer against the seller can be roughly divided into three
types

1. Damages for non-delivery

2. Remedy for breach of warranty
3. Specific Performance

i. Damages for Non- Delivery

Section 57

95
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer
may sue the seller for damages for non-delivery.

When the property in the goods has passed, the buyer, provided that he is entitled to the
immediate possession, has all the remedies of an owner against those that deal with the goods
in a manner inconsistent with his rights. If, therefore, the seller wrongfully re-sells them, he
may sue the seller in trover, and also against the second buyer, though as against him the rights
may be cut down by the provisions in sections 30 and 54.

In the case of non-delivery, the true measure of damages will be the difference between the
contract price and the market price at the time of the breach. The market value of the goods
means “the value in the market, independently of any circumstances peculiar to the plaintiff
(the buyer)”[viii].

Where he, the seller, is guilty of breach of an agreement to sell, the following remedies may be
available to the buyer:

(i) The buyer may sue for damages for non-delivery under section 57 of the Sale of Goods Act

(ii) In case the price has been paid by the buyer, he may recover it in a suit for money had and
received for a consideration which has totally failed

Where however the buyer has failed to prove the alleged damages caused due to short supply
of goods by seller and has also not served to seller a notice under Section 55 of the Indian
Contracts Act, the buyer cannot claim damages.

In the case of pre-payment, the date for ascertaining the measure of damages must be the date
of the breach, though it might be said in such a case, the buyer has not got the money in his
hands and cannot therefore go into the market and buy; and in conformity with this idea it has
been ruled at nisi prius that the date of the trial may be taken. However a more rational view is
that even in this case the date of breach should be taken to calculate the difference between the
contract price and the sale price, and the buyer can recover this amount, along with an interest

In a case where the seller failed to deliver Finnish timber, and the nearest substitute which the
buyer could obtain was English timber which involved more expenditure, in cutting and also
more wastage, it was held that the buyer was entitled to claim the extra cost since the buyer
had acted reasonably in mitigating his claim[xii].

Where the seller failed to deliver timber, the market price of the timber, on the due date for
delivery was taken as the basis for assessing damages. The Privy Council observed that “had
the seller supplied the timber, the buyers would have made their profits and would have still
had the other timber to sell upon which they were entitled to make such profits as they
could.”[xiii] In order that the buyer may recover as damages an amount in excess of that which
represents the difference between the market price and the contract price, it is necessary to
prove facts which will bring the case within the second branch of S. 73of the Contract Act.

ii. Remedy for Breach of Warranty

Section 59

96
(1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled
to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is
not by reason only of such breach of warranty entitled to reject the goods; but he may-

(a) Set up against the seller the Brach of warranty in diminution or extinction of the price; or

(b) Sue the seller for damages for breach of warranty.

(2) The fact that a buyer has set up a breach of warranty in diminution or extinction of the price
does not prevent him from suing for the same breach of warranty if he has suffered further
damage.

A breach of warranty does not entitle the buyer to reject the goods and his only remedy would
be those provided in s. 59 namely, to set up against the seller the breach of warranty in
diminution or extinction of the price or to sue the seller for damages for breach of warranty.
From the definition of warranty given ins. 12(3) it is clear that a breach of it gives rise to a
claim for damages only on the part of the buyer. It is also laid down by s. 13 that, even in the
case of a breach of condition, if the buyer has accepted the goods, or, in the case of entire
contracts, part of them, either voluntarily, or by acting in such a way as to preclude himself
from exercising his right to reject them, he must fall back upon his claim for damages as if the
breach of the condition was a breach of warranty.

This section declares the methods by which a buyer who has a claim for damages, in either
case, may avail himself of it. It does not deal with the cases of fraudulent misrepresentation,
which may enable the buyer to set aside the contract nor with cases where by the express terms
of the contract the buyer may return the goods in case of a breach of warranty. Also, in cases
where the buyer has lawfully rejected the goods, he must proceed not under this section, but
under s. 57, and if necessary under s. 61, to recover the purchase price and interest.

It must be noted here that in such cases, damages are assessed in accordance with the provisions
contained in section 73 of Indian Contract Act, 1872. This was also observed by a division
bench of the Bombay High Court in City And Industrial Development Corporation of
Maharashtra ltd., Bombay v Nagpur steel and alloys, Nagpur;

“Remedies under Section 59 are not absolute and cannot be resorted to at any point or
strategical point suitable to the buyer. He is duty bound to give notice of his intention. Its proper
time, form and manner will, of course, depend upon the facts and circumstances of each case.
To hold otherwise, would amount to placing the seller in an awkward and indefinite position
— not warranted either by law or by equity.”

In the case of a warranty of quality, the presumption is that the measure of damages is the
difference between what the goods are worth at the time of delivery, and what they would have
been worth according to the contract which this must be ascertained by reference to the market
price at the time.

In a majority of cases it is found that the warranty in question is not a warranty as defined in s
12(2), but a condition which falls under s 13(2) to be treated as a warranty. Very often it is the
condition that the goods should correspond with the description by which they were sold, or
should be fit for a particular purpose.

97
It is necessary that the buyer should rely on the warranty, and act reasonably, that is to say, he
should take reasonable steps to minimize the damages. Where there is a breach of the warranty
that the goods should be fit for a particular purpose, the rule again is that the damages should
be such, as may naturally flow from the breach. This was seen in a case where the plaintiff’s
wife died from the effects of eating tinned salmon which the plaintiff bought from the
defendant, the plaintiff was held entitled to recover, as damages for the breach of the warranty,
that the salmon would be fit for human consumption. Compensation was awarded for medical
expenses, funeral costs, and the loss of her life.

There may also be breaches of other conditions which can be treated as breaches of warranty,
such as the warranty of title. In such a case also, the buyer may be involved in difficulties with
sub-buyers, for instance, he may buy a motor car from one who has no right to sell it and may
resell it to a third person, from whom the true owner may recover it, or its value.

iii. Specific Performance

Section 58

Subject to the provisions of the Specific Relief Act, 1877, in any suit for breach of contract to
deliver specific or ascertained goods, the court, may, if it deems fit, on the application of the
plaintiff, by its decree direct that the contract shall be performed specifically, without giving
the defendant the option of retaining the goods on the payment of damages. The decree may
be unconditional, or upon such terms and conditions as to damages, payment of the price, or
otherwise, as the Court may deem just, and the application of the plaintiff may be made at any
time before the decree.

This section may best be explained by an illustration; there was a contract to sell a ship to a
German ship owner. The ship was an old ship but her engines and boilers were new, so as to
satisfy the German regulations, and the buyer could have her registered immediately in
Germany. In view of these facts and the price, the ship was of peculiar value to the buyer, and
there was only one other ship on the market that would suit his requirements. The court granted
specific performance of the contract[xviii].

Originally, the provisions relating to sale of goods were part of the Indian Contract Act, 1872
which as such did not provide for the equitable remedy of specific performance. Subsequently,
a separate Act namely Specific Relief Act, 1877, was enacted to provide for equitable remedies
including the remedy of specific performance.

The section provides a remedy to the buyer, and gives no correlative right to the seller. It is
therefore only on application of the buyer when suing as plaintiff, that the contract of sale can
be enforced specifically and the section only applies when the contract is to deliver specific or
ascertained goods. It has been held that a seller is not entitled to enforce specific performance
of the contract under s. 58 because it deals with the case of a buyer of specific goods in respect
of a contract to deliver specific or ascertained goods. ‘Specific’ here has the meaning which is
given in section 2(14) while ‘ascertained’ means ‘identified in accordance with the agreement
after a contract of sale is made’.[xix]

Section 58, as noted above, reproduces with some suitable changes s. 52 of the English Act.
Before passing of the Sale of Goods Act, 1930, there existed Specific Relief Act 1877, Chapter
II of which dealt with specific performance of an existing contract. This is also why Section

98
58 of the Sale of Goods Act, 1930 begins with the words “subject to the provisions of Chapter
II of the Specific Relief Act, 1877”.

The court has wide discretion to impose conditions. In one case, specific performance of
agreement to transfer shares was granted subject to a lien to protect the transferor against non-
payment of the price of the shares.[xx] In another case, the House of Lords while ordering the
specific performance of a contract to sell shares put a condition that the buyer should pay
interest on the purchase price which he had been entitled to retain pending the order.

Remedies available to both seller and buyer

The suits that can be instituted by either the buyer or the seller are of two types

1. Suit for repudiation of contract before date or anticipatory breach

2. Interest by way of damages and special damages

i. Suit for repudiation of contract before date or anticipatory breach

Section 60

Where either party to a contract of sale repudiates the contract before the date of delivery, the
other may either treat the contract as subsisting and wait till the date of delivery, or he may
treat the contract as rescinded and use for damages for the breach.

This section, does not appear in the English act, and deals with anticipatory breach of a contract,
that is to say, a manifested intention, by either party, to not be bound by the promise to perform
that part of the contract when the time of performance arrives. Whether or not there has, in fact,
been repudiation depends on the facts of each particular case.

The measure of damages is not fixed by date of the defaulting party’s repudiation. It is decided,
in case of goods for which there is a market, in accordance with the difference between the
contract price of the goods and market price on that day. This is done in order to bring the
plaintiff as near to the position as he would have been in, had the contract not been repudiated.
In cases of contracts where no date is fixed, and a party refuses to perform the contract the
principle of reasonable time is applied. In this case the date of repudiation is treated as the date
on which the contract is broken, and damages are calculated on the basis of this date.

If the party not in default declines to accept the other party’s repudiation, he keeps the contract
alive for all purposes, as can be seen from Frost v Knight. Hence it follows that if, when the
time for performance arrives, he himself is unable to perform or does not perform his contract,
the position will be the same as it would have been if there had been no anticipatory repudiation
by the other party and the latter may be discharged, and can also sue for damages.

If therefore, the seller after refusing to accept the buyer’s anticipatory repudiation, when the
time for performance arrives, tenders goods which are not of the contract description, or tenders
documents under a CIF contract which the buyer is not bound to accept, the buyer may lawfully
reject the goods or the documents and the seller will be without remedy; or the buyer may
accept the goods tendered and treat the breach of condition as a breach of warranty and recover
damages accordingly.

99
ii. Interest by way of damages and special damages

Section 61

(1) Nothing in this Act shall affect the right of the seller or the buyer to recover interest or
special damages in any case whereby law interest or special damages may be recoverable, or
to recover the money paid where the consideration for the payment of it has failed.

(2) In the absence of a contract to the contrary, the Court may award interest at such rate a it
think fit one the amount of the price-

(a) to the seller in a suit by him for the amount of the price.- from the date of the tender of the
goods or from the date on which the price was payable.

(b) to the buyer in a suit by him for the refund of the price in a case of a breach of the contract
on the part of the seller- from the date on which the payment was made.

This section preserves the right of a party to a contract of sale to recover special damages, that
is to say, compensation for any loss or damage caused to him by either party’s breach ‘which
the parties knew when they made the contract to be likely to result from the breach of it’.

These damages are contrasted with those which ‘naturally arose in the usual course of things’
from the breach. Generally speaking, the latter alone are recoverable by the plaintiff. However,
his rule is subject to limitations where the breach has occasioned a special loss, which was
actually in contemplation of the parties at the time of entering into the contract, that special
loss happening subsequently to the breach must be taken into account.

In a case, the defendant agreed to sell and deliver a threshing machine to the plaintiff on 14
August. The plaintiff was a farmer and required the machine for threshing on August 14, a fact
that was well known to the defendant. The defendant however failed to deliver it, all the while
assuring the plaintiff he would deliver soon. On the basis of these assurances, the plaintiff did
not hire another thresher. The plaintiff was therefore obliged to stack the wheat, and while
stacked, it was damaged by the rain, and had to be dried in a kiln. The plaintiff was entitled to
recover damages as the cost of stacking wheat, the loss due to its deterioration by stacking, the
damage by rain and cost of drying, but he could not recover for the fall of the market price.

Act 32 of 1839 provided for the payment of interest by way of damages in certain cases. Under
the Act, the court could allow interest on debts or certain sums payable by an instrument in
writing, from the time when the amount became payable where a time was fixed for payment,
or when no time was fixed, from the date on which the demand was made for payment in
writing giving notice to the debtor that interest would be claimed.

However, special damages may be awarded in respect of interest paid by the plaintiff as due to
the defendant, if the rule of remoteness is satisfied.

It will be observed that the seller can only recover interest when he is in a position to recover
the price. When he can only sue for damages for breach of contract, he is not entitled to interest
under the provisions of this sub-section.

100
Similarly, the buyer too can only recover interest when he is entitled to recover the purchase
price, that is to say, when he can sue for the price prepaid as money and received, by reason of
total failure, for consideration. He cannot recover interest when his only remedy is to sue for
damages, for instance for a breach of warranty, even though those damages may be sufficient
to extinguish the price. Moreover, he is only entitled to interest in the case of a breach of
contract, presumably by the seller. This limitation therefore, excludes cases arising under
sections 7 and 8, and presumably other cases where the contract is dependent upon some
condition inserted for the benefit of the seller, and is not performed owing to the non- fulfilment
of that condition, or the contract is frustrated by circumstances over which the seller has no
control, so that in law he would not be liable to an action.

101
 AL AMEEN COLLEGE OF LAW

MODEL QUESTIONS AND ANSWERS

1. Discuss the rights of a Finder of Lost Goods as a Bailee?

According to section 71 of the Indian Contract Act, 1872 by the finder of lost goods we mean a
person who comes across the goods that are unclaimed or whose actual owner is not known. Such

102
a person has to take care of these lost goods as Bailee unless a true owner is found. He has the same
responsibility, rights and duties of that of a Bailee as per section 151 of the Indian Contract Act,
1872. He is duty bound to return the goods to the actual owner. He has to take all measures to find
actual owners. He cannot refuse the delivery of goods else he will be liable for non- delivery of
goods.

Rights of Finder of Lost Goods

• The right of Lien: According to section 168 of the Indian Contract Act, 1872 finder of
the lost goods can exercise his right of particular lien if the actual owner refuses to make
the payment of the expenses incurred to preserve those goods or to find the actual
owner. But finder of the lost goods cannot sue him for the same.
• The right of Claiming the Award, if announced by the owner: According to section 168
of the Indian Contract Act, 1872 finder of lost goods cannot sue the actual owner for
expenses incurred by him. But he can sue him for the award that is announced by the
owner and he refuses to pay the same. For instance, X finds Z’s wallet and gives it to
him. Z promises X to give him Rs. 100 for the same. This is a contract of bailment and
Z is bound to pay the reward.
• Right to sell the goods found: According to section 169 of the Indian Contract Act, 1872
finder of the lost goods also have the right to sell the goods on certain circumstances
i.e. either he could not find the actual owner after taking all due diligence or the goods
or of such nature that their value might perish.

2. Define Lien. What are types of Lien?

By right of Lien, we mean that the Bailee has the right to retain the property or goods until the
Bailor makes the payment of expenses or remuneration. Lien is of two types:

• Particular Lien: According to the section 170 of the Indian Contract Act, 1872 in the
absence of any contract to the contrary if the Bailee uses his skills and renders his
service to the Bailor on the goods bailed, he has the right to the particular lien if he fails
to pay the remuneration for the same. But the Bailee cannot sue him for the non-
payment of remuneration, he can only retain the goods.
• General Lien:According to the section 171 of the Indian Contract Act, 1872 in the
absence of any contract to the contrary the Bailee can retain possession of goods or
property for non-payment of expenses or remuneration against the general balance of

103
 the account. For instance, A borrows Rs. 1000 from the bank without security. Later he
takes one more loan of Rs 5000 from the same bank against a security of gold. A pays
backs Rs. 5000 but yet has not paid Rs 1000. So the bank can retain gold (general
balance of the account) for the previous loan. This is the general lien. The right of
general lien has been conferred on the following kinds of Bailee:
o Bankers,
o Factors,
o Wharfingers,
o Attorney of a High Court,
o Policy Brokers.

3. What are the types of Bailment?

Bailment is of two types:

• Gratuitous Bailment: It is the duty of the bailor to disclose all the defects in the goods
that he is aware of to the Bailee that can interfere with the use of goods or can expose
him to extraordinary risks. And failure to do the same will make bailor liable for
damages.
• Non – Gratuitous Bailment (Bailment for Reward): This duty particularly deals with
the goods given on hire. As per this provision, when the goods are bailed for hire, then
in such a situation even if the bailor is aware of the defect in the goods or not will be
held liable for the injury that has been caused due to the existence of such defect.

4. Define Bailment. When can bailment be terminated?

Bailment as defined in section 148 of the Indian contract act 1872 is the
delivery of goods by one person to another for some specific purpose, upon a
contract that these goods are to be returned when the specific purpose is
complete. For example, A delivering his car for Service at the service center is
an example of bailment. The person delivering the goods is known as
bailor and the person to whom goods are delivered is known as
bailee. However, if the owner continues to maintain control over the
goods, there is no bailment .

104
Illustration If A gives his car to B his neighbor for 10 days, but at the same
time he keeps one key with himself and during this period of 10 days he used
to take the car. Now this will not be a case of bailment as A is keeping control
over the property bailed.

Essentials of Contract of Bailment

1. The existence of a valid contract:- The existence of a valid contract is a

foremost condition in bailment which implies that goods are to be returned when
the purpose is fulfilled. Finder of lost goods is also known as bailee although
there may not be any existing contract between him and the actual owner.
2. Temporary delivery of goods:- The whole concept of bailment revolves
around the fact that the goods are delivered for a temporary period and bailee
cannot have permanent possession. Delivery of goods can be done through
actual delivery or through constructive delivery which means that doing
something which has the effect of putting the goods in possession of bailee or
any other person authorized by him.
3. Return of specific goods:- The bailee is bound to return the goods to bailor
after the purpose for which it was taken is over. If the person is not returning the
goods then it will not be bailment.

Types of Bailments

1. Deposit:- It is the simple bailment of goods by one man to another for

a particular use.
For example, A gives his computer to B for 7 days, it will be a case of a
deposit
2. Hire:- It includes goods delivered to the bailee for hire
For example, A gives his car to B for 7 days on rent of Rs. 700 per day,
it will be a case of a hire
3. Pawn/ Pledge:- when goods are delivered to another person by way of
security for money borrowed.
For example, A takes a loan from the Bank and keeps his papers of the
house with a bank as security, it will be a case of pledge.

The Bailment can be terminated when the:

105
 • The time period of the bailment expires,
• The purpose for which the bailment was done is achieved,
• Bailor or Bailee dies,
• Goods are used in an inconsistent manner,
• Bailor himself terminates the same.

5. Meaning Of Pledge. Who may Pledge?

Meaning and Introduction

A pledge is only a special kind of bailment, and chief basis of distinction is the object
of the contract. Where the object of the delivery of goods is to provide a security for a
loan or for the fulfilment of an obligation, that kind of bailment is pledge. Under Indian
Contract Act, 1872 the ‘Pledge’ has been defined in section 172 as:
S 172. “Pledge”, “pawnor”, and “Pawnee” defined.- The bailment of goods as security
for payment of a debt or performance of a promise is called “pledge”. The bailor is in
this case called the “Pawnor”. The Bailee is called the “Pawnee”.

Example :- Mr. Shukla borrows Rs. Ten thousands from Mr. Pritam and keeps his motor
cycle as security for payment of the debt. The bailment of motor cycle is called pledge.

BASIC ESSENTIALS OF PLEDGE :-

Following are the important essentials of pledge :

1. Moveable Property :-
The pledge is concerned with the moveable property. All types of goods and valuable
documents are included in it.

2. Transfer of Possession :-
In case of pledge only possession of goods transferred by the pawnor to the pawnee.

Example :- Mr. Nelson ledges car with Mr. Mcculan and gets Rs. 100,000. He gives the
possession of car to Mr Mcculan.

3. Ownership Right :-
In case of pledge, the ownership of the goods remains with the pawnor. It is not transfered
to pawnee.

Example :- Mr. Wali pledges the plot with Mr. Raffel and gets 10 lac. The ownership of the
plot remains with Mr. Wali.

4. Case of Mere Custody :-

Those people who have only mere custody of the goods cannot pledge them.

Example :- A custodian cannot pledge his masters banglow. It will be invalid pledge.

106
5. Limited Interest :-
Pledge property cannot be used for unlimited interest. When a person pledges goods in
which he has only limited interest, the pledge is valid to the extent of that interest only.

Example :- Mr. Nelson gives car to Mr. Andre for repair, but does not pay Rs. 20,000 repair
charges. Mr Andre pledges the car with Mr. Smith and borrows Rs. fifty thousands. This
pledge is valid only up to ten thousands.
Any of the following persons may make a valid pledge:

i. The owner, or his authorized agent, or

ii. One of the several co-owners, who is in the sole possession of goods, with the consent of
other owners, or
iii. A mercantile agent, who is in possession of the goods with the consent of the real owner,
or
iv. A person in possession under a voidable contract, before the contract is rescinded, or
v. A seller, who is in possession of goods after the sale or a buyer who has obtained possession
of the goods before the sale, or
vi. A person who has a limited interest in the property. In such a case the pawn is valid only
to the extent of such interest.

6. Discuss whether the pledge is a special type of contract of bailment?

It is right to say that pledge is a special type of bailment. Since all the essentials of the pledge are
same as that of bailment. Both the contracts deal with movable property only. In both the contracts
goods or property is transferred and repayment is also must. Like Bailment, the pledge is one of its
special kind.

7. What are the differences Pledge and Hypothecation?

Introduction

Basis Pledge Hypothecation

It is defined under Section 172 of the Indian

Defined As such it is not defined in the Indian
Contract Act, 1872.
Contract Act, 1872 but has been

107
 recognized by the usage since very
long.

Transfer of Property is transferred from one person to Property is not transferred, it stays with
Property another as security. the owner.

Since the property stays with the

Dealing in Once the property is pledged, the owner
owner, therefore he can deal in the
Property loses the right to deal in that property.
property subject to certain condition.

The right of lien cannot be exercised

The right of lien can be exercised since the
Right of Lien since the property is not with the
property is with the Pawnee.
creditor.

SHORT NOTES:

1. Rights of indemnity holder

2. Undisclosed Principal
3. Right of Stoppage in transit
4. Good will
5. Sub agent
6. Types of agents
7. Finder of lost goods
8. Co surety
9. Termination of agency
10. Unpaid seller

PROBLEMS
1. ‘A’ agrees to sell to ‘B’ 10 bags of Rice out of 50 bags
stores in bis godown for Rs 10,000/-. The Rice is
completely destroyed by fire. Can ‘B’ compel ‘A’ to
supply the Rice?
2. ‘ X’ employs ‘Y’ to recover the debt Rs 1,500/- from ‘Z’.
the debt became time barred, because of Y’s negligence. Is
‘Y’ entititled to remuneration for services?
3. ‘A’ and ‘B’ form trading Partnership for 5 years. After 2
years, ‘A’ is convicted of travelling on the Railway

108
 without ticket. ‘A’ files suit for dissolution of the firm on
the ground of his own misconduct. Will he succeed?
4. Mrs Vaibhavi purchased a Bus under loan from Karnataka
Bank. For which her husband Shekar stood as surety. After
one year Shekar divorces Vaibhavi. Later she defaulted in
the payment of her instalment. Manager of the Karnataka
Bank approaches Mr. Shekar to compel him to clear the
dues as he is the surety. Since Shekar is no more her
husband, whether he is discharged from suretyship?
Decide.
5. ‘R’ purchased a motor car from ‘D’ and used the same for
several months. ‘D’ had no title to the car and therefore,
‘R’ was compelled to give it up to the true owner. ‘R’ sued
‘D’ to recover back the price which he had already paid-
Decide.
6. ‘A’ advances to ‘B’ a minor, Rs 1,00,000/- on the
guarantee of ‘C’. ‘A’ on demand for repayment from ‘B’.
‘B’ refuses to pay on the ground of his minority. Can ‘A’
recover the amount from ‘C’? decide.
7. ‘A’ lends a horse to ‘B’ for his own riding only. ‘B’ allows
‘C’ a same member of his family to ride the horse with
care but the horse accidently falls and is injured. Whether
‘B’ is to make compensation to ‘A’? give reasons
8. ‘A’ ;eaves his cow to take care for the month. B accepts
but after fifteen days sells the cow to ‘C’. decide
9. ‘A’ while walking on the road found a Jewel and took that
Jewel to a goldsmith ‘B’ to know its genuinety. Goldsmith
‘B’ after testing, refuses to return the Jewel. Decide.
10. A, B, C are partners of a partnership firm. ‘C’ who is
an active partner retires without giving public notice. ‘X’
supplies the goods to the firm after ‘C’ s retirement.
Advise ‘X’ as to the recovery of amount of the goods
supplied.

109