Professional Documents
Culture Documents
Guess Paper
Indian Contract Act- 1872- II
UNIT- I
1. What is contract of Indemnity? Explain the right of indemnity holder. Distinguish
between contracts of Indemnity & Contract of Guarantee.
2. Discuss the nature, rights and liabilities of a Surety.
3. Explain the essential feature of Guarantee. What are the liabilities & rights of the
Surety? Can the surety discharge from his liability? What is the difference between
contract of Guarantee and Indemnity?
4. Liability of surety is co-extensive with that of Principal debtor.
UNIT-II
1. Explain the standard of care required of a bailee in respect of goods bailed to him.
2. What can be pledged? Who can make the valid Pledge? Differentiate between Pledge &
Lien.
3. What is bailment? What are the essentials of bailment? What are the duties & rights of
Finder of lost goods as a bailee?
4. What is Pledge? Distinguish between Pledge and Bailment.
UNIT – III
1. What is Agency? What are the various modes of creating Agency relationship? Also
describe the different kinds of Agent.
2. What are the circumstances in which agency is terminated?
3. Discuss fully the extent of Principals liabilities to third parties for the act of Agent.
4. Define the term sub-Agent. How for is principal bound by the acts of sub-agent?
Distinguish between sub-agent and substituted Agent.
UNIT- IV
1. Sharing of profits in business is not conclusive evidence of the existence of Partnership.
Discuss with the help of relevant case law.
2. How the firm is registered? What is the effect of Registration & Non registration of
firm?
3. Distinguish between partnership business and joint Hindu family business.
4. Discuss the essentials of Partnership firm.
5. Define the principal of Holding out.
6. What are the provisions of dissolution of partnership Firm?
UNIT- V
Write short notes on the followings:-
i) Continuing Guarantee.
ii) Co-Sureties.
iii) Feature of Bailment.
iv) Rights of Pawnee to redeem.
v) Kinds of Agent.
vi) Agency by Ratification.
vii) Nature of Partnership.
viii) Registration of Firm.
ix) Termination of Agency.
x) Rights & duties of finder of lost goods.
xi) Modes of discharge of surety.
xii) Doctrine of Holding out.
xiii) Minor admitted to benefit of partnership.
xiv) Dissolution of firm.
xv) General lien & Particular lien.
xvi) Difference between Hypothecation & Pledge.
xvii) Co-ownership & Partnership.
xviii)Partnership at will.
xix) Dormant Partner.
xx) Ostensible authority.
xxi) Sub Agent & Substituted Agent.
xxii) Pledge &Mortgage.
1. Define the Contract of Indemnity. Distinguish between contract of Indemnity & contract
of guarantee. And explain the rights of indemnity holder.
Introduction: - A Contract of indemnity is a direct engagement between two parties whereby
one promises to save another from harm. According to section 124 of the Indian Contract Act a
contract of indemnity means,” 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.”
This gave a very broad scope to the meaning of indemnity and it included promise of
indemnity due to loss caused by any cause whatsoever. Thus any type of insurance except life
insurance was a contract of indemnity however Section 124 of Indian Contract Act 1872 makes
the life insurance was a contract of indemnity. However the Contract Act -1872 makes the scope
narrower by defining the contract of indemnity.
DEFINITION: - As provisions made in section 124 of the Indian Contract Act-1872 says that,
“whenever one party promises to save the other from loss caused to him by the conduct of the
promisor himself or by the conduct of other by the conduct of the any other person is called a
Contract of Indemnity.”
New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others, 1997, A
Contract of indemnity is a direct engagement between two parties thereby one promises to save
the other harm. It does not deal with those classes of cases where the indemnity arises from loss
caused by events or accidents which do not or may not depend on the conduct of indemnifier or
any other person.
ESSENTIAL ELEMENTS:- The following are the essentials of the Contract of Indemnity:-
1. There must be a loss.
2. The loss must be caused either by he promisor or by any other person.
3. Indemnifier is liable only for the loss.
Thus it is clear that this contract is contingent in nature and is enforceable only when the loss
occurs.
RIGHTS OF INDEMNITY HOLDER
The promisee in a contract of indemnity acting within the scope of his authority is entitled to
recover from the promisor so under Section 125 of the Act defines the rights of an indemnity
holder which are as under :-
1. Right of recovering Damages: - All the damages that he is compelled to pay in a suit in respect
of any mater to which the promise of indemnity applies.
2. Right of recovering Costs: - All the costs that he is compelled to pay in such suit if in bringing
o defending it he did not contravene the orders of the promisor and has acted as it would have
been prudent for him to act in the absence of the contract of indemnity or if the promisor
authorised him in bringing or defending the suit.
3. Right of recovering sums :- All the sums which he may have paid under the terms of a
compromise in any such suite if the compromise was not contrary to the orders of the promisor
and was one which would have been prudent for the promisee to make in the absence of the
contract of indemnity.
In another case of Mohit Kumar saha v/s New India Assurance Co.-1997 It was held that the
indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the
Surveyor. Any settlement at the lesser value is arbitrary and unfair and violates art.14 of the
constitution.
DIFFERENCE BETWEEN INDEMNITY & GUARANTEE
INDEMNITY GUARANTEE
1. In indemnity there are two, one who is There are three parties, Principal debtor,
indemnified and the other indemnifier. surety and the Creditor.
2. It consists of only one contract under
which indemnifier promises to pay in the There are three contracts between surety,
event of certain loss. principal debtor and creditor.
3. The contract of indemnity is made to
protect the promise against some likely loss. The object of contract of guarantee is the
4. The liability of the indemnifier in a security of the creditor.
contract of indemnity is a primary one.
In guarantee the liability of surety is only a
secondary, when principal debtor default.
CONCLUSTION:- It has been noted above that section 124 recognises only such contract as
contract of indemnity where there is a promise to save another person from loss which be caused
by the conduct of the promisor himself or by conduct of any other person. It does not cover a
promise to compensate for loss not arising due to human agency. If under a contract of insurance
an insurer promises to pay compensation in the event of loss by fire. Such contracts are valid
contracts as being contingent contracts under sec.31.
2. Discuss the nature, rights and liabilities of a surety.
INTRODUCTION:- The surety who is entitled to be reimbursed by the principal debtor for the
amount paid by him on his behalf. The liability of the surety is co-extensive with that of the
principal debtor unless it is otherwise provided by the contract under section 128.
NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of the principal
debtor which means that on a default having been made by the principal debtor the creditor can
recover from surety the all what he could have recovered from the principal debtor.
Example:- The principal debtor makes a default in the payment of a debt of Rs.10,000.00, the
Creditor may recover from the surety the sum of Rs.10000/- plus interest becoming due thereon
as well as the amount spent by him in recovering that amount.
LIABILITY OF SURETY:- A bare perusal of section 128 of the Contract Act would make it
clear that the liability of a surety is co-extensive with that of he principal debtor. The word co-
extensive denotes that extent and can relate only to quantum of the principal debt. Refer a case
of Industrial Financial Corporation of India v/s Kannur Spinning & Weaving Mills Ltd,
2002: However the liability of the surety does not cease merely because of discharge of the
principal debtor from liability.
Bank of Bihar Ltd. v/s Damodar Prasad, 1969: The Supreme Court held that the
liability of the surety is immediate and cannot be defended until the creditor has exhausted all his
remedies against the principal debtor.Maharashtra Electricity Board Bombay v/s Official
Liquidator and Another, 1982: under a letter of guarantee the bank undertook to pay any
amount not exceeding Rs.50000/- to the Electricity Board. It was held that the Bank is bound to
pay the amount due under the letter of guarantee given by it to the Board.
RIGHTS OF SURETY:- The surety has certain rights against the principal debtor, the creditor
and the co-sureties. His right against each one of them are being discussed as under :-
1. Right of Subrogation: Under section 140 when a principal debtor makes a default in the
performance of his duty and on such default the surety makes the necessary payment or makes
performance of all what he is liable. Firstly the surety can claim indemnity from the principal
debtor secondly he is also entitled to the benefits of every security which the creditor has against
the principal debtor. Case of Mukesh Gupta v/s Sicorn Ltd. Mumbai, 2004.
2. Right of Indemnity against the principal debtor: Similarly as above when a principal debtor
makes a default the surety has to make the payment to the creditor. After making the payment he
can recover the same from him under section 145 of the act.
3. Right against Creditor to take back the securities deposited by the Principal debtor:- After
making the dues the surety has all the rights which are available to the creditor against the
principal debtor under section 141 of the act. He is entitled to the benefit of every security which
the creditor has against the principal debtor.
4. Surety has no right to goods in hypothecation:- In case there is hypothecation of the goods
the goods remain in the possession of the borrower the surety cannot invoke the provision of
section 141 in such case. Refer a case of Bank of India v/s Yogeshwar Kant Wahhera, 1987.
CONCLUSION:- Keeping in view the above facts it is revealed that the surety’s nature,
liabilities and rights are of such types once he stands surety for any debt he will remain bound till
the amount is repaid by the principal debtor. Although the surety has some rights such as right
of subrogation, indemnity and to taking back the securities but even though there are more
complications in this regard. So one should stand surety for a person who have some qualities
of good pay master.
3 The liability of the surety is co-extensive with that of Principal debtor.
INTRODUCTION:- Surety’s Liability : The liability of the surety is co-extensive with that of
the principal debtor, unless it otherwise provided by the contract for example A guarantees to B
for 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.
DEFINITION OF CO-EXTENSIVE:- Section 128 of the Indian contract Act provides the
following definition in respect of the surety liability:-
“It says that the liability of the surety is co-extensive with that of the principal debtor
unless it otherwise provided by the Contract.”
A case of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel-1991: It was
held by the court that where there were joint promisors and consideration was paid by only one
of them the other piomisors were equally liable to pay amount. The liability of son was co-
extensive with his father who was principal debtor in view of section 127 and 128 of the Indian
contract Act.
The gist of some the leading cases in which the liability of the surety is co-extensive are
given below to strengthening the answer of the question:-
· Kellappan Nambiar v/s Kanhi Raman-1957: In this case that if the principal debtor happens
to be a minor and the agreement made by him is void, the surety too cannot be made liable in
respect of the same because the liability of the surety is co-extensive with that of principal
debtor. It has been held that the guarantee of the loan or an overdraft to an infant is void because
the loan to the infant itself is void.
· That in case of State Bank of India v/s V.N. Anantha Krishnam-2005: that in view of the
provision of section 128 of Act the Presiding officer was not correct in giving directions to the
Bank to proceed against the property because cash credit facility and the liability of surety was
co-extensive with that of principal debtor.
· In a case of Bank of Bihar Ltd. v/s Dr.Damodar Prasad -1969: The Supreme Court held that
the liability of the surety is immediate and cannot be defended until the creditor has exhausted all
his remedies against the principal debtor.
· A case of Industrial Financial Corporation of India v/s Kannur Spining & Weaving Mills
Ltd.-2002: It was held that the liability of surety does not cease merely because of discharge of
the principal debtor from liability.
· In a case of Harigobind Aggarwal v/s State Bank Of India-1956: It was held that the
principal debtor liability is reduced e.g. after the creditor has recovered a part of the sum due
from him out of his property the liability of the surety is also reduced accordingly.
CONCLUSION:- On deeply going into depth of provisions laid down in the Act it is revealed
that surety liability is co-extensive with that of principal debtor means that his liability is exactly
the same as that of the principal debtor. Suppose if the default having made by the principal
debtor the creditor can recover the same from the surety all what he could have recovered from
the principal debtor.
4. What do you understand by contract of guarantee? How does it differ from contract of
Indemnity?
INTRODUCTION: - The contract of guarantee may be an ordinary or some different type of
guarantee which is different from an ordinary guarantee. Guarantee may be either oral or written.
Basically it means that a contract to perform the promise or discharge the liability of third person
in case of his default and such type of contracts are formed mainly to facilitate borrowing and
lending money which based on the following facts :-
i) Surety is the person by the whom the guarantee is given.
ii) Principal debtor is the person from whom the assurance is given.
iii) Creditor is the person to whom the guarantee is given.
DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge
the liabilities of a third person in case of his default. The person who gives the guarantee is
called surety, the person in respect of whose default the guarantee is given is called Principal
Debtor and the person to whom the guarantee is given is called creditor. A guarantee may be
either oral or written.”
ILLUSTRATION: - A promises to a shopkeeper C that A will pay for the items being bought
by B if B does not pay this is a contract of guarantee. In case if B fails to pay C can sue A to
recover the balance the same was held in the case of Birkmyr v/s Darnell-1704, the court held
that when two persons come to shop one person buys and to give him credit the other person
promises, “ if he does not pay, I will”, this type of a collateral undertaking o be liable for the
default of another is called a contract of guarantee.
ESSENTIALS: - The following are the essential elements of Guarantee:-
1. Existence of Creditor, Surety, and Principal debtor: - The economic function of a guarantee
is to enable a credit-less person to get a loan or employment or something else. Thus there must
exist a principal debtor for a recoverable debt for which the surety is liable in case of the default
of the principal debtor. In the case of Swan v/s Bank of Scotland -1836, It was held that a
contract of guarantee is a triplicate agreement between the creditor, the principal debtor and the
surety.
2. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable for
the liability of the Principal debtor.
3. Liability must be legally enforceable: - Only if the liability of the principal debtor is legally
enforceable, the surety can be made liable. For example a surety cannot be made liable for a debt
barred by Statute of Limitation.
4. Consideration: - As with any valid contract the contract of guarantee also must have a
consideration. The consideration in such contract is nothing but anything done or the promise to
do something for the benefit of the principal debtor. The section 127 of the Act clarify as
under :-
“Anything done or any promise made for the benefit of principal debtor is sufficient
consideration to the surety for giving the guarantee.”
Illustrations: - 1. A agrees to sell to B certain goods if C guarantees for payment of the price of
the goods. C promises to guarantee the payment in consideration of A’s promise to deliver
goods to B. This is sufficient consideration for C’s promise.
2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for an year and
promise if A does so he will guarantee the payment if B not pay. A forbears to sue B for one
year. This is sufficient consideration for C’s guarantee.
5. It should be without misrepresentation or concealment: - Section 142 of the Act specifies
that a guarantee obtained by misrepresenting facts that are material to the agreement is invalid,
and section 143 specifies that a guarantee obtained by concealing a material fact is invalid as
well.
Illustration :- 1. A appoints B for collecting bills to account for some of the bills. A asks B to
get a guarantor for further employment. C guarantees B’s conduct but C is not made aware of B
previous mis-accounting by A. B afterwards defaults. C cannot be held liable.
Illustration: 2- A promise to sell Iron to B if C guarantees payment. C guarantees payment
however, C is not made aware of the fact that A and B had contracted that B will pay Rs.5/-
higher that the market price. B defaults. C cannot be held liable
A case of London General Omnibus V/s Holloway- 1912: A person was invited guarantee an
employee, who was previously dismissed for dishonesty by some employer. This fact was not
told to the surety. Later on the employee embezzled funds but the surety was not held liable.
CONCLUSION
It is noted from the above mentioned facts that the contract of guarantee is a triplicate agreement
between Creditor, Surety and the Principal debtor. A person who stands for surety known as
guarantor for a third person (principal debtor) who in case of his default to fulfil his promise or
to discharge the liabilities. The surety or guarantor has to make a distinct promise for payment of
the liabilities of the Principal debtor which must be legally enforced.
Pledge is deliver of goods to the creditor as security for the debt. Lien is a right of a creditor to r
paid or satisfied
CONCLUSION:- In Pledge which a kind of bailment and also to be considered as security for
the debt of the creditor. It is also essential in the Pledge that there must be delivery of the
moveable goods from pawnor to pawnee and transfer of possession from one fellow to another.
A person who is having the possession of goods and consent of the true owner and acting in good
faith can make a valid pledge.
8. What is bailment? Explain its essential ingredients of Bailment? What are the duties &
rights of Finder of the goods as a Bailee?
INTRODUCTION:-Means delivery of goods i.e. moveable property by one person who is
generally the owner thereof, to another person for some purpose. The goods are to be returned to
the owner after accomplished the purpose to take further action as per directions of the owner of
the goods.A.T.Trust Ltd., v/s Trippunhura Devaswomi-1954. In a contract of bailment the
person who delivers the goods called the “Bailor” and to whom the goods are delivered is called
as “Bailee”.
DEFINITION:- Section 148 of the Indian Contract Act, A bailment is the delivery of goods by
one person to another for upon a contract that they shall when purpose is accomplished be
returned or otherwise disposed of according to the directions of the person delivering them. The
person delivering the goods is known as BAILOR and the person to whom goods are delivered is
known as the BAILEE.
ESSENTIAL INGREDIENTS OF BAILMENT:- The following are the essentials of the
bailment under the Contract Act:-
(a) DELEVERY OF GOODS FOR SOME PURPOSE:- Delivery means transfer of the goods
from the possession of one person to another person. Delivery need not always be actual,
sometimes it may be constructive or symbolic as per instructions laid down in section 149 of the
Act, and this section recognises it other than actual delivery. However section 149 also provides
below in this regard:-
The delivery to the bailee may be made by doing anything which has the effect of putting the
goods in the possession of the intended bailee or any other person authorized to hold them on his
behalf.”
i) Jagdish chand Trikha v/s Punjab National Bank, 1998 : It was held by the court that the
position of the bank was that of a Bailee and it failed in its duty to take care of the goods and
return them to the Bailor. The Bank was held liable to pay the cost of Rs. 3,72,400/- along-with
simple interest @12% from the date of institution of the suit.
ii) Ultzen v/s Ni coles, 1894:- It was held that the defendant was the bailee of the coat as his
servant had assumed the possession of the same and he was therefore liable for its loss which
was occurred due to his negligence.
(b) IF THE OWNER MAINTAINS CONTROL OVER THE GOODS THERE IS NO
BAILMENT: When the person keeps his goods in the premises of others but himself continues
to have the control over them, this is not sufficient delivery for being considered to be
bailment. Kaliaporumal Pillai v/s Visalakshmi, 1938 : It was held that there was no bailment
as she had not handed over the possession of the jewels to the goldsmith, and therefore the
goldsmith could not be made liable for the loss. Punjab National Bank v/s Sohan Lal, 1962, It
was held that the locker could be operated even without the key with the consumer. The
consumer’s control over the valuable things in the locker had gone and the same with the bank,
therefore the bank was liable being bailee and thus Bank is liable for the loss of the belonging of
the consumer in the locker.
(c) THERE CAN BE BAILMENT WITHOUT CONTRACT:- In some cases there can be a
bailment when the person obtains the possession without a contract of the bailment as it was
done in the case of :Ram Gulam v/s Govt. Of Uttar Pradesh- 1950, The court expressed that
the property of plaintiff was stolen and the same was recovered by the Police, Police kept the
same in the Malkhana. Property was again stolen from the Maalkhana and could not be traced
out. Here the point of bailment raised since no contract of bailment was made for which
conviction is announced but the law itself recognises the finder of the goods as bailee under
section 71 of contract Act, hence it was held that bailment can be even there when there is no
contract of bailment. L.M. Co-operative Bank v/s Prabhudass HathiBhai-1966:- It was held
that the government stood in the position of a Bailee to take due care of the goods. Govt., duty to
prove that they had taken proper care as was possible for them and the damage was due to
reasons beyond their control.
RETURN OF GOODS AFTER THE PURPOSE IS ACHIEVED: OR
THEIR DISPOSAL ACCORDING TO THE BAILOR DIRECTIONS:- The delivery of the
goods in a bailment is only for some purpose i.e. for safe custody, for carriage, for repair etc.,
when the purpose is accomplished the goods are to be returned or otherwise disposed of
according to the directions of the person delivering them. According to Section 148, the goods
shall be when purpose is achieved returned to the bailor or disposed of as per his directions i.e.
when the cloth is given for being stitched in to suit or gold for being converted into ornaments or
wheat for being converted into flour there is a bailment in each case. When the money is
deposited into a Bank, when the agent receives some payment on behalf of Principal, he is not
the bailee thereof because he is only bound to pay an equivalent of it to the principal rather than
the same currency as done in the case of: - Secretary of State for India Council v/s Sheo
Singh-1880: Some notes were given to Treasury for being cancelled, there is no bailment as the
same notes are not to be returned. Constructive bailment does not confer any right to a stranger.
Bailment regarding hiring of a locker will not create relationship of Land lord and the tannent, as
the Bank can always open the locker with a Master Key. The hirer of the locker is not in a
position to open the locker without the assistance of the Bank. The Hirer has to operate the
locker only within the Bank’s time but the bank has no such limitation
CONCLUSION:- Keeping in view the above stated facts and the gist of the decisions of the
Courts it is noticed that the goods are to be returned to their original owner after the purpose is
accomplished or they are to be disposed of as per the directions of the Bailor in same condition
as these were bailed.
Pledge is bailment of goods as security for Bailment is a delivery of goods by one person
the payment of debt or for the to another for some purpose upon a contract.
performance of a promise.
In the contract of bailment after the
Moveable property is subject-matter of accomplishing of the purpose the goods are to
pledge under the contract Act. be returned or otherwise disposed of
according to the directions of the Bailor.
CONCLUSION:- In Pledge which a kind of bailment and also to be considered as security for
the debt of the creditor. It is also essential in the Pledge that there must be delivery of the
moveable goods. Whereas in the contract of bailment there is a delivery of goods by one person
to another for some purpose and when the purpose is accomplished the goods are to be returned
or to disposed of as per the directions of the Bailor.
UNIT- III
11. Explain various ways in which an agency relationship is created. Also describe about
the different kinds of Agent?
INTRODUCTION:- An agent is a person employed to do any act for another or to represent
another in dealing with third parties. The person for whom such act is done or who is so
represented is called the principal. Where one person mere gives advice to another in matter of
business agency does not arise because of such advice only does not create an Agency. Sayed
Abdul Khader v/s Rami Reddy,1979.
The following are the various ways in which a relationship of agency is created:-
WHO MAY EMPLOY AGENT:- No person can employ an agent if he does not possess
capacity to contract. So a minor or person of unsound mind cannot become the principal
under section 183 of the Indian Contract Act.
WHO MAY BE AN AGENT:- According to section 184 of the Act any person can be
appointed as an agent but a person who is not of age of majority and of sound mind cannot be
made personally liable for the act done on behalf of the principal. Minor can create contractual
relation but a minor agent cannot be made personally liable to the principal for the misconduct
like an adult agent.
CONSIDERATION: No consideration is required for the creation of an Agency under section
185 of the Act. A case of Digvijay Cement Co.Ltd. v/s State Trading Corpn., 2006.
KINDS OF AGENT:- On the basis of provisions available in the Contract Act the following are
kinds of Agent in the business of Agency:-
1. Del-Credere Agent:- Such type of Agent who for extra remuneration undertakes the liability of
guarantee the due performance of the contract by the other party. He is also responsible for the
solvency and performance of their contracts by the other parties.
2. COMMISSION AGENT:- A commission agent is person who purchases and sells goods in the
market on behalf of his employer on the best possible terms and who gets commission for his
labor.
3. FACTOR:- He is such type of agent who is given the possession of the goods for the purpose
of selling them. He is entitled to sell the goods in his own name. A factor has a right to retain the
goods for a general balance of accounts.
4. BROKER:- He is also to be known in the name of Mercantile Agent employed for the purpose
of sale and sale of goods. The main duty of a broker is to establish privity between two parties
for a transaction and he gets commission for his labour. He is not entrusted with the possession
of the goods. He merely brings two parties together and if the deal is materialized he becomes
entitled to the commission.
5. CO-AGENT:- Where several persons are expressly authorized with no stipulation that anyone
or more of them shall be authorized to act in name of the whole body. They have a joint authority
and they are called co-Agents.
6. Sub-Agent:- The sub-agents are usually appointed by the original Agent in the business of
Agency. He works under the control of original Agent.
7. PACCA- AARTIA:- He is also known by this name only and he works in the open market to
sell the goods on commission basis. He only sells the goods.
CONCLUSION:- As regards to determine whether relationship is that of Agent and Principal or
that of Master and servant. Agent has to remain faithful to his principal and has work in good
faith in the business of Agency. There must be relation in between principal and the agent.
Merely giving advice to another person in the matter of business does not arise any business of
agency. The main object of the agency business that the agent makes the principal answerable to
third person.
14. Define the term Sub-Agent. How for is principal bound by the acts of Sub-Agents.
Distinguish between Sub-Agent and Substituted Agent.
INTRODUCTION:- A rule which based on the principle that Agency is a contract based on
trust and mutual confidence between the parties. A principal may have the mutual confidence in
his Agent but not in the subsequent sub Agent appointed by the Agent. There is a provision
regarding ‘delegates non-protest delegare’ which means of this maximum is that an agent to
whom another has delegated his own authority cannot delegate that authority to a third person.
PROVISIONS MADE IN THE ACT:- Under section 190 of the Contract Act which deals with
delegation of an authority by the Agent describes as under:-
“An agent cannot lawfully employ another to perform acts which he has expressly or impliedly
undertaken to perform personally unless by the ordinary custom or trade a sub-agent may or
from the nature of the agency a sub-agent must be employed.”
However the general principle is that the agent cannot delegate his authority to a third person but
there are two exceptions to this general rule. These are:-
i) When the ordinary custom of trade permits employment of a sub-agent.
ii) When the nature of agency demands that employment of a su-agent is necessary by the Agent.
Although there are two exceptional conditions no agent is authorized to delegate his
authority it the nature of his act is purely managerial and he is supposed to use his personal skill
in discharge of his duty or where he is personally required to perform his duties.
SUB-AGENT:- Sub agent is a person employed by and acting under the control of the original
Agent in the business of Agency under section 191 of the Act.
LEGAL POSITION OF SUB-AGENT PROPERLY APPOINTED:- Sub Agent may be
either properly appointed or improperly appointed. If he is appointed by the Agent with the
authority of his principal he is called sub-agent properly appointed. If he is appointed without
the authority of principal he is improperly appointed.
When the sub-agent is appointed properly with the consent of the principal, the principal is
bound by his acts and is responsible for his action as if he was an agent appointed by the
principal.
The sub-agent is not responsible for his acts to principal. He is responsible only for such acts to
the original Agent.
But if the sub-agent is guilty of fraud or willful wrong against the principal he becomes directly
responsible to the principal under section 192 of the Act.
Difference between sub-Agent & substitute Agent
SUB-AGENT SUBSTITUTED AGENT
Sub Agent is a person employed by and acting Substituted agent can be nominated by the
under the control of the original agent in the original Agent to act for the principal for a
business of agency. certain part of the business of agency.
A substituted agent by his mere appointment
A sub-agent is not generally responsible to the becomes immediately responsible to his
principal but he is responsible to the agent. principal.
There is no privity of contract between sub- A privity of contract is created between the
agent and principal. principal and the substituted Agent.
UNIT-IV
15. Sharing of Profits in business is not conclusive evidence of the existence of partnership.
INTRODUCTION:- The object of every partnership must be to carry on a business for the sake
of profits and share the same. Therefore clubs, societies which do not aim at making profits are
not said to be a partnership. The definition of term ‘Profits’ in the Partnership Act is that ‘net-
gains’ i.e. he excess of the returns over outlay. At one time it was thought that a person who
shared the profits must incur the liability also as he was deemed to be a Partner as it was held in
a case of Grace v/s Smith, 1775. This principle was again confirmed in a case of Waugh v/s
Carver, 1793, it was held that the person sharing the profits does not always incur the liability of
partners unless the real relation between them is that of partners.
ESSENTIALS:- Although sharing of profits is one of the essential elements of every partnership
but every person who shares the profits need not always be a partner.
Example No.1: - I may pay a share of profits to the manager of my business instead paying him
fixed salary so that he may takes more interest in the progress of the business, such person
sharing the profits is simply my servant or agent but not my partner. Example No. 2:- A share
of profits may be paid by a business man to a money-lender by way of payment towards the
return of his loan and interest thereon, such a money-lender does not thereby become a partner.
a. The principle laid down in Cox v/s Hickman-1860: this principle forms the basis of the
provisions of section 6 of the Partnership Act which gives a caution that the presence of only
some of essentials of partnership does not necessarily result in partnership. For determining
the existence of partnership there must be had to thereal relation between the parties after
taking all the relevant facts into consideration.
b. In determining whether a group of persons is or not a firm or whether a person is or is not a
partner in a firm. To answer this query an explanation is given below:
(i) Sharing of profits or of gross returns arising from property by persons holding a joint or
common interest in that property does not of itself make such persons as partners.
(ii) Receipt by a person of a share of the profits of a business or of a payment contingent upon the
earning of profits or varying with the profits earned by a business does not of itself make him a
partner with the persons carrying on the business and in particulars the receipt of such a share by
a servant or agent as remuneration a case of McLaren v/s Verschoyle-190l, or by a widow or
child of a deceased partner.
(iii) Mollow March & Co. v/s Courts of Wards-1872: In this case a Hindu Raja advanced a large
amount to a firm. Raja was given extensive powers of control over the business and he was to get
commission on profits until the repayment of loan with 12% interest. It was held by the Raja
could not be made liable for the debts contracted in the agreement was not to create Partnership
but simply to provide security.
(iv) In a case of Walker v/s Hi4sch-1884: A person was working as clerk. The served a notice by
the defendants terminating his services. Clerk contented that he was a partner and claimed
dissolution of firm. I was held that though he shared the profits he was having the capacity of a
servant only. He was not a partner and could not see dissolution of the firm.
CONCLUSION:- On nut-shell it could be concluded that just sharing the profits in the business
is not conclusive existence of the partnership till it create some relationship between the persons
who have entered into Partnership.
16. How the firm is registered? What is the effect of Registration & Non-Registration of
firms?
INTRODUCTION: - In the Contract Act it is not necessary that the firm should be registered at
the time of its formation. However a firm may be got registered at any-time after the creation of
Partnership. Act does not lay down any-time limit within which the firm should be registered
provided insection 63 of Partnership Act. The act does not impose any penalties for non
registration of firms.There are some disabilities are provided in sec.69 of the Act for unregistered
firms and their partners.
HOW THE FIRM IS REGISTERED:- The partnership agreement or any transaction between
the partners and third parties is void on the basis of non-registration of partnership firm and the
partners themselves. In addition to the above no prudent partner or firm should hesitate to get his
or its name registered at the earliest possible opportunity. The procedure of registration is very
simple as provided in section 58 and 59 of the Act.
A registration of firm may be affected by submitting to the Registrar of Firms a statement in the
prescribed form and accompanied by the prescribed fee. The application must bear the following
information:-
The firm’s name. Place of business and the name of other places where the firm can carry on
business. Date of joining of each partner with their permanent addresses. The duration of the
firm.
When the Registrar is satisfied that the above mentioned requirements have been complied with
and then he shall record an entry of statement in the register. This amounts to the registration
of the firm.
Section 69 of the Act imposes certain claims in the Civil Courts. This section provides pressure
which is to be brought to bear on partners to have the firm and themselves registered. The
pressure consists in denying certain right of litigation to the firm or partners not registered under
this act. A cause of action arose when the firm was unregistered but was registered at the time of
filing the suit. It was held in the case of State of U.P., v/s Hamid Khan & Bros. and othrs-
1986: it was held that section 69 to be inapplicable in this case.
EFFECTS OF NON-REGISTRATION& REGISTRATION
ON REGISTRATION OF FIRM ON NON-REGISTERED FIRM
Any partner, nominee and authorized agent can No partner, nominee and agent can bring a suit
bring a suit to enforce a right arising from a to enforce a right arising from a contract
contract against any past or present partner and against any firm or any past or present partner
for the third parties too. of the firm or third parties.
Registered firm can claim of set-off or other The disabilities as provided in sec.69 of the act
proceedings to enforce a right arising from a i.e.to claim of set-off or other proceedings to
contract u/s 69 of the Act. enforce a right arising from a contract.
Filing of the return every year is necessary. It is not required to file the return by the un-
registered firm.
Loonkaran v/s Ivan E. John, 1977, it was held that sec.69 is mandatory and unregistered
partnership firms cannot bring a suit to enforce a right arising out of a contract falling within the
ambit of sec.69 void.
In M/s Balaji Constructions co., Mumbai v/s Mrs. Lira Siraj Sheikh, 2006 It was observed
that the firm was not registered on the date of filing of suit and person suing as partners were not
shown in register of firm and suit by such firm hit by section 69(2) of Partnership Act and was
liable to be dismissed.
CONCLUSION :- It is very well established that the partnership agreement or transaction
between the partners and third parties is void on the ground of Non-Registration of the firm as
well as of Partners. To enforce any right arising out of a contract the registration of both firm and
partners are necessary for the benefit of the both.
17. Distinguish between partnership business and Joint Hindu family business.
INTRODUCTION: According to Partnership Act persons who have entered into partnership are
individually called partners and coactively a firm and the name under which their business is
carried on Is called firm name. In the eyes of law a firm is merely a collective name of
individuals who have entered into a partnership.
Whereas in Joint Hindu family business it is based on status of persons by virtue of his being
born in the particular family. The distinctions between these two can be made on the basis of
following facts:-
DIFFERENCE
ORDINARY PARTERNSHIP JOINT HINDU FAMILY BUSINESS
An agreement between the parties to join the No such agreement is required. A joint family
partnership is necessary. business is created by operation of law.
The members of ordinary partnership have no The members of the joint family have their
interest in the partnership by birth. interest & become shareholders and entitled to
profits in the business by birth.
The partnership in ordinary partnership is On the death of one or more members the joint
automatically dissolved in case of death of any family business does not dissolve.
partner.
In case of ordinary partnership each partner has In case of joint family business there is no
to render accounts to his co-partners. accounting between the member and neither
any of them can ask for the account regarding
profits and losses of the business.
In ordinary partnership each partner is the In joint family business the manager or
agent of the firm for the purpose of business of managers has as implied authority to contract,
the firm. debts and pledge the property and credit of the
family for the ordinary purposes of family
business.
In case of ordinary partnership the relationship In joint family business the coparceners are the
between partners arises out of a contract. joint owners of the family property and their
mutual rights are the result of a status and not a
contract.
CONCLUSION:- After going through the facts mentioned above it are clear that there are lot
and lot of difference in between an ordinary Partnership and Joint Hindu family business.
Ordinary partnership is a result of agreement between the parties to join partnership to share the
profits earned by the business being carried out from partnership whereas in joint family business
there is no need of an agreement it is created by operation of law. In ordinary partnership each of
the partners has to render the account and to work as an agent. In joint business there is no need
to render account of profit and loss.
18. Discuss the essentials of Partnership Firm.
INTRODUCTION: - Indian partnership Act was enacted in 1932 and it came into force on Ist
day of October, 1932. A partnership arises from a contract and therefore such a contract is
governed not only by the provisions of the Partnership Act but also by general law of contract.
DEFINITION OF PARTNERSHIP:- Kent’s view “Partnership as a contract of two or more
competent persons to place their money, efforts, labour and skill or some of them in lawful
commerce or business and to share the profit and bear the loss in certain proportions.
“Dixon defines partnership as, “Group of Persons”. According of Pollock, “Partnership is a
relation which subsists between persons who have agreed to share the profits of a business
carried on by all or any of them on behalf of all of them.”
Definition:- Section 4 of the Indian Partnership Act defines the ‘Partnership’ as under:-
Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.”
NATURE OF PARTNERSHIP:- Partnership is a form of business organization, where two or
more persons join together for jointly carrying on some business. It is an improvement over the
‘Sole-trade’ business, where one single individual with his own resources, skill and effort carries
on his own business. Any two or more persons can join together for creating Partnership.
In certain respects a partnership is a more suitable form of business organization than a
Company. For the creation of partnership just an agreement between various persons is required.
Whereas in the case of company there are a lot of procedural formalities which have to be gone
through to create a Company. In the case of company the control over regarding distribution of
profits, holding of meetings, maintaining of accounts runs through a statutory control. Whereas
in partnership firm the partners are the master of their affairs.
ESSENTIALS OF PARTNERSHIP: THE FOLLOWING ARE THE ESSENTIALS OF THE
PARTNERSHIP:-
1. PERSONS WHO HAVE AGREED:- A question is arises at the preliminary stage is that, “
who are the persons and who can agree for partnership:
(i) MINORS: - A minor is incompetent to contract case of Mohori Bibi v/s Damodardass
Ghosh-1903: Minor may not become partner but he can be admitted to benefit of partnership
and can share the profits. He cannot be liable for the losses.
(ii) CORPORATION: - A corporation is a legal person therefore corporation may enter into a
partnership with the condition only if the constitution of the corporation must empowers it to
form a partnership and not otherwise.
(iii) FIRM: - Firm is also recognized as a legal person in India and it cannot enter into a
partnership. A firm which is proprietorship firm or a company registered under the Company’s
Act can very well enter into a partnership but here is mentioned that partnership firm is not a
legal person therefore it is not competent to enter into a partnership. Duli chand v/s CIT, 1956.
(iv) ALIEN: - A national of other country may be a friendly alien or an enemy alien. A friendly
Alien can enter into Partnership but latter Cannot except when he is under the protection of that
country.
2. TO SHARE THE PROFITS OF A BUSINESS:- This line consists the two parts: 1. To share
the profit and 2. Of a business. However the explanation of these two terms are as under :-
(i) Business:-This definition is not exhaustive. The existence of business is essential unless there
is no intention to carry on business and to share the profits, there can be no partnership.
Therefore the objects of the partnership and business must be lawful. Case of R.R.Sharma v/s
Ruben, 1946.
(ii) Sharing of Profits:- A case of Cox v/s Hickman, 1860: though sharing of the profits of
business is essential. The definition leave it opens as to how and when these profits are to be
shared. In order to continue the partnership the actual existence of a business carried on by
partners with an agreement to share profits of such business is essential.
(iii) Sharing of losses Grace V/s Smith-1775, Mutual Agency and Acting for all and to carry on
the business are the essential terms of the partnership.
CONCLUSION:- In order to constitute partnership there must not only be sharing of profits but
there must be also the relationship and the principle of agency. Section 4 of the act that there
must be actual existence of a business carried on by the partners with an agreement to share the
profits of such business is essential.
CO-SURITIES
Sometimes there may be conditions in a contract of guarantee that there shall be a co-
surety also. 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 the other
person does not join. (It has also been provided in section 144 of the act.) It means that in such
a contract liability of the surety is dependent on the condition precedent that a co-surety will join.
The surety can be made liable under such a contract only if the co-surety joins, otherwise not.
On the basis of provision under section 128.
LIABILITY OF CO-SURETY
From the above statement it has been noticed that the liability of sureties isco-extensive with that
of the principal debtor. It implies that the creditorcan proceed against the principal debtor or the
surety at his discretion unless it is otherwise provided in the contract.
The same principle is applicable with regard to the rights and liabilities of the co-sureties. Since
the liability of the co-surety is joint and several a co-surety cannot insist that the creditor should
proceed either against the principal debtor or against any other surety before proceeding against
him.
A case in this regard is of State Bank of India v/s G.J.Herman-1998: It was held that neither
the court nor a co-surety can insist that the creditor should first proceed against another surety
before proceeding against him. Such direction would go against the co-extensiveness.
In the case of Bank of Bihar Ltd. v/s Dr. Damodar Prasad-1969: It was held that the liability
of the surety is immediate and cannot be defended until the creditor has exhausted all his
remedies against the principal debtor.
CONCLUSION
It has already been noted that section 128 declares that the liability of the surety is co-extensive
with that of principal debtor. The word co-extensive denotes that extent and can relate only to the
quantum of the principal debt. However the liability of the surety does not cease merely because
of discharge principal debtor from liability. Refer a case of Industrial Financial Corp. of India
v/s Kannur Spinning & Weaving Mills Ltd.-2002.
NATURE OF PARTNERSHIP:- Section 4 of Indian Partnership Act 1932,
That partnership is the relations which subsist between persons who have agreed to combine
their property, labour and skill in some business and to share the profits thereof between them.
The Present definition is wider than one contained in the Partnership Act.
DEFINITION:- According to Partnership Act 1932 the definition of the Partnership is as
under: “Partnership is the relation between persons who have agreed to share the profits of
business carried on by all or any of them acting for all.”
NATURE OF PARTNERSHIP
On the basis of provisions laid down in the act of partnership the nature of the partnership is of
the following aspects :-
i) There should be an agreement between the persons who wants to be partners.
ii) The purpose of creating partnership should be carrying on of business.
iii) The motive of creating of partnership should be earning and sharing of the profits.
iv) The business of the firm should be carried on by all of them or any of them acting for all.
The partnership Act is very much clear about it concept and it gives the directions
regarding creation of a partnership by having an agreement for sharing of their property, labour
and skill in some business which aimed to share the earning and profits.
TERMINATION OF AGENCY
INTRODUCTION:- The agency which may be validly created stands terminated in the event of
different situations as the principal revoked his authority, or by the agent renunciation of
business of the agency or the death or unsound mind any of the i.e. principal or of the agent.
Even when the principal being adjudicated in insolvent.
DEFINATION OF TERMINATION OF AGENCY
On the basis of provisions laid down in the Act under section 20, “That the agency is terminated
by the principal revoking his authority or by the Agent renouncing the business of the agency
being completed or either the principal or agent dying or becoming of unsound mind or by the
principal being adjudicated an insolvent under the provisions of any act for the time being in
force in the relief of insolvent debtors.”
DIFFERENT MODES OF TERMINATION OF AGENCY
The following are the modes under which an Agency can be terminated:-
1. By Revocation of Agent’s Authority:- The revocation of agent’s authority can be made by the
principal subject to the condition:-
i) Revocation may be express or implied as provided in section 207 of the Act.
2. By the Principal revoking his authority: Provisions have been made in the section 203 of the
Act that Principal may revoke his authority given to his agent.
3. By the Agent renouncing the business of the Agency:- Under section 207 of the Act, It is
mentioned that theAgent should give a reasonable notice to his Principal, otherwise Agent can be
made liable to make good any damage caused to Principal.
4. By the completion of Business of Agency:- When the agency is created for the fixed time by an
express or implied contract and after expiry of the term it automatically terminates on the expiry
of the said term u/s 205 of Act.
5. By either death or Unsound mind of Principal or of Agent:- Section 201 of the Act laid
down that the agency is stands terminated on the death of the Principal or of the Agent.
6. By the Principal being adjudicated an Insolvent:- Section 201 also says that the agency can
be terminated if principal being adjudicated as an insolvent.
In addition to above as provided in section 210 that all the sub-agencies shall remain
terminated on the termination of original agency.
CONCLUSION:- Agency can be terminated on the above mentioned reasons.
Extraaaaaaaaaaaaaaaa
Question No.6: What are the provisions regarding dissolution of partnership firm?
INTRODUCTION:- Dissolution of partnership means coming to an end of the relation known
as Partnership between various partners. It may also can be defined as the breaking up or
extinction of the relationship which subsisted between all the partners of the firm as held in a
case of Santdas v/s sheodyal-1971:
Here we are to note the significance of words in definition is, “between all partners “means every
one of the members of the firm cease to carry on business of partnership. Thus where one or
more members ceased to be partners in such firm while others remain the firm is not said to be
dissolved.
DEFINITION: - The term dissolution of the Partnership firm has been defined in Section 39 of
the Partnership Act which lies as, “the dissolution of partnership between all the partners of
a firm is called the, ‘dissolution of the firm’.”
MODES OF DISSOLUTION: - There are five different modes of the dissolution of a firm:
Dissolution: = I without the interference of Court.
Ii. With the orders of the Court.
1. Without the interference of the Court: - there are four modes of dissolution of firm:-1.By
Agreement under section 40 of the Act. 2, Compulsory dissolution u/s-41. 3. on the
happening of certain contingencies u/s 42. 4. by Notice u/s 44 of Act.
1. Dissolution by Agreement: - As partners can create partnership by making a contract as
between them, they are also similarly free to end this relationship and thereby dissolve the firm
by their mutual consent.
Sometimes there may have been a contract between the partners indicating as to when and how a
firm may be dissolved, such firm can be dissolved in accordance to such contract. A firm may be
dissolved with the consent of all the partners or in accordance with a contract between the
partners as provided in section 40 of the Act. A case in this regard is of, EFD.Mehta v/s MFD
Mehta-1971.
2.Compulsory dissolution:- Under Section 41 of the Act, if by the happening of any event
which makes it unlawful for the business of the firm or for the partners to carry it on in
partnership.
(a)If by the adjudication of all the partners or of all the partners but one as insolvent declared by
the court.
3.On he happening of certain contingencies:- On the grounds of the gist of contract made
between the partners of a firm may dissolved :- i) If the partnership firm constituted for a fixed
term. By the expiry of the term firm can be dissolved. Ii) By the death of a partner may results
dissolution unless rest of partners agrees to contrary. iii) It firm is constituted to carry out one or
more adventures or undertaking by the completion thereof. On completion of the same firm may
be dissolved.
4.Dissolution by Notice of Partnership:- If the partnership is azt will the firm may be dissolved
by any partner giving notice in writing to all the other partners of his intention dissolve the firm
as provided in section 44 of this act, with the following conditions:-
a). The notice for dissolution of partnership must contain the clear intention of dissolving the
firm which must be a final one. The date on which firm is dissolved must be indicated in the
notice. A case of Mir Abdul Khaliq v/s Addul Gaffar Serifff-1985.
b). Notice must be given in writing.
c). Written notice must be given to all other partners of the firm.
5. Dissolution By Court:- A firm may be dissolved at the suit of a partner on any of grounds
which provided in Section 44 of Act:-
i. That the partner has become of an unsound mind.
ii. That the partner has become in any way permanent incapable of performing his duties as a
partner but in the case of Whitewell v/s Arthur- 1885: it was held partial incapacity cannot be a
ground for dissolution of partnership firm.
iii. That a partner is guilty of such misconduct as would prejudicially affect the business of the
firm, a case of Harrison v/s Tenent-1856.
iv. That the business cannot be carried on except at loss.