Bu 5

BUSINESS LAWS
An Authentic Textbook for B.Com. (CBCS), University of Delhi

BUSINESS LAWS
UGC Recommended Text Book for B.Com. under CBCS
Bhushan Kumar Goyal

M.Com., LL.B.
Associate Professor
Department of Commerce
Shri Ram College of Commerce
University of Delhi
Kinneri Jain
Assistant Professor
Department of Commerce
Shri Ram College of Commerce
University of Delhi
Business Laws
© Bhushan Kumar Goyal :
• The Indian Contract Act, 1872 • The Sale of Goods Act, 1872 • The Information Technology
Act, 2000
Kinneri Jain :
• The Limited Liability Partnership Act, 2008
First Edition, 2013

Ninth Edition, 2020
Price : R 390.00
ISBN : 978-93-88-790-00-0
Published by :
Singhal Publications
89/6 Bhagat Colony
West Sant Nagar, Burari, Delhi-84
Mob. 9873473459, 8505850850
e-mail: singhalpublications@gmail.com
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claim for damages and criminal prosecution.
General : While every effort has been made to prevent authentic information and avoid errors, the
authors and the publishers are not responsible for the consequences of any action taken on the basis
of this book. Every effort has been made to avoid errors or omissions in this publication. Any, mistake,
error or discrepancy noted may be brought to our notice which shall be taken care of in the next
edition.
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PREFACE
TO THE NINTH EDITION
It gives us immense pleasure and satisfaction to present the ninth edition

of Business Laws. We are highly thankful to all the teachers and the students
for appreciating the earlier editions of this book.
In this edition, we have thoroughly revised the whole book as per the
revised syllabus. Examples and cases have also been added in the
Information Technology Act, 2000 to illustrate the legal provisions.
Distinctions have been given in the tabular form for convenience of the
students.
We acknowledge the suggestions of our esteem readers for improving the
book, particularly Dr. Renu Aggarwal of Deen Dayal Upadhyaya College, Mr.
J.S. Arora of Shri Teg Bahadur Khalsa College, Mr. I.P. Singh Bhatia, Mr.
Rajiv Midha of Shri Guru Nanak Dev Khalsa College, Ms. Smita Sharma, Ms.
Reena Chadha, Dr. Abhay Jain, Ms. Vartika Khandelwal, Ms. Shikha
Makkar and Ms. Kanu Jain, Mr. Sudhanshu Yadav of SRCC, Ms. Surjeet
Kaur of Shri Guru Gobind Singh College of Commerce, Ms. Meenakshi Pant
of Shaheed Bhagat Singh College, Mr. P.P. Joshi and Dr. Dhani Ram of
Ramjas College, Dr. Kiran Sachdeva and Ms. Monica Chhabra of Jesus and
Marry College, Dr. Anita Goel, Dr. Madhu Aggarwal, Alka Herneja of Laxmi
Bai College, Ms. Sadhna Gupta of Acharya Narender Dev College, Dr.
Maninder Kumar of Lady Shri Ram College, Ms. Nirmala Chauhan of
Maitreyi College, Ms. Isha Goel of Daulat Ram College, Ms. Sharda Garg, Ms.
Renu Arora of Mata Sundari College, Dr. Nidhi Goel and Mr. Gurjinder
Singh of Kirori Mal College. Dr. Bharat Bhushan, Dr. Sneha Suri of Hansraj
College, Ms. Sushma Bansal of Vivekanand Mahila College, Sh. Sushil
Tandon of Delhi College of Arts and Commerce and Dr. Subhash Malkani of
P.G.D.A.V. College. Ms. Rita of Zakir Hussain College (D), Mr. Naresh
Dhawan of A.R.S.D. College, Ms. Renu Ghosh of Rajdhani College, Ms. Renu
Aggarwal of D.D.U. College, Ms. Nidhi of Kirori Mal College and Himanshu
Shekhar of Ramanujan College.
We are confident that the revised edition would prove more useful to the
teachers and the students.
We solicit suggestions to improve the book.
Bhushan Kumar Goyal
9810994452
bhushangoyal@rediffmail.com
________________________________________
Kinneri Jain
9911726224
kinnerijain@rediffmail.com
_____________________________________
PREFACE
TO THE FIRST EDITION
We have great pleasure in placing this book before the esteem readers.
Our long experience of teaching Business Laws at Sri Ram College of
Commerce has been instrumental in writing this book. The following are the
main features of this book :
• It has been written in a simple language and in a systematic manner.

• All the legal rules and principles have been lucidly explained and well
illustrated by examples and English and Indian court cases.
• Court cases have been explained in detail for better understanding of
legal rules.
• A large number of theoretical questions have been given at the end of
each chapter.
• True/False questions and some multiple choice questions have also
been given.
• A large number of practical problems have also been given so that the
students can check their knowledge and understanding of the legal
issue involved.
• Most of the theoretical questions, true/false questions and practical
problems given at the end of the chapters have been asked in the
University and professional examinations.
We are confident that the book will serve the needs of the academic
community of the University of Delhi.
We are thankful to all the faculty members who teach this subject in the
University or have interest in this subject for giving valuable suggestions.
In particular, we convey our thanks to Shri P.P. Joshi (Ramjas College),
Shri A.K. Hasti, Shri K.B. Gupta and N.K. Aggarwal (School of Open
Learning), Shri Bharat Bhushan and Shri Rakesh Aggarwal (Hansraj
College), Shri Sushil Tandon (Delhi College of Arts and Commerce), Shri
Harpal Singh (Moti Lal Nehru College), Dr. Subhash Malkani (PGDAV
College), Shri M.S. Bhatia (S.G.T.B. Khalsa College), Mrs. Sarabjeet Kaur
(Shri Guru Gobind Singh College of Commerce), Mrs. Renu Gulati (I.P.
College), Mrs. Sharda Garg and Mrs. Renu Arora (Mata Sundari College),
Mrs. Sushma Bansal (Vivekanand Mahila College), Mrs. Sima Sodhi (B.R.
Ambedkar College) Shri V.K. Tomar and Mrs. Puneeta Agrawal (Maharaja
Agrasen College), Shri Mohammad Naqi (Zakir Hussain College), Shri P.R.
Chadha (Shivaji College), Dr. Sneh Lata Gupta (Shyam Prasad Mukherjee
College), Dr. R.K. Chopra (College of Vocational Studies), Shri Anil Kumar
Sharma and Shri Krishan Chadha (Satyawati College Eve.), Shri Ramesh
Wadhwa (Satyawati College), Shri Salil Kumar Verma (Shyam Lal College),
Dr. J.S. Arora and Shri H.S. Arora (S.G.T.B. Khalsa College), Dr. M.S. Bhatia
(S.G.N.D. Khalsa College), Mrs. Sushma Arora and Ms. Isha Goel (Daulat
Ram College), Ms. Rajni Jagota (PGDAV College), Dr. Meenakshi Pant
(Shaheed Bhagat Singh College), Dr. Anita Goel, Dr. Madhu Aggarwal and
Ms. Tejender Kaur (Lakshmi Bai College), Ms. Romila Aggarwal and Ms.
Monika Arora (Bharati College), Ms. Sadhna Gupta and Ms. Nidhi Kesri
(ANDC), Dr. Kalpana Bhola (JDM), Dr. Maninder Duggal (Lady Shri Ram
College) and Dr. D.K. Jain (Shaheed Bhagat Singh Evening College). Our
special thanks to our esteemed colleagues at Shri Ram College of Commerce :
Shri S.K. Aggarwal, Mrs. Smita Sharma, Miss Karuna, Mrs. Vartika
Khandelwal, Miss Kanu Jain, Miss Shalini Aggarwal, and Miss Kavita.
We are thankful to our family members for their support and patience.
We express our gratitude to the publishers for giving us an opportunity to
serve the students.
Bhushan Kumar Goyal

9810994452
bhushangoyal@rediffmail.com
________________________________________
Kinneri Jain
9811726224
kinnerijain@rediffmail.com
_____________________________________
SYLLABUS
University of Delhi
B.Com.
SEMESFTER II—PAPER BC 2.2 : BUSINESS LAWS
Duratioon : 3 Hrs. Marks : 100 Credit : 6
Course Objective
To impart basic knowledge of the important business laws relevant to conduct
general business activities in physical and virtual spaces along with relevant
case laws.
Course Leaning Outcomes

After completing the course, the student shall be able to:
CO1: Understand basic aspects of contracts for making the agreements,

contracts and subsequently enter valid business propositions.
CO2: Handle the execution of special contracts used in different types of
business.
CO3: Learn legitimate rights and obligations under The Sale of Goods Act.
CO4: Acquire skills to initiate entrepreneurial ventures as LLP.
CO5: Understand the fundamentals of Internet based activities under The
Information and Technology Act.
Course Contents
Unit I: The Indian Contract Act, 1872
Contract – meaning, characteristics and kinds. Essentials of valid contract -
Offer and acceptance, consideration, contractual capacity, free consent,
legality of objects. Void agreements. Discharge of contract – modes of
discharge including breach and its remedies. Quasi – contracts.
Unit II: Special Contracts

Contract of Indemnity and Guarantee, Contract of Bailment and Pledge
Contract of Agency.
Unit III: The Sale of Goods Act, 1930

Contract of sale, meaning and difference between sale and agreement to sell.
Conditions and warranties . Transfer of ownership in goods including sale by
non-owners. Performance of contract of sale. Unpaid seller – meaning and
rights of an unpaid seller against the goods.
Unit IV: The Limited Liability Partnership Act, 2008
Salient Features of LLP, Difference between LLP and Partnership, LLP and
Company LLP Agreement. Nature of LLP. Partners and Designated
Partners. Incorporation Document Incorporation by Registration, Registered
office of LLP and change therein. Change of name. Partners and their
Relations. Extent and limitation of liability of LLP and partners. Whistle
blowing. Taxation of LLP. Conversion of LLP.
Unit V: The Information Technology Act 2000

Definitions under the Act. Digital signature. Electronic governance.
Attribution, acknowledgement and dispatch of electronic records. Regulation
of certifying authorities Digital signatures certificates. Duties of subscribers.
Penalties and adjudication. Offences.
CONTENTS
Pages
BHUSHAN KUMAR GOYAL
1. INTRODUCTION 1—3
Definition and Object of Law; Definition and Scope of
Mercantile or Business law; Needs for its Study; Sources of
Indian Mercantile or Business Law; Meaning of “Plaintiff” and
“Defendant”, etc.
THE INDIAN CONTRACT ACT, 1872
2. NATURE AND KINDS OF CONTRACTS 4—18

Definition of Contract; Essential Elements of a Valid contract;
Classification of Contracts on the basis of Mode of Formation;
Classification of Contracts on the basis of Enforceability;
Classification of Contracts on the basis of Extent of
performance; Classification of Contracts on the basis of
Obligation Outstanding at the time of formation of contract;
Distinction between Agreement and Contract; Distinction
between Void Agreement and Voidable Contract; Distinction
between Void Agreement and Illegal Agreement; Distinction
between Void Agreement and Void Contract.
3. OFFER AND ACCEPTANCE 19—44

Legal Rules for a Valid Offer; Distinction between Offer and
Invitation to Offer; Distinction between General Offer and
Specific Offer; Distinction between Cross Offer and Counter
Offer; Communication of Special Terms or Standard Form
Contracts; Legal Rules for a Valid Acceptance; Communication
of Offer and Acceptance; Contracts through Telephone or Telex;
Communication of Revocation; Revocation and Lapse of Offer;
Revocation of Acceptance; Comment on Certain Statements.
4. CONSIDERATION 45—58
Definition of Consideration; Legal Rules as to Consideration;
Exceptions to the rule, “No Consideration, No Contract”.;
Privity of Contract; Exceptions to the Rule of Privity of
Contract.
5. CAPACITY OF PARTIES 59—71

Nature of Minor’s Agreements; Persons of Unsound Mind;
Other persons Disqualified from Contracting.
6. FREE CONSENT 72—99
Consent and Free Consent; Coercion; Undue Influence;
Difference between Coercion and Undue Influence;
Misrepresentation; Fraud ; Is Silence Fraud; Distinction
between Misrepresentation and Fraud; Loss of Right of
Rescission; Mode of Communicating or Revoking Rescission of
Voidable Contract; Party rightfully Rescinding Contract
Entitled to Compensation; Mistake; Mistake of Law; Mistake of
Fact; Instances of Bilateral Mistake (both Common and
Mutual); Mistake as regards identity of Person ; Mistake as
regards Nature of Document.
7. LEGALITY OF OBJECT AND CONSIDERATION 100—109

What Considerations and Objects are Unlawful; Agreements
Opposed to Public Policy; Effects of Unlawful or Illegal
Agreements; Object or Consideration Unlawful in Part.
8. AGREEMENTS EXPRESSLY DECLARED VOID 110—123

Agreements in Restraint of Marriage; Agreements in Restraint
of Trade; Agreements in Restraint of Legal Proceedings;
Uncertain Agreements; Wagering Agreements.
9. CONTINGENT CONTRACTS 124—127

Definition; Rule Regarding Performance of Contingent
Contracts; Difference between Wagering Agreements and
Contingent Contracts.
10. QUASI CONTRACTS OR CERTAIN RELATIONS

RESEMBLING THOSE CREATED BY CONTRACT 128—135
Meaning and Rationale; Claim for Necessaries supplied to a
person incapable of Contracting (S. 68); Reimbursement of
person paying Money due to another, in payment of which he is
interested (S. 69); Obligation of a person enjoying, benefit of a
non-gratuitous act (S. 70); Responsibility of finder or goods (S.
71); Liability of a person to whom money is paid, or thing
delivered by mistake or under coersion (S. 72).
11. DISCHARGE OF CONTRACTS 136—155

Discharge of Contract by Performance; Discharge of Contract by
Agreement; Discharge of Contract by Lapse of Time; Discharge
by operation of law; Discharge of Contract by subsequent or
supervening impossibility or illegality (doctrine of frustration);
Discharge of Contract by breach; Actual Breach; Anticipatory
Breach.
12. REMEDIES FOR BREACH OF CONTRACT 156—176

Suit for Damages; Kinds of Damages; Duty to Mitigate Damage;
Liquidated Damages and Penalty; Suit upon Quantum Meruit;
Rescission of Contract; Suit for Specific Performance; Suit for
Injunction.
13. CONTRACTS OF INDEMNITY AND GUARANTEE 177—198

Contract of Indemnity; Contract of Guarantee; Definition (S.
126); Essential Features of a Contract of Guarantee; Nature
and Extent of Surety’s Liability; Kinds of Guarantee; Rights of
Surety; Discharge of Surety.
14. BAILMENT AND PLEDGE 199—222

Bailment; Definition (S. 148); Essential of Bailment; Kinds of
Bailment; Duties of Bailee; Duties of Bailor; Bailee’s Lien;
Particular Lien (S. 170); General lien (S. 171); Distinction
between Particular Lien and General Lien; Rights of Bailors
and Bailees against Wrong-doers (S. 181); Termination of
Bailment; Pledge or Pawn; Pledge by Non-onwers.
15. AGENCY 223—262

Definition of Agent, Principal and Agency (Section 182);
General Rules of Agency; Test of Agency; Essential Elements of
Valid Agency; Distinction between Agent and Servant;
Distinction between Agent and Independent Contractor;
Distinction between Agent and Bailee; Kinds of Agents;
Creation of Agency; Extent of Agent’s Authority; Delegation of
Authority; Sub-Agent (Sections 191 to 193); Substituted Agent
(Sections 194 and 195); Difference between Sub-Agent and
Substituted Agent; Duties of Agent; Rights of Agent; Duties of
Principal; Rights of Principal; Principal’s Rights and Liabilities
for the Acts of the Agent in Relation to Third Parties; Personal
Liability of Agent to Third Party; Termination of Agency;
Irrevocable Agency.
THE SALE OF GOODS ACT, 1930
16. CONTRACT OF SALE OF GOODS 263—281

Scope of the Act; Definition and Essential Elements or Features
of a Contract of Sale; Distinction between Sale and Agreement
to Sell; Distinction between Sale and Hire-Purchase Agreement;
Distinction between Contract of Sale and Contract for Work or
Service; Types of Goods; Effect of Perishing of Goods; The Price
17. CONDITIONS AND WARRANTIES 282—301

Definition of Condition and Warranty; Difference between
Condition and Warranty; When Breach of Condition is to be
treated as a Breach of Warranty; Express and Implied
Conditions and Warranties; Doctrine of Caveat Emptor.
18. TRANSFER OF PROPERTY 302—320
Meaning of ‘Property’; Importance of Time of Passing Property;
Risk Prima Facie Passes with Property; Transfer of Property in
Specific or Ascertained Goods; Transfer of Property in case of
Sale on Approval; Transfer of Property in Unascertained and
Future Goods; Sale or Transfer of Title by Non-Owners.
19. PERFORMANCE OF CONTRACT OF SALE 321—328

Delivery of Goods; Rules as to Delivery of Goods.
20. REMEDIES FOR BREACH OF CONTRACT OF SALE 329—343

Definition of Unpaid Seller; Rights of Unpaid Seller against the
Goods; Right of Lien (Section 47, 48 and 49); Right of Stoppage
of Goods in Transit (Sections 50, 51 and 52); Right of Re-sale
(Section 54); Rights of Unpaid Seller against the Buyer
Personally; Buyer’s Rights Against Seller.
21. AUCTION SALE (Only for B.Com.) 344—345

Auction Sale.
THE INFORMATION TECHNOLOGY ACT, 2000
22. OBJECTIVES, SCOPE AND DEFINITIONS 346—356

Rational or Objectives of Passing the Information Technology
Act, 2000; Features of Information Technology Act, 2000; Scope
of the Act; Non Applicability of the Act; Definitions Under the
Act (Section 2); Difference Between Paper Based and Electronic
Documents.
23. DIGITAL SIGNATURE AND ELECTRONIC

SIGNATURE 357—368
Development of Internet and Digital Signature; Technology
behind Digital Signature; Meaning of “Encryption” and
“Decryption”; Encryption Technologies; Distinction between
Private Key and Public Key; Hash Function; Transition from
Digital Signature to Electronics Signature; Digital Signature;
Meaning of Digital Signature; Creation or Affixing of Digital
Signature; Verification of Digital Signature; Authentication of
Electronic Records by Affixing Digital signature; Distinction
between Handwritten signatures & Digital Signatures;
Electronic Signature; Authentication of an electronic record by
electronic signature; Emerging New Forms of Electronic
Signatures; e-Hastakshar; Distinction between Digital
Signature and e-Hastakshar.
24. ELECTRONIC GOVERNANCE 369—374

Provisions which Facilitate and Strengthen Electronic
Governance; Legal Recognition of Electronic Records (S. 4);
Legal recognition of Electronic Signatures (S. 5); Use of
Electronic Records and Electronic Signatures in Government
and its agencies (S. 6); Retention of Electronic Records (S. 7);
Publication of rule, regulation etc., in Electronic Gazette (S. 8);
No Right to insist acceptance of Document in Electronic Form
(S. 9); Power to make Rules by Central Government in respect
of Electronic Signature (S. 10); Validity of contracts formed
through electronic means (S. 10A).
25. ATTRIBUTION, ACKNOWLEDGEMENT AND

DESPATCH OF ELECTRONIC RECORDS 375—379
Legal Provisions as Regards Attribution, Acknowledgement and
Despatch of Electronic Records; Attribution of Electronic
Records (S. 11); Acknowledgment of Receipt (S. 12); Time and
Place of Despatch and Receipt of Electronic Record (S. 13).
26. SECURE ELECTRONIC RECORDS AND

SIGNATURES 380—381
Secure Electronic Records and Secure Electronic Signatures
(Sections 14-16).
27. REGULATION OF CERTIFYING AUTHORITIES 382—393

Public Key Infrastructure; Controller of Certifying Authorities;
Appointment of Controller and other Officers (S. 17); Functions
of Controller of Certifying Authorities; Powers of Controller of
Certifying Authorities; Power to regulate Certifying Authorities
(S. 18); Recognition of Foreign Certifying Authorities (S. 19);
Power to grant or reject the application for giving licence to
issue Electronic Signature Certificates (S. 24); Power of
Suspension and Revocation of Licence (Sections 25 and 26);
Power to Delegate (S. 27); Power to Investigate Contraventions
(S. 28); Power to access to Computers and Data (S. 29); Power of
Controller to give Directions (S. 68); Grant of Licence to be a
Certifying Authority (Sections 21 to 24); Certifying Authorities;
Regulatory provisions for Certifying Authorities (or Duties of
Certifying Authorities) (Sections 30 to 34); Functions and
Powers of Certifying Authorities.
28. ELECTRONIC SIGNATURE CERTIFICATE 394—397

Electronic Signature Certificate; Digital Signature Certificate;
Procedure Relating to Electronic Signature Certificate;
Certifying Authority to Issue Electronic Signature Certificate
(S. 35); Representations upon Issuance of Digital Signature
Certificate (S. 36); Suspension of Digital Signature Certificate
(S. 37); Revocation of Digital Signature Certificate (S. 38);
Notice of Suspension and Revocation (S. 39).
29. DUTIES OF SUBSCRIBERS 398—400

Duties of Subscriber; Generating Key Pair (S. 40); Duties of
Subscriber of Electronic Signature Certificate (S. 40a);
Acceptance of Digital Signature Certificate (S. 41); Control of
Private Key (S. 42).
30. PENALTIES, COMPENSATION, ADJUDICATION AND

CYBER APPELLATE TRIBUNAL 401—409
Penalties and Compensation or Contraventions; Penalty and
Compensation for Damage to Computer, Computer System, etc.
(S.43); Compensation for Failure to Protect Data (S. 43A);
Penalty for Failure to Furnish Information, Return, etc. (S. 44);
Residuary Penalty (S. 45); Compounding of Contravention (S.
63); Recovery of Penalty (S. 64); Adjudication on
Contraventions; Power to Adjudicate (S. 46); Factors to be taken
into Account by the Adjudicating Officer (S. 47); The Cyber
Appellate Tribunal.
31. OFFENCES UNDER THE IT ACT, 2000 410—424

Meaning of offence; Distinction between Contraventions (that is
civil offences) under the Act and cyber offences (that is Criminal
Offences) under the Act; Offences under the Act; Tampering
with Computer source Documents (S. 65); Computer related
Offences (S. 66); Dishonestly receiving Stolen Computer
Resource or Communication Device (S. 66B); Identity theft (S.
66C]; Cheating by Personation by using Computer Resource (S.
66D); Violation of Privacy (S. 66E); Cyber Terrorism (S. 66F);
Cyber Offences relating to Obscenity and Pornography (Ss. 67,
67A and 67B); Offence of not Preserving and Retaining
Information by Intermediaries (S. 67C); Offence of not following
the directions of the Controller (S. 68).; Violations of
Government Directions on Monitoring or Blocking Information;
Cyber Security (S. 70); Penalty for Misrepresentation (S. 71);
Penalty for Breach of Confidentiality and Privacy (S. 72);
Punishment for Disclosure of Information is Breach of Lawful
Contract (S. 72A).; Offences related to Electronic Signature
Certificate; Miscellaneous Provisions on Contraventions and
Offences.
KINNERI JAIN
LIMITED LIABILITY PARTNERSHIP ACT, 2008

32. NATURE OF LIMITED LIABILITY PARTNERSHIP 425—436
Definition – Section 2(1) (n); Features of LLP; Nature of
Limited Liability Partnership; LLP Agreement; Difference
Between Partnership, Company and LLP.
33. INCORPORATION OF LIMITED LIABILITY

PARTNERSHIP 437—446
Incorporation of LLP – Section 11; Incorporation by
Registration – Section 12; Registered office of Limited Liability
Partnership–Section 13; Change of Registered Office – Section -
13; Effect of Registration – Section 14; Pre-incorporation
contracts; Name of LLP – Section 15; Reservation of Name –
Section 16; Change of Name of LLP ; Penalty for Improper use
of words “Limited Liability Partnership” or “LLP; Publication of
Name and Limited Liability – Section 21.
34. PARTNERS AND THEIR RELATIONS 447—460

Eligibility to be Partners – Section 22; Who can be Partners of
LLP – Section 5; Who can not be Partners of LLP;
Disqualifications to become a Partner of LLP – Section 5;
Minimum and Maximum Number of Partners – Section 6;
Designated Partners; Cessation of Partnership Interest –
Section 24; Registration of Changes in Partners – Section 25;
Partner as Agent of LLP – Section 26; Extent of Liability of LLP
– Section 27; Extent of Liability of Partners of LLP – Section 28;
Liability by Holding Out – Section 29; Unlimited Liability in
case of Fraud – Section 30; Whistle Blowing (Waiver of Penalty)
– Section 31; Contributions.
35. FINANCIAL DISCLOSURE 461—469

Rules Related to Maintenance of Books of Account and other
Records – Section 34; Audit of Accounts; Annual Return –
Section 35; Inspection of documents kept by Registrar– (Section
36); Penalty for False Statement – Section 37; Power of
Registrar to obtain Information – Section 38; Compounding of
Offences – Section 39; Destruction of old records – Section 40;
Enforcement of Duty to Make Returns etc. – Section 41.
36. CONVERSION TO LLP 470—482

Conversion from Firm into Limited Liability Partnership;
Conversion from Private Company into LLP; Conversion from
Unlisted Public Company into LLP.
37. TAXATION 483—490

Eligibility to be Assessed as a Firm; Certain Specific Provisions
of the Income Tax Act Applicable to LLP.
QUESTION PAPERS
LEADING CASES
Offer and Acceptance

1. Balfour vs. Balfour. There was no intention to create legal relations.
2. Harris vs. Nickerson. Advertisement for auction is only an invitation to
offer.
3. Pharmaceutical Society of Great Britain vs. Boots Cash Chemists
(Southern) Ltd. Picking up a bottle of medicine from shelves is only an
invitation to offer.
4. Harvey vs. Facie. Mere statement of lowest price is only an invitation to
offer.
5. McPherson vs. Appana. If an offeree’s agent says that the offeree will not
accept anything less than a certain amount, it is only an invitation to offer.
6. Carlill vs. Carbolic Smoke Ball Co. General offer is valid offer.
7. Harbhajan Lal vs. Harcharan Lal. A general offer can be accepted by
fulfilling the conditions mentioned in the offer.
8. Lalman Shukla vs. Gauri Dutt. There can be no acceptance unless there is
knowledge of the offer.
9. Boulton vs. Jones. An offer can be accepted only by the person to whom it is
made.
10. Hyde vs. Wrench. A counter offer puts an end to the original offer.
11. Brogden vs. Metropolitan Railway Co. Putting the letter of acceptance in
the drawer does not amount to communication of acceptance, without any
external manifestation of the intention to accept the offer.
12. Felthouse vs. Bindley. Silence cannot be prescribed as a mode of
acceptance.
13. Powel vs. Lee. Acceptance must be communicated by authorised person.
14. Ramanbhai vs. Ghasiram. Partial acceptance is not valid.
15. Adams vs. Lindsell. A binding contract comes into existence as soon as a
letter of acceptance is posted.
16. Entores Ltd. vs. Miles For East Corporation. In case of instantaneous
means of communication like telex and telephone, the contract is complete
only when the acceptance is received by the offeror; and at the place where
acceptance is received.
17. Bhagwan Das vs. Girdhari Lal. In case of contracts through telephone, the
contract is complete at the place of the offeror; and in case of contract through
post contract is complete at the place of the offeree.
18. Henthorn vs. Fraser. The notice of revocation of proposal must reach the
offerree before he mails his letter of acceptance.
19. Ramsgate Victoria Hotel Co. vs. Montefoire. An offer lapses after the
expiry of reasonable time.
20. Hydge vs. Wrench. An offer lapses if it is rejected by the offeree.
21. Errington vs. Errington and Woods. A promise made in consideration of
the promisee performing an act constitutes a contract as soon as the promisee
entered on the performance of the act, unless the promisee included expressly
or impliedly that it can be revoked before the act has been completed. For
details see chapter on ‘consideration’.
22. Nihal Chand vs. Amarnath. The counter offer makes an offer to lapse.
23. Henderson vs. Stevenson. Special terms and conditions must also be
communicated.
24. Olley vs. Marlborough Court Ltd. Special terms and conditions of the offer
must be brought to the notice of the offeree before or at the time of formation
of contract, and not subsequently.
25. Lilywhite vs. Mannuswami. The terms and conditions in a standard form
of contract must be reasonable.
Consideration
1. Durga Prasad vs. Baldeo. Consideration must move at the desire of the
promisor.
2. Kedarnath vs. Gorie Mohomed. A promise to contribute to a charitable
cause is enforceable as soon as any definite steps are taken in furtherance of
the object on the ground of presence of consideration.
3. Abdul Aziz vs. Masum Ali. In this case a Mahommedan promised to pay R
500 as subscription to a fund started for rebuilding a mosque. But no steps

were taken to rebuild the mosque. The subscriber was held not liable due to
lack of consideration.
4. Chinnaya vs. Ramayya. A stranger to consideration can sue.
5. White vs. Bluett. Consideration must be something of value in the eyes of
law..
6. Bolton vs. Madden. Inadequacy of consideration will not make the contact
void.
7. Collins vs. Godfroy. Consideration must be something which the promisor
is not already bound to perform.
8. Ramchandra Chintamani vs. Kalu Raju. Consideration must be
something more than what a promisee is already bound to do.
9. Rajluckhy Dabee vs. Bhootnath Mukherjee. Nearness of relationship
does not mean that there is love and affection between the parties.
10. Dunlop Pneumatic Tyre Co. vs. Selfridge and Co. Ltd. A person who is
not a party to a contract cannot claim rights under the contract.
11. Jamna Das vs. Ram Avtar Pandey. A stranger to contract cannot sue on
the contract, unless the case comes within one of the recognised exceptions.
12. Khwaja Mohammad Khan vs. Hussaini Begum. A contract to provide
benefit to a stranger to contract under a charge on immovable property is
enforceable.
13. Shappu Ammal vs. Subrahmanium. A stranger, usually female and old
age members of the family, can sue on a contract in case of family settlement.
14. Daropati vs. Jaspat Rai. Defendant’s wife was held entitled to sue the
defendant for breach of contract entered into between the defendant and her
father.
Capacity of the Parties

1. Mohiri Bibi vs. Dharmodas Ghose. An agreement with a minor is void.
2. Sadiq Ali vs. Jai Kishore. The rule of estoppel does not apply against a
minor.
3. Khan Gul vs. Lakha Singh. When a minor misrepresents his age, the court
can use its equitable jurisdiction and order the refund of money.
4. Raj Rani vs. Prem Adib. A contract of service entered into by the father on
behalf of the minor is not enforceable due to lack of consideration.
5. De Francesco vs. Barnum. If contract of apprenticement is too harsh, the
agreement is not enforceable.
6. Suraj Narain vs. Sukhu Ahir. A minor’s agreement cannot be ratified on
attaining the age of majority.
7. Raghava Cheriar vs. Srinivas. An agreement to give loan by minor on the
mortgage of borrower’s property was held enforceable by the minor.
8. Nash vs. Inman. ‘Clothing of an extravagant and ridiculous style’ are not
necessaries.
9. Inder Singh vs. Parmeshwadhari Singh. An idiot is not competent to
contract.
Free Consent
1. Chikham Ammiraju vs. Chikham Seshamma. A threat to commit suicide
is coercion.
2. Mannu Singh vs. Umadat Pandey. Gift of whole of his property by a
devotee to his guru was set aside on the ground of undue influence.
3. Derry vs. Peek. A company’s false statement in the prospectus with honest
belief does not amount to fraud.
4. Mithoo Lal Nayak vs. LIC. The court does not entertain an action for
refund of money, where in order to succeed, the plaintiff has to prove his own
fraud.
5. Horsfall vs. Thomas. A deceit which does not deceive is no fraud.
6. With vs. O. Flanagan. Non-disclosure of change of circumstances amounts
to misrepresentation or fraud, as the case may be.
7. Smith vs. Chandwick. The act constituting fraud must have induced the
other party to enter into a contract.
8. Couturier vs. Hastie. Where both he parties to an agreement are under a
mistake of fact essential to the agreement, the agreement is void.
9. Cundy vs. Lindsay. If there is a mistake as regards identify of the person
contracted with, the agreement is void.
10. Phillips vs. Brooks. If there is no mistake as regards identify of the person
contracted with and there is fraudulent misrepresentation only, the contact is
voidable and not void.
11. Said vs. Butt. Mistake of identity of the party makes the agreement void.
12. Dularia Devi vs. Janardan Singh. Mistake as to character of a document
make the agreement void.
13. Ningawwa vs. Byrappa. Mitake as to contents of the document makes the
contract voidable.
14. Raja Singh vs. Chaichoo Singh. Mistake as to the nature of the document,
makes the agreement void.
15. Upton-on-Seven Rural District Council vs. Powel. In this case, A (the
defendant) called upon fire brigade, in mistake for the Pershore fire brigade.
A’s house was situated in Pershore fire brigade areas and not of Upton fire
brigade. He was entitled to services without payment from the Pershore fire
brigade. The Upton fire brigade accepted the call in good faith. It was held
that A was contractually bound to pay for the services despite the fact that
neither party thought they wee entering into a contract.
Legality of Object and Consideration

1. Bhikan Bhai vs. Hiralal. If the object of the statute is not to forbid a
transaction, it is not unlawful. It was held that Bombay Tolls Act, 1875 was
passed for the benefit of revenue.
2. Ram Sarup vs. Bansi Mandar. An agreement to work as a bonded labour is
unlawful.
3. Bai Vijli vs. Nansa Nagar. An agreement to advance money to a married
women to enable her to obtain divorce from her husband is unlawful.
4. Ouseph Poule vs. Catholic Union Bank. An agreement to stiffle
prosecution is invalid. But in this case the borrower agreed to make up the
deficiency of stock due to its overvaluation by hypothecating more goods as
security. The agreement was held valid.
5. N.V.P. Pandian vs. M.M. Roy. An agreement to pay a sum of money to
procure a seat in a medical college is unlawful as it is against public policy.
6. Pearce vs. Brooks. An agreement to give goods on hire for an immoral
purpose is illegal.
Agreements expressly declared void

1, Lowe vs. Peers. An agreement in restraint of marriage is void.
2. Madhub Chander vs. Raj Coomar. An agreement in restraint of trade is
void whether the restraint is general or particular.
3. S.B. Fraser & Co. vs. The Bombay Ice Manufacturing Co. An agreement
among the traders not to sell goods below a certain price or to pool output is
not void, provided it is not in the nature of restraint of trade.
4. Charlesworth vs. Macdonald. Negative stipulations operating during the
term of employment may not be in restraint of trade.
5. Hukam Singh vs. Gammon (India) Ltd. Section 28 does not prevent the
parties to the contract from selection of one of the two competent courts for
the disposal of their disputes.
6. Gherulal Parekh vs. Mohadeo Das Maiya. A wagering agreement is void
and unenforceable but it is not forbidden by law. Thus, collateral transactions
to a wagering agreement are enforceable.
Discharge of Contract
1. Taylor vs. Coldwell. Destruction of subject-matter of a contract makes a
contract void.
2. Krell vs. Henry. Failure of the object of the contract makes the contract
void.
3. Satyabrata Ghosh vs. Magneeram Bangur & Co. Government
intervention of temporary nature which does not vitally affect the contract
will not make the contract void.
4. Hurnandrai Fulchand vs. Pragdas Budhsen. A contract to supply goods
“as and when they may be received from the mills” does not mean “if and
when received from the mills”.
5. Henri Bay Steam Boat Co. s. Hutton. Failure of one of the object does not
make the contract void.
6. Hochester vs. De La Tour. Anticipatory breach of contact can be treated as
a breach of contract. In this case, the promisor expressly stated that he would
not require the services of his courier.
7. Frost vs. Night. In this case, there was implied repudiation of contract as
the promisor married another person before the date of marriage.
Remedies for Brach of Contract

1. Haldley vs. Baxendale. Damages for loss of profits were not allowed in this
case.
2. Jamal vs. Moola Dawood and Co. Ordinary damages are calculated as the
difference between the contract price and market price on the date of breach.
3. Madras Railway Co. vs. Govinda Raju. Compensation is not to be given
for any remote or indirect loss or damage sustained by reason of the breach of
contract. There was delay in sending the sewing machine in this case.
4. Niku vs. Pirbhu. The aggrieved party must minimise the damage.
5. Plinche vs. Coldburn. If a person has done work for another in pursuance
of a contract which has been discharged by the letter’s wrongful breach, he
may obtain reasonable compensable for his work on the basis of quantum
merit.
6. Sumpter vs. Hedges. A person who is himself guilty of breach of contract
cannot sue if the contract is not divisible.
Quasi-Contracts
1. Tulsa Kunwar vs. Jogeshwar. The case is on reimbursement of person
paying money due to another, in payment of which he is interested (S. 69 of
the Indian Contract Act, 1872).
2. State of West Bengal vs. B.K. Mondal & Sons. If a person accepts the
benefit of a structure constructed for it, is liable under S. 70 of the Indian
Contract Act, 1872.
3. Hollins vs. Fowler. A finder of goods is entitled to possess the goods as
against everyone except the true owner.
Contracts of Indemnity and Guarantee
1. Adamson vs. Jarvis. There may be implied promise of indemnity.
2. Gajanan Moreshwar vs. Moreshwar Madan. If the indemnified had
incurred a liability and that liability is absolute, he is entitled to call upon the
indemnifier to save him from that liability and pay it off.
3. Swan vs. Bank of Scotland. A guarantee for an unenforceable obligation
will not be binding on the surety.
4. Bank of Bihar vs. Damodar Prasad. Surety’s liability arises immediately
after default of the principal debtor.
5. M.S.E.B., Bombay vs. Official Liquidator. The liability of the surety is co-
extensive with that of the principal debtor unless otherwise provided by the
contract.
6. M.S. Anirudhan vs. Thomco’s Bank Ltd. Unsubstantial alteration in an
instrument which are for the benefit of the surety, do not discharge the
surety from liability.
Bailment and Pledge

1. State of Gujarat vs. Menon Mohammad Haji Hasan. Bailor-bailee
relation may exist even though there is no contract between them.
2. Kaliaperumal Pillai vs. Visalakshami. The mere leaving of box in room in
goldsmith’s house when the lady herself took away the key of the box, cannot
amount to delivery of goods within the meaning of Section 149 of the Indian
Contract Act, 1872. Therefore, jweller was held not liable for stolen jewellery.
3. Utzen vs. Nicols. The owner of the restaurant was held liable as a bailee as
his waiter did not take reasonable care of the goods.
4. Houghland vs. R.R. Low (Luxury Coaches) Ltd. The respondent
company was held liable for goods stolen from the boot of the coach.
5. Jaggilal Kamlapat Oil Mills vs. Union of India The bailee is excused
from returning the goods bailed in case they are taken away from him by the
authority of law exercised through regular and valid proceedings.
6. Chand Mal vs. Gonda Singh. A bailee cannot claim particular lien for safe
custody charges.
Agency
1. Watteau vs. Fenwick. Principal is liable if the agent acts within his
ostensible or apparent authority, although he exceeds his actual authority,
unless the third party is aware of the restriction.
2. Ryan vs. Pilkington. An estate agent has implied authority to receive a
deposit from an intending purchaser. Therefore, the principal will be held
liable if the estate agent misappropriates the money.
3. Couturier vs. Hastie. In case of emergency, the person entrusted with the
property becomes an agent of necessity with the implied authority to do what
is necessary to save the property.
4. Boulton Partners vs. Lambert. Ratification tantamounts to prior
authority.
5. Smart vs. Sandars. Where an authority is given for the purpose of securing
some benefit to the agent, such authority is irrevocable.
Contract of Sale of Goods

1. Wood vs. Manley. A agreed to buy haystack from B on B’s land. The buyer,
as per the contract, was allowed to come on B’s land to take it away. This was
held to be a sale and not agreement to sell.
2. Johnson vs. Macdonald. There was a contract for sale of a certain quantity
of nitrate of soda to arrive by a certain ship. This was held to be an
agreement to sell.
3. Helby vs. Mathews. A hire purchaser cannot transfer a good title to a
bonafide purchaser.
Conditions and Warranties

1. Baldary vs. Marshal. Suitability of the car for touring purposes is a
condition and not a warranty.
2. Niblett vs. Confectioners’ Materials Co. The seller must have the right to
sell the goods under the brand name under which he is selling the goods,
otherwise it will amount to breach of condition as to title.
3. Varley vs. Whipp. Condition in a sale by description.
4. Moore & Co. vs. Landauer & Co. Condition as to description also apply to
the mode of packing also.
5. Drummond & Sons vs. Van Ingen. Condition in a sale by sample. There
was latent defect in the worsted coatings.
6. Wallis vs. Pratt. Condition in a sale as well as description. Once a condition
always a condition whether a not the remedies remains the same or not.
Common English sanfoin case.
7. Re Andrew Yule & Co. Condition as to quality or fitness. Hessian Cloth
case. Buyer did not specify the purpose. Goods fit for other purposes and not
for the buyer’s purpose.
8. Priest vs. Last. Condition as to quality a fitness. Hot water bottle case.
Bottle was not fit for hot water.
9. Grant vs. Australian Knitting Mills. Condition as to quality or fitness.
Goods were not fit for the usual purpose. There was chemical irritant in the
undergarments.
10. Griffiths vs. Peter Canway Ltd. There was no breach of condition as the
coat was fit for normal person.
11. Jones vs. Just. Condition as to merchandability. Manila hemp case. Goods
were not merchantable as they were damaged during sea transit.
12. Morelli vs. Fetch Gibbons. Goods were held not merchantable when the
wine bottle broke at the neck while it was being opened with corkscrew.
13. Frost vs. Aylesbury Dairy. Eatable must be wholesome. In this case milk
contained germs of typhoid fever.
14. Mason vs. Burgingham. Breach of warranty of quiet possession.
15. Ward vs. Hobbs. Rule of caveat emptor.
Transfer of Property
1. Dennant vs. Skinner. Property passes when intended to pass.
2. Rugg vs. Minett. Property does not pass until the goods are put in a
deliverable state.
3. Mahabir Commercial Co. Ltd. vs. CIT. Buyer’s consent to the passing of
property is implied in the circumstances mentioned in S. 23(1) of the Sale of
Goods Act, 1932.
4. Folkes vs. King. Sale by a mercantile agent below the specified price was
held valid.
5. Lee vs. Buttler. Buyer in possession of goods after an agreement to sell can
transfer a good title to a bonafide purchaser for value.
6. Bolsize Motor Supply Co. vs Cox. A person in possession of goods under a
hire purchase agreement cannot transfer a good title even to a bonafide
purchaser for value.
Remedies for Breach of Contract of Sale
1. Valpy vs. Gibson. Where the seller repossesses the goods for some purpose,
he cannot exercise the right of lien on those goods.
2. GIP Rly. Co. vs. Hanuman Das. Transit comes to an end when the goods
reach their destination and the buyer or his agent obtains delivery thereof.
3. James vs. Griffin. Where the buyer does not accept the goods, the transit
does not terminate.

Definitions
1. Vyakti Vikas Kendra, India Public Charitable Trust through Trustee
Mahesh Gupta & Others v. Jitender Bagga and Another [CS (OS) No.
1340/2012], Delhi High Court held Google to be “intermediary” within the
definition of Section 2(1)(w) of the Information Technology Act, 2000.
Attribution, Acknowledgement and Despatch of Electronic Records

1. P.R. Transport Agency v. Union of India [AIR 2006 All 23], it was held
that an electronic record is deemed to be despatched at the place where the
originator has his place of business.
Penalties, Compensation, Adjudication and Appellate Tribunal

1. Shri Umashankar Sivasubramanian v. ICICI Bank, it was held that the
ICICI Bank did not exercise due diligence to prevent the financial loss to the
petitioner.
Offences under the IT Act, 2000

1. Syed Asifuddin v. The State of Andhra Pradesh, 2005 Cr.LJ 4314, the
CDMA handsets which were given to the Reliance Infocomm subscribers were
technologically locked so that it would only work with Reliance Infocomm
services.
2. Vyakti Vikas Kendra, India Public Charitable Trust through Mahesh
Gupta & Others v. Jitender Bagga and Another [CS (OS) No. 1340/2012
(popularly known as ‘Art of Living’ case)], is a typical example of how
vulnerable public figures in India are to cyber defamation.
1 Introduction
LEARNING OBJECTIVES
After reading this chapter, you will learn :
➥ Definition and Object of Law
➥ Need for Study of Business Law
➥ Sources of Indian Business Law
➥ Meaning of Plaintiff, Dependent, etc.
DEFINITION AND OBJECT OF LAW

The term ‘law’ has been defined differently by different writers. This is
because the term ‘law’ is used in many senses. In its widest sense, the term
refers to rule of external human action. In the context of physical and natural
sciences, the term ‘law’ means uniformity in nature. But when we speak of
the law of the land or state, we use the term in a special and restricted sense.
Salmond in his book, Jurisprudence, defines law as “The body of principles
recognized and applied by the state in the administration of justices”.
Similarly, Holland, in his book, Elements of Jurisprudence, defines law as “a
general rule of external human action enforced by a sovereign political
authority.”
In simple words, it is a body of principles that govern human conduct in a
civil society and the observance of which can be enforced in courts.
According to William Anson “the object of law is order, and the result of
the order is that men are enabled to look ahead with some sort of security as
to the future.” In simple words, the object of law is the creation and protection
of legal rights to maintain order in the society because only in a state of order
person feel safe and secure.
There are several branches of law, such as International Law,
Constitutional Law, Administrative Law, Criminal Law and Civil Law.
Mercantile or Business Law is a part of Civil Law.
DEFINITION AND SCOPE OF MERCANTILE OR BUSINESS LAW

Mercantile law is also known as Commercial Law or Business law. It is a
body of legal rules which relates to the conduct of business. According to
Slater, “The phrase Mercantile Law or Commercial Law, is generally used to
denote those portions of the law which deal with the rights and obligations
2 Business Laws
arising out of transactions between mercantile persons.” It comprises a vast

number of laws pertaining to business transactions, and these laws govern
the relation of businessmen to society. There is no separate statute entitled
‘Mercantile Law’, and the term appears to be “a convenient way of grouping
together laws that should be regarded important for men in business.” It
comprises – laws concerning trade, commerce and industry.
Mercantile law is a part of civil law. It includes the Law of Contracts,
Law relating to Sale of Goods, Partnership, Companies, Negotiable
Instruments, Charter Party and Bill of Lading, Insurance, Common Carriers,
Arbitration Consumer Protection and Insolvency. It is an ever growing
branch of law.
NEEDS FOR STUDY OF BUSINESS LAW

As citizens all of us are expected to have some knowledge of law as ignorance
of law is no excuse. This is because, we are brought into legal relationship
with others knowingly or unknowingly, day-in and day-out. Such legal
relationship casts upon us a legal duty or an obligation of doing or abstaining
from doing a particular act. For instance, when we board a bus, enter a
restaurant or a theatre, receive an article or money on behalf of somebody,
stand on a weighing machine, borrow a book from library, pick up a purse
lying on the road, we will automatically be brought into legal relationship
with the owner, and a legal tie of doing or refraining from doing a definite act
is created.
It is here that the knowledge of law of contracts becomes desirable and it
is the foundation of mercantile law. Similarly, when a cheque is wrongfully
dishonoured by the banker, knowledge of the law relating to negotiable
instrument becomes useful. Since rights and duties are correlative, the legal
obligation imposed on us becomes the right of another with whom the legal
relation is created. If knowledge of law is necessary for non-mercantile
persons, it should be more so for mercantile person.
Knowledge of mercantile law would make them appreciate the legal
problem pertaining to their transactions, avoid legal pitfalls, and obtain in
time expert advice before a transaction is completed.
SOURCES OF INDIAN MERCANTILE OR BUSINESS LAW

The main sources of Indian mercantile of business law are as follows :
1. English mercantile law. Indian mercantile law is mainly based
upon English mercantile law. The various statutes comprising
mercantile law are mainly based upon the English law. Where Indian
law is silent on a point and the customs and usages prevailing in
Indian permit, the courts in India take recourse to the English law.
Sources of English mercantile law include common law, equity, law
merchant and statute law. Common law refers to customs and usages
Introduction 3
which were prevalent in England and which were recognised and

enforced by courts. It was created by judicial pronouncements. Equity
means morality, honesty, fairness or principles if natural justice. It is
a system of law parallel to rules of common law and statute law. The
law merchant refers to a number if usages prevalent among
merchants of England and that of other European countries.
2. Statute law. A statute is a formally codified law enacted by
legislature. Thus statute law is the law laid down in the Acts of
Parliament, State Legislatures and any other law-making body.
Indian mercantile law is mostly codified by Parliamentary
enactments. If a bill is passed by Parliament and it is signed by the
President, it becomes an Act or a statute. The Indian Contract Act,
1872; The Negotiable Instruments Act, 1881; The Sale of Goods Act,
1930; The Indian Partnership Act 1932; The Companies Act 1956 are
some of the examples of statutes.
3. Case law. Statute law is given effect to by courts of law, which
interpret and explain the law. In the course of interpretation, a rule
of law may be enunciated and if done so, it becomes a precedent for
the subordinate courts. A judicial precedent may by either
authoritative or persuasive. The decisions of the Supreme Court of
India are authoritative for all courts in India, while a decision of High
Court, although authoritative to its subordinate courts are mainly
persuasive to other High Courts and their subordinate courts.
4. Usage or custom of trade. Usage or custom of trade are also the
guiding factor in deciding disputes provided they are widely known
and reasonable and not inconsistent with the provisions of the
relevant statute. A statute may provide that the provisions contained
therein are subject to the particular usage or custom of trade.
MEANING OF “PLAINTIFF” , “DEFENDANT”, ETC.

Plaintiff. Plaintiff is one who commences a law suit; the complaining party
in any litigation.
Defendant. Defendant is a person who defends a legal action or required to
make answers in a legal action or suit; opposite of plaintiff.
Appellant. Appellant is one who appeals against decision of lower court to
higher court. Further, the name of the appellant appears first in the case. For
example, in Bhagwan Das Goverdhan Das Kedia v. Girdhari Lal
Purshottam Das & Co. [AIR 1966 SC 543], the appellant was Bhagwan Das
Goverdhan Das Kedia in the Supreme Court.
Respondent. Respondent is the party who makes an answer to an appeal,
application application or petition or other proceeding in court. In the above
case, Girdhari Lal Purshottam Das & Co. was the respondent.
Nature and Kinds of

2 Contracts
LEARNING OBJECTIVES
After reading this chapter, you will be able to learn :
➥ Importance of the Law of Contract
➥ Definition and Essentials of Contract
➥ Classification of Contracts
IMPORTANCE OF THE LAW OF CONTRACT

A study of mercantile or business law necessarily starts with a study of the
rules of law governing contract, since the law of contracts is the basis of other
enactments covered by the term ‘mercantile or business law’. Further, the law
of contracts is applicable not only to mercantile community, but to others
also. Almost everyone of us enters into a number of contracts whether as
businessmen or otherwise, and as such, it is necessary for us to familiarize
ourselves with the law of contract. According to Anson, “The law of contract is
intended to ensure that what a man has been led to expect shall come to pass;
that what has been promised to him shall be performed.”
The Indian Contract Act, 1872

The Indian Contract Act, 1872, came into force with effect from 1st
September, 1872.
The Indian contract Act, 1872, lays down the law relating to contracts. It
enunciates the legal principles governing business transactions in India. The
Act recognizes freedom of contract, and the rights and duties created by a
contract can be enforced by courts of law.
The Act is not exhaustive. It does not cover all the branches of the law of
contracts. The Act lays down general principles of law of contract in Sections
1 to 75. It also deals with certain special contracts such as Indemnity and
Guarantee, Bailment and Pledge and Agency. Sections 124 to 238 deal with
these special contract. It does not, however, provide rules of law relating to
other branches of contract. The Indian Partnership Act, The Sale of Goods
Act, The Negotiable Instruments Act, The Companies Act, etc., are separate
Nature and Kinds of Contracts 5
enactments, although they fall within the purview of the term ‘the law of
contracts’. Sections 76 to 123 relating to sale of goods were repealed in 1930
and the Sale of Goods Act was passed. Similarly Sections 239 to 266 were
repealed in 1932 when the Indian Partnership Act was passed.
It does not override usage or custom of trade. Section 1 of the Act
has laid down that, “Nothing herein contained shall affect the provisions of
any Statute, Act or Regulation not hereby expressly repealed, nor usage or
custom of trade, nor any incident of any contract, not inconsistent with the
provisions of this Act.”
A contract creates rights in personam which can be enforced against
party on whom legal obligation to do or not to do a definite act is imposed.
DEFINITION OF CONTRACT
According to Halsburry, “A contract is an agreement between two or more
persons which is intended to be enforceable at law and is constituted by the
acceptance by one party of an offer made to him by the other party to do or
abstain from doing some act.”
Section 2(h) of the Indian Contract Act, 1872 defines a contract as follows:
“An agreement enforceable by law is a contract”.
Thus a contract consists of the following two elements:
(1) An agreement, and
(2) Legal obligation, i.e., duty enforceable by law.
Contract = Agreement + Legal Obligation
An agreement is enforceable by law if it creates a legally binding

obligation between two or more parties. It is also essential that the legal
obligation must arise out of an agreement. These two elements are discussed
below :
(1) Agreement. According to Section 2(e) “Every promise and every set of
promises, forming consideration for each other, is an agreement,”
Accordingly, an agreement is a promise or a set of promises. A promise
is defined in Section 2(b). It lays down that “a proposal when accepted,
becomes a promise.” An agreement is an accepted proposal. In other
words, it means that there must be a proposal or offer by one party and
that proposal or offer must be accepted by the other party. Thus, an
agreement consists of a proposal or offer from a party and its acceptance
by the other.
Agreement = Offer or Proposal + Acceptance of the Offer
Example : A makes an offer to sell his car for 1,50,000 to B. B accepts the offer.
R
This offer after acceptance becomes a promise and the promise is an agreement between
A and B.
6 Business Laws
Thus, there must be two or more persons to enter into an agreement

because one person cannot enter into an agreement with himself.
Further, there must be consensus ad idem or identity of minds. It
signifies that the parties are agreed about the same thing in the same sense.
Accordingly, an agreement is said to be formed between two or more parties
only when their minds coincide or when they are ad idem or when they agree
upon the same thing in the same sense. An agreement may be oral or in
writing or it may be implied from the conduct of the parties.
According to S. 2(c), the person making the proposal is called the
“promisor”, and the person accepting the proposal is called the “promisee”.
(2) Legal obligation. An agreement to become a contract must give rise to
a legal obligation. Legal obligation means a duty enforceable by law. It
binds the parties to contract and imposes the necessity of doing or to
abstain from doing, a definite act or acts. If an agreement does not
create a duty enforceable by law, it is not a contract. Thus, an
agreement is a wider term than a contract. An agreements creating
social obligations does not make a contract.
Example : A invites B to dinner and the invitation is accepted by B, the obligation of A
to prepare the dinner and the obligation of B to come for dinner are social obligations and
they do not create a legally enforceable agreement. If any one of the them does not
perform his part of the social obligation, the other cannot take any action against the
former.
In case of business agreement, it is usually presumed that the parties

intend to create legal obligations.
Example : An agreement to sell 100 kg of rice of a particular variety at 60 per kg is
R
a contract because it gives rise to a legal obligation i.e., a duty enforceable by law and in
case of breach of contract by either party a suit can be filled in a court of law provided
other essentials of a valid contract as laid down in Section 10 are present.
Thus, all contracts are agreements but all agreements are not
contracts. Only those agreements are contracts which give rise to legal
obligations.
On the other hand, all legal obligations are not contracts. Only
those legal obligations constitute contract which arise out of
agreement. The obligations which are imposed by the general law of the
land and do not arise out of agreement are not contractual. These obligations
include (a) judgement of court; (b) tort or civil wrong; (c) quasi-contract and
(d) status obligations. Obligations imposed by judgement of courts and
entered in court records do not have their source in agreements. A tortuous
liability is imposed by the general law of the land.
Therefore, Salmond rightly says, “The Law of Contracts is not the
whole law of agreements nor is it the whole law of obligations. ; it is
the law of those agreements which create obligations, and of those
obligations which have their source in agreements.” This is further
explained below:
The law of contracts is not the whole law of agreements

The law of contracts is the law of those agreements which create legal
obligations which are enforceable by law.
Examples : (i) A offers to sell his car to B for 2,00,000. B accepts the offer. In this
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agreement if there is default by either party, then the other party can
file a suit for breach of contract provided all the essential elements
of a valid contract are present.
(ii) A invites B to a dinner. B accepts the invitation. B does not turn up
for the dinner. A cannot sue B because in this agreement there is no
intention to create legal obligation.
The law of contract is not the whole law of obligations

The law of contracts is the law of those legal obligations which have their
source in agreements. The law of contracts is not concerned with those
obligations which do not arise out of agreements.
Example : Obligations arising from judgements of courts, obligations arising from tort
or civil wrong and obligations to maintain wife and children do not arise out of agreements
and hence they do not constitute contracts.
ESSENTIAL ELEMENTS OF A VALID CONTRACT

Section 10 of the Act lays down the essentials of a valid contract. According to
this section, “All agreements are contracts if they are made by the free consent
of the parties competent to contract, for a lawful consideration and with a
lawful object, and are not hereby expressly declared to be void.” Accordingly all
contracts are agreements, but all agreements need not be contracts. The
following are the essentials of a contract, as per section 10 :
1. An agreement (or offer and acceptance). An agreement is
essential for a contract. An agreement is the result of offer and
acceptance. An offer or proposal to do or not to do a definite act or
acts is made by one party, and the same must be accepted by the
other party to whom the offer is made. Thus, agreement requires
two parties — one making the offer and the other accepting it. Offer
and acceptance must satisfy their respective legal rules. For
example, the terms of an offer must be definite and certain and it
must be communicated to the other party. Similarly, the acceptance
must be absolute and unqualified and it must be communicated to
the person who has made the offer. Offer and acceptance may be
express or implied.
2. Intention to create legal relations. When two parties want to
enter into a contract, their intention must be to create legal
relations between themselves. If the intention is not to create legal
relations, it will not give rise to a contract. In every day life, a
number of social and domestic arrangements are entered into and in
these cases the parties usually do not intend to create legal relations
between themselves. Therefore, they are not contracts. An
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agreement to dine at a friend’s place, or to attend a social or a

religious function, or to play a friendly cricket match, or to go on a
pleasure trip, or to see a movie, etc…, does not confer any right of
action since it does not create any legal obligation.
CASE : In the leading case Balfour vs. Balfour [(1919) 2KB 571], Mr. Balfour who
was serving the Government of Ceylon went to England with his wife on leave. After
the expiry of the period of leave, Mr. Balfour had to go back to Ceylon, but his wife
could not accompany him for medical reasons. Consequently, he promised orally to
pay an allowance of £ 30 per month until she rejoined him. The amount was not fixed
as compensation for or in satisfaction of the obligation of the husband towards his wife
to maintain her. On his failure to make the payment, the wife sued him for the recovery
of the promised amount. Her suit was dismissed by the court of Appeal on the ground
that the agreement was only an arrangement between the two, and the parties never
intended to create legal relations.
Generally speaking, in the case of agreements regulating social matters,

the parties do not intend to create legal relations. However, if the parties
intend to crate legal relations, there can be a contract between family
members or between relatives. For example, in Mcgregor v. Mcgregor
[(1888) 21 QBD 424], husband and wife withdrew their complaints under an
agreement by which the husband promised to pay an allowance and wife
agreed to refrain from pledging his credit. It was held that the agreement was
a contract.
In the case of agreements regulating business transactions, the
assumption is that the parties intend to create legal relations. This
presumption can, however, be rebutted by the party asserting that no legal
relationship was intended.
Sometimes, the parties to a business agreement may specifically state
that they do not intend to create legal obligation. In such a case, the promise
will be binding in honour only.
CASE : In Rose & Frank Co. vs. J.R. Crompton & Bros. Ltd. [(1925) AC 445] two
firms entered into a written contract for the sale and purchase of tissue paper. The
agreement contained a clause to the effect that “this arrangement is not entered into,
nor is this memorandum written, as a formal or a legal document, and shall not be
subject to legal jurisdiction in the law court”. The goods were not delivered and,
therefore, the buyers brought an action for non-delivery. It was held that there was no
intention to create legal relations on the part of the parties to the agreement and thus
there was no contract.
Thus, whether the parties to an agreement intended to create legal

relations or not, is a question of fact to be inferred from the circumstances of
the case.
3. Consensus ad idem and free consent. In order that an
agreement may become enforceable by law, the parties should be ad
idem. i.e., agree upon the same thing in the same sense (Sec. 13).
Example : A, who owns two houses, one in old Delhi and the other in New Delhi,
offers to sell his Old Delhi house to B for 20,00,000 and B accepts the offer thinking it to
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be in respect of A’s New Delhi house, the agreement between A and B is not enforceable,
owing to the absence of identity of minds.
Consent must also be free. Section 14 provides that consent is said to be
free when it is not caused by coercion, or undue influence, or fraud, or
misrepresentation or mistake. If the contract is vitiated by any of the first
four elements, the contract would be voidable at the option of the party whose
consent has been so caused.
Example : A threatens to shoot B if he (B) does not sell his goods worth 50,000 for
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R 10,000. B agrees to sell the goods under the threat. The consent of B is caused by
coercion, therefore, it is not free. The contract is voidable at the option of B.
4. Contractual capacity. The parties who enter into an agreement
must be legally competent to do so. According to Section 11, minors
(i.e. a person who has not attained the age of 18 years), persons of
unsound mind and persons disqualified by any other law such as
alien enemies are incompetent to contract. An agreement entered
into with a person who is not competent to contract at the time of
entering into the agreement is void and thus not enforceable.
However, in some special cases, e.g., in case of necessaries supplied
to a minor, the supplier under Sec. 68 is entitled to be reimbursed
from his estate.
5. Lawful consideration. Section 25 provides that an agreement
without consideration is void, i.e., not enforceable, barring the
exceptions mentioned in that section. The absence of consideration
makes a promise gratuitous and, therefore, such promise is not
enforceable by law.
Consideration is something in return for the promise, i.e., quid pro quo.
Both the parties must give something and get something in return. Thus,
consideration is the price for the promise.
Example : A offers to sell his car to B for 1,50,000 and B accepts the offer. For A,
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the promise of B to pay 1,50,000 is the consideration and for B, the promise of A to
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deliver the car is the consideration.
Consideration may consist of the payment of money, the delivery of goods,

a certain act, or a promise to do an act or to refrain from doing an act. It may
be past, present or future. It need not be adequate. But it must be real and
valuable in the eyes of law.
6. Lawful object. The object or the purpose of an agreement should be
lawful. The object would be unlawful if it is forbidden by law; or is of
such a nature that, if permitted, it would defeat the provisions of
any law; or is fraudulent; or involves or implies injury to the person
or property of another; or the court regards it as immoral, or opposed
to public policy (Sec. 23).
Example : A promises to B to drop a prosecution which he has instituted against B for
robbery and B promises to restore the value of things taken. The agreement is illegal, as
its object is unlawful being opposed to public policy.
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7. Not expressly declared void. Enforceability of an agreement also

depends upon whether it is expressly declared void by the Act. In
fact, the Act itself has expressly declared void certain types of
agreements. For example, agreements in restraint of marriage, in
restraint of trade, in restraint of legal proceeding, uncertain
agreements and wagering agreements. These agreements are void
and therefore, the aggrieved party cannot seek any relief from the
court.
Example : A and B agree that if it rains today A will pay B R 100, and if it does not
rain B will pay A 100. it is a wagering agreement and thus void.
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The terms of the agreement should be certain or capable of being made

certain (Sec. 29). If A agrees to sell a hundred tons of oil and the agreement
does not specify the type of oil agreed to be sold. The agreements being
uncertain, cannot be enforced. However, if the agreement is capable of being
made certain by circumstances, the agreement would be valid contract.
8. Possibility of performance. The act contemplated in the agreement
should be capable of performance. Agreements to do an act
impossible of performance cannot be enforced (Sec. 56).
Example : A agrees with B to discover treasure by magic, or to make two parallel
straight lines meet, B cannot seek redressal of the grievance through the court on A’s
failure to perform the promise.
9. Legal formalities. Agreements may either be oral or written.
However, certain agreements are required to be in writing or in the
presence of witnesses or registered by law in force in India.
Therefore, an agreement must comply with the necessary legal
formalities as to writing, registration, stamping etc., if any, required
in order to make it enforceable.
Thus, where a statute requires an agreement to be put in
writing or registered, the same should be complied with;
otherwise the agreement will not be enforceable. For instance,
negotiable instrument should be in writing according to the
Negotiable Instruments Act. The Arbitration law requires an
arbitration agreement to be in writing. The Transfer of Property Act
has made the writing and registration compulsory for contracts
relating to transfer of immovable properties.
Example : A orally agrees to sell a flat to B. the agreement is unenforceable because
such agreement must be in writing and registered.
CLASSIFICATION OF CONTRACTS
1. Classification of Contracts on the Basis of Mode of Formation
(a) Express contract. Where both offer and acceptance constituting a
contract are made in words, spoken or written, the contract is said to
be express contract. Thus, a contract entered into between the
parties by words, written or spoken, is known as an express

contract.
Example. A writes a letter to B for purchase of certain goods at a certain price. B
accepts the offer by writing a letter to A. This is an express contract.
(b) Implied contract. Where both offer and acceptance are made
otherwise than in words, the contract is said to be implied contract.
Thus, an implied contract is that contract which is inferred from act
or conduct of the parties. It is not formed by words, written or
spoken.
Examples : (i) Where a person boards a public transport bus, an implied contract
is entered into between him and the public transport bus owner
because by his act it is implied that he undertakes to pay the
relevant fare even though he makes no express promise to do so.
(ii) A, a coolie in uniform picks up the luggage of B to carry it out of the
railway platform to the taxi stand without being asked by B, and B
allows him to do so. In this case there is an implied offer by the
coolie and implied acceptance by the passenger and there is
implied contract between the two. The passenger is bound to pay
for the service rendered by the coolie.
(See Uptron Rural District Council vs. Powel case in the Chapter :
Consideration)
It may be noted that certain contracts may be a mixture of the ‘express’
and ‘implied’ types of contracts. This happens when out of offer and
acceptances, one is made in words and the other otherwise than in words.
Quasi-contract. There are certain legal obligations which do not spring
from agreement. As pointed out earlier, quasi-contract is one of them. Quasi-
contractual obligations are imposed by law. In such cases no real contract,
express or implied, exists. Quasi-contractual obligations resemble to the
obligations created by contracts. Therefore, the Indian Contract Act describes
these obligations as “Certain relations resembling those created by contracts”.
It rests on the doctrine of ‘unjust enrichment’. Thus, the term ‘quasi-contract’
is a misnomer.
Example : A, a tradesman, leaves goods at B’s house by mistake. B treats the goods
as his own. He is bound to pay A for them, (Illustration to Sec. 70). For detailed discussion
see chapter on “Quasi-Contracts”.
2. Classification of Contracts on the Basis of Enforceability

(a) Valid contract. A valid contract is an agreement enforceable by
law. Thus, an agreement which satisfies all the legal requirements
laid down in Section 10 of the Act, is known as a contract or valid
contract.
(b) Voidable contract. A voidable contract is defined in Section 2(i)
thus: “An agreement which is enforceable by law at the option of one
or more of the parties thereto, but not at the option of the other or
others, is a voidable contract.” Thus, a voidable contract is one which
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is enforceable at the option of one of the parties to it, but not at the
option of the other.
Sometimes, a party to an agreement may procure the consent of the other
party due to coercion, undue influence, fraud or misrepresentation. In such
cases where the consent is not free, the party whose consent is so caused
becomes the aggrieved party who can either affirm the contract or rescind it.
This right to rescind the contract should, however, be exercised within a
reasonable time and before third party acquire rights under the contract.
Otherwise, the contract will be binding on the aggrieved party.
Example : A threatens to shoot B if he does not sell his goods worth 50,000 for
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R 10,000. B agrees to sell the goods to A for 10,000 under coercion. The contract is
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voidable at the option of B since his constent is not free. B may repudiate the contract or
opt to be bound by it. In this case if before repudiation of contract by B, A sells the goods
to a third party and the third party purchases the goods in good faith and for consideration
then B will lose his right of rescission of the contract.
According to Section 64, when the aggrieved party avoids the contract,
the other party thereto need not perform any promise, and the party avoiding
the contract should restore any benefit he has received under the contract to
the other party.
(c) Void agreement. According to Sec. 2(g ), “An agreement not
enforceable by law is said to be void”. A void agreement is a nullity
in the eyes of law. Such an agreement does not create any legal
rights, and nor does impose any legal obligation on the parties to it.
Void agreement is void ab intio i.e., it is void from the beginning. An
agreement with a minor, for instance, is void from the beginning. An
agreement without consideration is also void from the beginning.
(d) A contract which has become void or void contract. Section
2(j) of the Act lays down that “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable.” A
contract which is enforceable by law, may sometime cease to be
enforceable subsequently. Such contracts become void only when
they cease to be enforceable. Till then they are valid.
A contract becomes void in the following situations :
(i) Supervening impossibility or Subsequent illegality (Sec. 56).
Section 56 has laid down that “A contact to do an act which, after
the contract is made, becomes impossible, or by reason of some
event which the promisor could not prevent, unlawful, becomes
void when the act becomes impossible or unlawful.”
Example : A agrees to let a music hall for a series of concerts and before the day of
performance, the music hall is destroyed by fire, the contract becomes void on the
destruction of hall by fire due to impossibility of performance.
(ii) Contract contingent on the happening of an uncertain event (Sec.
32). Section 32 provides that contingent contracts do or not to do
anything if an uncertain future event happens cannot be enforced
by law unless and until that event has happened. If the event
becomes impossible such contracts become void.
Example : A contracts to pay B a sum of money by way of loan if B marries C. C dies
without being married to B, the contract becomes void.
Obligation of person who has received benefit under an agreement which
is discovered void or contract that becomes void. Section 65 provides that
when an agreement is discovered to be void or when a contract becomes void,
any person who has received any advantage under such agreement or
contract is bound to restore it, or to make compensation for it to the person
from whom he received it.
Thus, the section provides for restitution of the benefit received in the
situations mentioned in the section. They are as follows:
(i) When an agreement is discovered to be void. When an agreement is
void from the very beginning, i.e., void ab-initio, but the fact of its
being void is discovered later on, the person who has received any
advantage under such agreement is bound to restore it, or to make
compensation for it to the person from whom he received it.
Example : A pays B 5,000 in consideration of B’s promise to sell his horse to A.
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Later on it was discovered that the horse was dead at the time of the agreement, though
neither party was aware of the fact. In this case the agreement is discovered to be void
and must repay 5,000 to A.
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(ii) When a contract becomes void. Restitution is also allowed when a

contract becomes void.
Example : A contracts to sing for B at a concert for 10,000, which are paid in
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advance. A is too ill to sing. A is not bound to make any compensation to B for the loss of
profits which B would have made if A had been able to sing, but must refund to B the
R 10,000 paid in advance.
(e) Illegal or unlawful agreement. According to Sec. 23 the
consideration or object of an agreement is unlawful if it is forbidden
by law; or is of such a nature that if permitted, it would defeat the
provisions of law, or is fraudulent; or involves or implies injury to
the person or property of another; or the Court regards it as
immoral, or opposed to public policy.
A promises to obtain for B an employment in the public service and B
promises to pay R 1,000 to A. The agreement is void, as the consideration is
unlawful.
An illegal agreement is void ab intio. All illegal agreements are void but
all void agreements are not illegal. The money paid or property transferred
under an illegal agreement cannot be recovered. No action can be taken for
breach of an illegal agreement. (For details see chapter on “Legality of Object
and Consideration”). In case of illegal agreement the collateral
transaction is also void.
Examples : (i) A agrees to pay B 50,000 if B kills a certain person. B agrees. A
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takes a loan of 50,000 from C to pay B the promised amount. C

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14 Business Laws
knows the purpose of the loan. In this case the agreement between A
and B is the main agreement and the agreement of loan between A
and C is the collateral transaction. The agreement between A and B
is illegal and void and B cannot recover the money and the collateral
transaction, i. e., the agreement of loan between A and C is void
because C knows the purpose of the loan. If C does not know the
purpose of the loan, then loan transaction would be valid.
(ii) A and B enter into a wagening agreement which is void under
Section 30. A loses the bet and borrows money from C to pay his
wagering debt. The contract of loan between A and C is valid whether
C knows the purpose of the loan or not.
(f) Unenforceable contract. An unenforceable contract is that
which is good in substance but cannot be enforced in a Court
of law because of some technical defects such as expiry of
the period within which enforceable, absence of writing,
registration and attestation, insufficient stamp etc. If the
technical defect can be cured, the contract becomes enforceable, if it
cannot be cured, the contract remains unenforceable.
Example. A and B enter into an oral arbitration agreement. The agreement is
unenforceable as the law require that the arbitration agreement must be in writing.
3. Classification of Contracts on the Basis of Extent of

Performance
(a) Executed contract. When both the parties have completely
performed their respective obligations under the contract, the
contract is said to be executed.
Example : A agrees to sell certain goods to B at a certain price. A delivers the goods
and B pays the price. Thus, both parties have performed their respective obligations. The
contract becomes executed contract.
(b) Executory contract. When both the parties have not performed
their respective obligations under the contract, the contract is said
to be executory.
Example : A agrees to sell his car to B for a certain sum of money. Delivery and
payment are to be made after fifteen days. The contract is executory.
(c) Partly executed and partly executory contract. If one of the
parties has performed his part of the obligation but the other party
has not yet completed his part of the obligation the contract is
executed as regards one party and executory as regards the other.
Example : A sells his television to B. A delivers the television to B but B is yet to
make the payment. As regards A the contracted is executed but as regards B it is
executory.
4. Classification of Contracts on the Basis of Obligation

Outstanding at the Time of Formation of Contract
(a) Unilateral contract. In case of unilateral contract the
obligation is outstanding only on the part of one of the
parties at the time of formation of contract. Offers made to the

world at large are usually unilateral offers, e.g., promising a reward
for doing a particular act, like finding a missing person. Unilateral
offer can be made to a specific person also.
Example : A’s son is lost and he offers by advertisement a reward of 40,000 to any
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one who will bring his son safely home. B, who knows about the reward, finds the boy and
brings him before A. As soon as he does this act the contract comes into existence. The
obligation to pay the reward money is outstanding on the part of A only.
(b) Bilateral contract. A bilateral contract is one in which obligations

of both the parties are outstanding at the time of formation of the
contract. Most contracts are bilateral.
Example : A manufacturer agrees to supply certain goods at a certain price to a
retailer after a certain time. The payment is to be made at the time of delivery of goods.
This is a bilateral contract as the obligations of both the parties are outstanding at the time
of formation of the contract.
CERTAIN DISTINCTIONS
Distinction Between Agreement and Contract
The following are the points of difference between an agreement and a
contract :
Basis Agreement Contract
1. Definition Every promise and every set An agreement enforceable by
of promises f o r m i n g law is a contract [2 (h)].
consideration for each other
is an agreement [S. 2(e)].
2. Constituents O f f e r a n d a c c e p t a n c e An agreement and its
constitute an agreement. enforceability or legal
obligation constitute a contract.
3. Legal An agreement may or may A contract necessarily creates a
obligation not create a legal obligation. legal obligation.
4. Binding on An agreement which does not A contract is legally binding on
parties create a legal obligation is the parties.
not legally binding on the
parties.
5. Scope An agreement is wider term All contracts are agreements
than a contract. An but all agreements are not
agreement is a genus. contracts. A contract is a
spiecie of agreement.
Distinction between Void Agreement and Voidable Contract

The following are the points of distinction between a void agreement and a
voidable contract.
16 Business Laws
Basis Void Agreement Voidable Contract

1. Definition An agreement n o t An agreement which is
enforceable by law is said to enforceable by law at the
be void [2 (g)]. option of one or more of the
parties thereto, but not at the
option of other or others is a
voidable contract [2 (j)].
2. Void A void agreement is void A voidable contract is not void
ab-intio from the very beginning i.e. when it is made and remains
it is void ab-intio. valid till it is rescinded by the
aggrieved party.
3. Enforceability A void agreement being void A voidable contract is
ab-intio, cannot be enforced enforceable like a valid
by any party. contract until the party
entitled to set it aside elects to
do so. If he elects to rescind it,
the voidable contract becomes
void. If it is not rescinded, it
continues to be enforceable.
4. Restitution When an agreement is When the aggrieved party
discovered to be void, any avoids the contract, the other
person who has received any party need not perform it and
advantage under such an the party avoiding the contract
agreement is bound to should restore any benefit he
restore it, or to make has received under the
compensation for it, to the contract to the other party (S.
person from whom he 64).
received it (S. 65).
5. Collateral A void agreement, if it is A voidable contract does not
transaction illegal also, makes the affect collateral transaction.
collateral transaction void.
6. Compensation As a void agreement is not The party rightfully rescinding
enforceable, a party to the a voidable contract is entitled
agreement cannot claim to claim damages for the loss
compensation for non- suffered by it in certain cases.
performance of the
agreement.
7. Right of third Third party does not acquire Third party may acquire a
party any right under it. better title.
8. Lapse of There is no effect of lapse of A voidable contract cannot be
reasonable reasonable time. rescinded after lapse of
time reasonable time.
Distinction Between Void Agreement and Illegal Agreement

A void agreement differs from an illegal agreement in respect of the
following :
Basis Void Agreement Illegal Agreement

1. Definition An agreement n o t An agreement is illegal if its
enforceable by law is said to object or consideration is
be void. [2 (g)]. forbidden by law; or if of such
a nature that, if permitted, it
would defeat the provisions of
law ; or is fraudulent ; or
involves or implies injury to
the person or property of
another ; or the court regards
it as immoral or opposed to
public policy.
2. Scope All void agreements are not All illegal agreements are
illegal. void.
3. Collateral Collateral transactions are Collateral transactions are
transactions not void also void.
4. Punishment There is no punishment. Illegal agreement may be
punishable.
Distinction between Void Agreement and Void Contract

The following are the points of difference between the two :
Basis Void Agreement Void Contract
1. Definition An agreement n o t A contract which ceases to be
enforceable by law is said to enforceable by law becomes
be void [S. 2(g)]. void when it ceases to be
enforceable [S. 2 (j)].
2. Time of A void agreement is not A void agreement is valid in
enforceability enforceable from the very the beginning and becomes
beginning. void later on.
3. Restitution If an agreement is discovered If a contract becomes void,
to be void, restitution under restitution under S. 65 is
S. 65 is allowed. Restitution allowed.
may not be allowed in other
cases of void agreement.
4. Title A person who acquires goods A person who acquires goods
under a void agreement under a contract which has not
would not get any title to the become void would get a better
goods. title to the goods if he has
purchased goods in good faith
and for consideration.
REVIEW QUESTIONS
1. Define Contract. State the essentials of a valid contract.
2. “All contracts are agreements but all agreements are not contracts.” Explain.
[B.Com., B.Com. (H), D.U.]
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3. Distinguish between the following :

(a) Void agreement and voidable contract; [B.Com., D.U.]
(b) Void agreement and illegal agreement.
4. State with reasons whether the following statements are true or false:
(a) Law of contract is not the whole law of agreements.
(b) Law of contract is not the whole law of obligations.
(c) In commercial and business agreements the usual presumption is that
the parties intend to create legal relations.
(d) Collateral transaction to a void agreement are also void.
(e) Collateral transactions to an illegal agreement are not void.
[Hint : True : (a), (b), (c); False : (d), (e)]
5. Select the best choice :
(i) A voidable contract is one which
(a) is void ab initio,
(b) can be enforced at the option of both the parties,
(c) can be enforced at the option of one of the parties thereto,
(d) is valid in the beginning and becomes void later on.
[Hint : (c)]
(ii) A void agreement is
(a) void ab initio
(b) enforceable at the option of one of the parties thereto,
(c) valid in the beginning and becomes voidable later on,
(d) enforceable at the option of both the parties.
[Hint : (a)]
6. “The Law of Contract is not the whole law of agreements, nor is it the whole
law of obligations. Critically examine the statement giving suitable
examples. [B.Com. (H), D.U.]
PRACTICAL PROBLEMS
1. A makes a promise to his son to give him a pocket money of 1,000 per
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month. After two months A stops making the payment. Whether a legally
enforceable contract is created between A and his son?
[Hint : No. There is social agreement between A and his son.]
2. A invites his friend B to see a picture with him on a particular day for a
particular show at a cinema hall. A purchases two tickets for that show and
waits for B at the cinema hall. But B does not turn up. Can A sue B?
[Hint : No. This is social agreement between A and B and the usual
presumption in such agreement is that the parties do not intend to create
legal relations.]
3. Is there a contract in the following cases :
(a) X boards a DTC bus
(b) X invites B to see a movie.
(c) A promises to pay B, his son, 500 per month as pocket money.
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[Hint : (a) Yes, (b) No; (c) No.]

3 Offer and Acceptance
LEARNING OBJECTIVES
After reading this chapter, you will understand the provisions relating to :
➥ Meaning of and Legal Rules for Offer
➥ Meaning of and Legal Rules for Acceptance
➥ Communication of Offer and Acceptance
➥ Revocation of Offer and Acceptance
An agreement enforceable by law is a contract. An agreement is a promise or

set of promises forming consideration for each other. A promise is an accepted
proposal. Thus an agreement is a two-sided bargain. It requires two parties-
one to make an offer and the other to accept the offer. There must be definite
offer on one side and equally definite acceptance of that offer on the other.
Therefore, a proposal or offer is the starting point in the process of concluding
an agreement between the parties.
PROPOSAL OR OFFER
DEFINITION OF PROPOSAL OR OFFER

Section 2(a) of the Act defines a proposal thus :
“When one person signifies to another his willingness to do or to abstain
from doing anything with a view to obtaining the assent of that other to such
act or abstinence, he is said to make a proposal.”
The person making the proposal or offer is called the offeror (or offerer) or
proposer. The person to whom the offer or proposal is made is called the
offeree. When the offeree accepts the offer, he is called the acceptor.
Example : A says to B, “I am willing to sell my car to you for R 2,00,000.” Here A has
made an offer to sell his car to B. A is offeror and B is offeree.
The following are the essentials of an offer as per the definition given in
S.2 (a) :
(i) An offer must be an expression of willingness to do or to abstain
from doing something.
(ii) The expression of willingness to do or to abstain from doing must
be made to another person. A person cannot make an offer to
himself.
20 Business Laws
(iii) The offer must be made with a view to obtaining the assent of the
other person to such act or abstinence.
How an offer is made. An offer may be express or implied. Thus, an
offer may be made either by words or by conduct. If an offer is made in words,
written or spoken, it is called an ‘express offer’ and if it is inferred from the
conduct of the parties it is called an ‘implied offer’. These have been explained
later.
To whom can an offer be made. An offer can be made to a definite
person or to the public at large. If an offer is made to a definite person it is
called ‘specific offer’ and if the offer is made to the world at large it is called
‘general offer’. These have been explained later.
LEGAL RULES FOR A VALID OFFER

The following are the legal rules or requirements for a valid offer :
1. An offer may be express or implied. An offer may be express or
implied. As per S. 9, if the offer is made by words, spoken or written, it is
called an express offer. If an offer is made otherwise than in words i.e.
inferred from the conduct of the party, it is called an implied offer.
Examples : (i) A says to B, “I am willing to sell my Parker pen to you for 100.”
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This is an express offer by A.

(ii) A writes to B in a letter, “I am willing to sell my scooty to you for
R 2,000.” This is an express offer.
(iii) A transport company runs buses on different routes in a
metropolitan city to carry passengers at fixed fares. This is an
implied offer by the transport company. The acceptance of the offer
is complete as soon as a passenger boards the bus.
(iv) A weighing machine kept at a cinema hall is an implied offer to use
the machine by inserting the necessary coin.
2. An offer must be made with an intention to create legal relations.
An offer must intend to create legal relations. Therefore, if an offer does
not intend to create legal relations, it is not a valid offer in the eyes of
law. For example, an offer to a friend to dine at offeror’s place. Similarly,
if a person makes an offer to one’s wife to take her to a hill station is not a
valid offer and therefore cannot constitute a legally binding agreement.
CASE : In the leading case Balfour v. Balfour [(1919) 2 KB 571] Mr. Balfour, who
was serving the Government of Ceylon, went to England with his wife on leave. After
the expiry of the period of leave, Mr. Balfour had to go back to Ceylon, but his wife
could not accompany him for medical reasons. Consequently, he promised orally to
pay an allowance of £ 30 a month. The amount was not fixed as compensation for or in
satisfaction of the obligation of the husband towards his wife to maintain her. On his
failure to make the payment, the wife sued him for the recovery of the promised
amount. Her suit was dismissed by the Court of Appeal on the ground that the
agreement was only an arrangement between husband and wife, and parties never
intended to make a bargain.
3. The terms of the offer must be definite and certain. The terms of an
offer must be definite and certain and not vague or ambiguous. For
Offer and Acceptance 21
example, an agreement to agree in future is not a contract as the

terms of the agreement are uncertain because they are yet to be
settled.
Accordingly, if the terms of an offer are vague or indefinite, a contract
cannot be created between two parties even if the offer is accepted.
Examples : (i) An agreement to take a lease of a house for three years at 60,000
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per annum, if the house is “put into thorough repair, and the
drawing room handsomely decorated. according to the present
style”, can not be enforced as the terms are vague and uncertain.
(ii) A proposes to sell his car for 2,00,000 or 2,50,000. Here the
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offer made by A is not certain because it is not clear which of the

two prices is intended.
If the terms of the offer are capable of being made certain, then the offer
is not vague. For example, A offers to sell 100 litres of oil to B at a certain
price. A is a dealer in mustard oil only. It is a valid as the terms of the offer
are capable of being made certain by nature of A’s business.
4. An invitation to offer or a mere statement of intention is not an
offer. An offer must be distinguished from an ‘invitation to offer’.
In case of invitation to offer a party proposes certain terms on which he is
willing to negotiate. He does not make offer but invites other(s) to make offer
on those terms. In case of an offer, the person is willing to enter into a contact
on the terms of the offer.
Invitation to offer, when acted upon by the other party, results in an
offer. An offer, when acted upon by the other party, may result in a contract.
The following are some instances of invitation to offer :
(a) Advertisement for sale of goods by auction. An advertisement for sale
of goods by auction is not an offer to hold the sale. It does not bind
the auctioneer to sell the goods since the announcement is not an
offer. Further, as there is no contract, he is also not liable to
indemnify a person who, while travelling to the place of auction has
incurred expenses. When an auction is actually held, a bid becomes
an offer and when the hammer falls on the highest bid, there is
acceptance and the contract is concluded.
CASE : The leading case on this point is Harris v. Nickerson. [(1873) LR QB226]. In
this case, in response to an advertisement, that office furniture would be sold by public
auction, A (the plaintiff) traveled all alone from London to advertised place and found
that auction sale was cancelled. A filed a suit for the recovery of the expenses on the
ground that the advertisement was an offer made to the public and that his acceptance
by traveling to the place, constituted a contract. The Court held that the advertisement
was only a declaration of intention which cannot be considered as a binding contract.
(b) Display of goods in a shop with price tags. Where a shop-keeper

displays goods in his shop with a slip on them stating a price, his act
is not an offer, but is merely an invitation to the public to make an
offer to buy the goods at the price stated. If a customer, therefore,
enters his shop, tenders the prices and demands the article, the
shop-keeper is not bound to sell it to him. The demand of the
22 Business Laws
customer is an offer which the shop-keeper may or may not accept.

The following is the leading case on this point :
CASE : In the leading case Pharmaceutical Society of Great Britain v. Boots

Cash Chemists (Southern) Ltd. [(1953) All ER 482], a customer selected a drug from
the shelves in a self-service shop and brought the same to the cash desk where a
registered pharmacist supervised the purchase of all drugs. The question was whether
the taking of the goods from the shelves constituted an offer to buy or it constituted
acceptance of the offer by the shop-keeper to sell. Holding that it was only an offer to
buy, the learned judge observed that “It would be wrong to say that the shop-keeper is
making an offer to sell every article in the shop to any person who might come in and
that, the person can insist on buying any article by saying, ‘I accept your offer’.
Therefore, I am of opinion, the mere fact that a customer picks up a bottle of medicine
from the shelves in this case does not amount to an acceptance of an offer to sell. It is
an offer by the customer to buy, and there is no sale effected until the buyer’s offer is
accepted by the acceptance of the price.”
(c) Catalogues and price lists. A catalogue or a price list, which contains
description of goods meant for sale, with prices stated against them,
although appears to contain a number of offers, it is, in fact, merely
an inducement to invite offers.
(d) Advertisement inviting tenders and quotations. An advertisement
inviting tenders and quotations of the lowest price, is also an
invitation to offer and not an offer capable of acceptance.
CASE : In Spencer v. Harding [(1870) LR 5 CP 561], A (the defendant) advertised
goods to be sold by tender. B (the plaintiff) send in a tender which turned out to be the
highest, but it was not accepted. In a suit by him, it was held that the advertisement did
not amount to a contract or promise to sell to the person who made the highest tender.
It was merely a mode of determining what offers can be had.
Tender may either be-

(i) for a definite quantity of certain goods, or
(ii) for supply during a specified period of certain goods not exceeding
a certain quantity, deliveries to be made if and when demanded or
standing offer.
(i) Tender for a definite quantity. If a tender is invited for a definite
quantity of certain goods, the acceptance of the tender is an acceptance in
legal sense and creates a legal obligation.
(ii) Standing offer. If tender is invited for the supply during the coming
year of certain goods not exceeding a certain quantity, deliveries to be made if
and when demanded, the tender is standing offer. In this case, the
‘acceptance’ of the tender does not convert the offer into binding contract. The
offeree has the right not to place any order after having approved the tender
and the offeror has the right to withdraw the offer before the order is placed,
in case of standing offer.
(e) Mere statement of lowest price. A mere statement of the lowest price
at which the vendor would sell contains no contract to sell at that
price to the person making the enquiry. The following is the leading
case on this point :
CASES : (i ) In the leading case Harvey v. Facey [(1893) AC 552], A (the plaintiff)
telegraphed to B (the defendant) “Will you sell us Bumper Hall Penn? Telegraph lowest
cash price.” B replied: “Lowest price for Bumper Hall Penn £ 900.” A then telegraphed:
“We agree to buy Bumper Hall Penn for £ 900 asked by you. Please send us your title
deeds in order that we may get early possession.” On refusal to sell the Bumper Hall
Penn (a plot of land) A sued B. It was held that the first telegram contained two
questions namely : ( i) the willingness of B to sell the plot of land and (ii) its lowest price.
B replied the second question only. The last telegram was offer to buy, which was
rejected.
(ii) In the leading case McPherson v . Appana [AIR 1951 SC 184], A (the plaintiff)
offered to purchase the lodge owned by B (the defendant) for 6,000. He (A) wrote to
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B’s agent asking whether his offer had been accepted and saying that he was prepared
to accept any higher price if found reasonable. The agent replied : “Won’t accept less
than 10,000”. A accepted this and brought a suit for specific performance. It was held
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by the Supreme Court that B did not make any offer or counter offer but was merely
inviting offers. There was no assent to A’s offer to buy at 10,000 and, therefore, no
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concluded contract. In this case the Supreme Court relied on the principle enunciated
in Harvey v. Facey.
(f) Announcement of voluntary retirement scheme. In Bank of India v.

O. P. Swarankar [AIR 2003 SC 858], it was held that announce-
ment of a voluntary retirement scheme by a nationalized bank is not
an offer. The employee who expresses his willingness to retire makes
an offer and the same becomes effective if it is accepted by the
management.
Similarly display of time-table by railways and advertisement for letting
out a house are examples of invitation to offer.
Distinction between offer and Invitation to offer

Basis Offer Invitation to an offer
1. Meaning Offer is expression of Invitation to an offer is
willingness to obtain assent of expression of invitation to
another for an agreement. negotiate for an agreement.
2. Parties The offeror makes the offer to The person making the
the offeree. invitation invites the other
person to make the offer.
3. Formation Offer can be accepted by the The offer is made to the person
of contract offeree. inviting the offer and he may
accept the offer.
4. Forms It is in form of a specific offer It is in the form of displayed
to an individual and general goods in a shop, catalogues, price
offer to public at large. lists, share issue by a company.
5. Example M offers N to sell his bike. A gives an advertisement to sell
certain goods by auction.
24 Business Laws
5. An offer may be specific or general. An offer may be specific or

general. It is said to be specific when addressed to a specific individual or
a specific group or individuals. When an offer is made to an
unascertained body of individuals or to the public at large, it is said to be
a general offer.
An offer to a definite person can only be accepted by him and no one else.
In the case of a general offer, however, the offeror indicates his willingness to
contract with any member of the public who accepts his offer. Frequently,
such promises are made in return for an act, thus leading to the formation of
unilateral contract. Section 8 of the Act recognizes acceptance by performing
conditions of the proposal.
CASES : (i ) The leading case on general offers is Carlill v. Carbolic Smoke Ball
Co. [(1893) 1 QB 256], In this case, a company (the defendants), who were the
proprietors and vendors of a medical preparation called ‘the carbolic smoke ball’,
inserted in newspapers an advertisement, offering a reward of £ 100 to anyone who
contracted influenza after using their smoke ball three times daily for two weeks,
according to the printed directions. It was also stated that £ 1,000 had been deposited
with the Alliance Bank, Regent Street, to show their sincerity in the mater. Mrs. Carlill
(the plaintiff), bought one of the balls on the faith of the advertisement, and used it as
directed from Nov. 20 to Jan. 17, when she was attacked by influenza. She sued the
company for the promised reward. It was held that the company was liable to pay the
reward. The Court held that general offer was a valid offer and the lady had
accepted the offer by performing the conditions attached to the offer. The Court
further held that inconvenience sustained by one party at the request of the other is
enough to create a consideration.
(ii) In the leading case Harbhajan Lal v. Harcharan Lal [AIR 1925 All 539], A issued a
handbill offering a reward of 500 to anybody who would trace his missing son. B, who
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knew about the reward traced the boy and sent a telegram to A that he had found his
son. It was held that the handbill was a general offer and was capable of acceptance by
any person who fulfilled the conditions mentioned in the offer. Therefore, B was entitled
to receive the reward.
It should be noted that where a reward is offered for information

or for tracing missing person or for tracing missing article, the offer
can be accepted by only one individual who performs the conditions
mentioned in the offer first of all and as soon as the condition is first
performed the offer is closed. In case of general offer of continuing
nature, as was the case in Carlill v. Carbolic Smoke Ball Co., the offer
can be accepted by a number of persons who fulfill the conditions of
the offer and there would be equal number of separate contracts.
Distinction between General offer and Specific offer

Basis General Offer Specific Offer
1. To whom General offer is made to Specific offer is made to a
offer is made world/public at large specific individual.
2. Who can It can be accepted by any one It can be accepted only by that
accept who fulfills the required specific person.
conditions of the offer
3. Number of Here as many number of Only one contract is formed

contracts contracts may be formed as with the specific individual.
many people accept the offer.
4. Revocation of Offer can be revoked by the Revocation of offer can be made
offer same channel through which prior to acceptance.
the offer was made but offeror
is bound by the contracts
made prior to revocation.
5. Example/ case There was general offer in A offers B to buy his car for
Cartill vs. Carbolic smoke Ball 50,000.R
Co.
6. The offer must be communicated. An offer does not become operative

until it has been communicated to the person to whom the same is
addressed. This is obviously because of the reason that the offeree cannot
accept an offer unless he knows of its existence.
Communication is necessary whether the offer is specific or general.
According to Section 4 of the Act, “The communication of a proposal is
complete when it comes to the knowledge of the person to whom it is made.”
There can be no acceptance unless there is knowledge of the offer. The
leading case on this point is as follows :
CASE : In the leading case Lalman Shukla v. Gauri Dutt [(1913) 11 All LJ 489], A’s
(the defendant’s) nephew absconded from home. A sent his servants to different places
to trace the boy. Amongst these servants was B, munim, (the plaintiff) who was sent to
Haridwar. Subsequently, A issued handbills offering a reward of 501 to anyone who
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might trace the boy. B traced the boy and sent a telegram to A who went to Haridwar
and brought the boy back to Kanpur. He gave B, inter alia, 20. B, without asking for
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anything more, continued to work for B for six months. Thereafter, he was dismissed.
he then filed a suit against A claiming the reward. The Allahabad High Court held
that since there can be no acceptance unless there is knowledge of the offer, B
was not entitled to the reward. It was further held in this case that “there was already
a subsisting obligation and therefore, the performance of the act cannot be regarded as
consideration for defendant’s promise.”
In an Australian case, R v. Clarke [(1927) 40 CLR 227], it was held that

even if the acceptor had the knowledge of the offer but had completely
forgotten about it at the time of acceptance, he would be in no better position
than a person who had not heard of the offer at all.
CASE : In R v. Clarke,12 the government offered a reward for giving information

about some murders. The offer further added that if the information was given by an
accomplice, not being himself the murderer, he would also be entitled to a free pardon.
The plaintiff, being an accomplice, saw the offer and was so much excited by the hope
of pardon, that he gave the information to save himself, completely forgetting the
reward. It was held that he could not recover the reward.
7. An offer should not contain any term the non-compliance of

which amounts to acceptance. The offeror may prescribe any mode of
26 Business Laws
acceptance, but he cannot prescribe the form or time of refusal so as to fix

a contract on the acceptor. He cannot, for instance, say that if the
acceptor does not communicate his acceptance within a specified time, he
is deemed to have accepted the offer.
In the leading case Felthouse v. Bindley [(1863) 7LT 835], the offeror
stated in his letter that if an acceptance is not communicated by a certain
date, the offer would be presumed to be accepted. This term was held to be
void.
8. Two identical cross offers do not result in a contract. Two identical
offers, each being made in ignorance of the other, do not make a contract.
It may cross in the course of transit, a similar offer made by another
person. In such a case, although the offer made by the second person is on
similar terms as that of the first person, the two offers do not make a
concluded contract between the two. They are only identical offers known
as ‘cross offers’ and they do not constitute acceptance of one’s offer by the
other and, therefore, there is no contract.
CASE : In Tinn v. Hoffman & Co. [(1873) 29 LT 271], A company (the defendants)
wrote to B (the plaintiff) on 28th November, 1871, offering to sell 800 tons of iron at 69
sh. per ton. On the same day, B wrote to the company offering to buy 800 tons at 69
sh. The two letters crossed in post, and neither of them knew anything about the offer
of the other. B contended that there was a good contract for 800 tons at 69 sh. It was
held that there was no contract and, therefore, the company would not be bound as a
result of the simultaneous offers, each being made in ignorance of the other.
Distinction between Cross offer and Counter offer

Basis Cross Offer Counter Offer
1. Meaning Two persons make identical Offeree makes a conditional
offers to each other in acceptance to the offer thereby
ignorance of the offer of the resulting in a counter offer.
other.
2. Knowledge There is no knowledge of offer Offeror is aware of the counter
being made by the other. offer being made by the offeree.
3. Validity of The offers do not come to an Original offer by the offeror
offer end by making cross offer. comes to an end by making
counter offer and counter offer is
the new offer.
4. Contract A contract is made only when If the offeror accepts the counter
a party gives acceptance to offer made by the offeree then
the offer made by the other. only contract shall take place.
5. Medium of It generally happens when It may happen in any form of
communica- service of post or electronic communication of offer.
tion of offer means are utilised to convey
an offer.
6. Example A writes a letter to B to buy A offers B to buy A’s bike for
his bike for 20,000. B also 20,000. But B says he would
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writes a letter to A to sell his give 18,000 then original offer

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bike to him for 20,000.

R of 20,000 by A comes to an end
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and new offer of 18,000 by B is

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a counter offer which A may or

may not accept.
Communication of Special Terms or Standard Form Contracts

An agreement is a two-sided bargain which is based on freedom of
contract. The buyer of an article or service is in many cases, in modern times,
in an unfavourable position relatively to the seller, who insists on the
former’s acceptance of the terms and conditions of his offer. Freedom of
contract becomes one-sided in the case of agreements with common carriers,
dry cleaners, tailors, insurance companies, hire-vendors, landlords, public
utilities, etc. The difficulty of drawing up a separate agreement with every
individual, have brought into existence, printed forms of agreements, known
as ‘Standard Form Contracts’. The examples of such contracts are : life
insurance policy, railway and bus tickets, dry cleaner’s receipt, charter party
and bill of lading, etc. The customer is not given any opportunity to negotiate
the terms of the contract. In such cases it is a ‘take it or leave it’ decision for
the customer. Even if he goes to another service provider, he will face similar
standard form contracts.
Such standard form contracts contain a large number of terms and
conditions, very often in small print, which restrict or exclude liability of the
party who has prepared them. The other party is compelled by circumstances
to accept all the terms and conditions of the offer, regardless of fact whether
he likes them or not. In case of any dispute between the two parties, even
courts of law have found it extremely difficult in some cases to protect the
interests of the weaker party, particularly when he has signed a standard
form contract.
It is only with a view to mitigating the hardship caused by such contracts,
that courts of law have evolved certain rules. These are as follows :
(i) When the offer contains special terms and conditions, the offeror must
give reasonably sufficient notice of all the terms and conditions.
CASES : ( i) In Henderson v. Stevenson [(1875) 32 LT 709], A (the plaintiff) bought

a ticket from a steamship company. On the face of the ticket the words ‘from Dublin to
Whiteheaven’ were written, but on the back of it were printed certain conditions which
excluded the liability of the company for loss or injury to the passenger or luggage. A
had not seen the back of the ticket, nor was there any indication on the face to draw his
attention to the conditions printed at the back. He lost his luggage as a result of ship
wreck caused by the negligence of the company’s servants. In a suit by him claiming
damages for the loss, it was held that A was entitled to succeed.
(ii) In Parker v. South Eastern Railway Co. [(1877) 2 CPD 416], A (the plaintiff)
deposited a bag in the clock room of a railway station belonging to a railway company
(the defendants). He got a ticket in exchange. On the face of the ticket was printed
among other things, the words ‘see back’. On the back a number of conditions were
printed. One of the conditions limited the liability of the company to a loss up to £
28 Business Laws
10 unless extra charge was paid. A notice to this effect was hung up in the cloak-
room. A’s bag was lost. He filed a suit for claiming the full value of the bag which was £
24-10-0. It was held that A was bound by the conditions as the railway company had
done what was reasonably sufficient to give him notice of their existence. It is no
defence to say that the acceptor is illiterate, or cannot read the language in which the
conditions are printed, provided the notice is reasonably sufficient for the class of
persons to which he belongs.
(iii) In Bharati Knitting Co. v. DHL Worldwide Express Courier [AIR 1996 SC 2508],
the appellant manufacturer (Bharati Knitting Co.) signed a contract with the respondent
courier company (DHL) for sending certain export documents under a cover to a
foreign buyer with whom the Bharati Knitting Co. had an agreement of sale pertaining
to summer season. Under the terms and conditions of the contract between the
appellant and the respondent, the liability of the Courier company of the
documents was limited to the lesser of US $100 or the amount of loss or damage
actually sustained or actual value of the document or parcel. Further its liability
for any consequential loss of market or any other indirect loss was excluded.
Bharati Knitting Co. had not purchased the insurance cover. The cover containing
the document did not reach the destination. Though the duplicate copies were
subsequently sent but by the date of receipt of the consignment, the season was over.
Due to delay, the German buyer paid only DM 35,000, against the value of DM 56,469.
Bharati Knitting Co. filed a complaint against the courier company demanding actual
damages suffered by it due to non-delivery of the courier. The National Commission
(the apex consumer court) held that since the liability was only to the extent mentioned
in the contract, Bharati Knitting Co. was entitled for the deficiency of service only to that
extent (US $ 100) plus interest @ of 18%. On appeal, the Supreme Court upheld the
decision of the National Commission.
(ii) Notice must be contemporaneous with the contract i.e., it should be

given either before or at the time of contracting. If the notice is given
subsequently, the other party is not bound unless he accepts the
variations in the terms of the contract. A party cannot unilaterally
introduce terms after the contract has been made.
CASE : In Olley v. Marlborough Court Ltd. [(1949) 1KB 532], A (the plaintiff) and
her husband hired a room at a hotel, and paid a week’s advance for boarding and
lodging. When they went up to occupy their room, they found a notice on one of the
walls which read thus : “The proprietors will not hold themselves responsible for articles
lost or stolen, unless handed to the managers for safe custody.” Owing to negligence of
the hotel staff, they lost some property. In a suit against B, the Court of Appeal held
that the notice did not form a part of the contract since A could not see it until after the
contract was made.
(iii) Even where sufficient notice of the terms and conditions has been
given, the party imposing the conditions may still be liable if he has
committed a breach of the contract which can be described as
fundamental.
Every contract contains a ‘core’ or ‘fundamental’ which must be
performed. If one party does not perform the fundamental obligation, he will
be held liable for breach of contract whether or not an exempting clause has
been inserted.
(iv) Unreasonable terms are excluded from contracts. A term is not

enforceable if it would defeat the purpose of the contract or if it is
unreasonable. It was held by the Supreme Court in LIC of India v.
Consumer Education & Research Centre [AIR 1995 SC 1811],
that an “unfair and untenable or irrational clause in a contract is
unjust and amenable to judicial review.”
CASES : ( i) In Lilly White v. Mannuswami [AIR 1966 Mad 13], a laundry receipt
contained a condition that the customer would be entitled to claim only 15% of the
market price of the article in case of loss. The plaintiff’s new saree was lost. The clause
was held to be void being opposed to public policy by the Madras High Court. The
Court said that if a condition is imposed which is in flagrant infringement of the law
relating to negligence the Court will not enforce such a term which is not in the interest
of the public and which is not in accordance with public policy. Similar was the decision
by the Bombay High Court in R.S. Deboo v. M.V. Hindelkar [AIR 1995 Bom 68].
(ii) In Delhi Transport Corporation v. D.T.C. Mazdoor Congress [AIR 1991 SC 101],
AIR 1991 SC 101, the clause for termination of service of permanent employee of
public or semi-government undertakings or statutory corporations only on one months’s
notice or pay in lieu of notice without any inquiry was held illegal.
ACCEPTANCE
DEFINITION OF ACCEPTANCE
According to S. 2(b) “When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A proposal, when
accepted, becomes a promise.”
Thus, acceptance is the manifestation of the assent of the person to whom
the offer is made, to the terms of an offer. Once the offer is accepted, a
binding contract comes into existence provided other essentials of a contract
are present. But before the offer is accepted, it can be revoked.
Example : A makes an offer to sell his car to B for 2,00,000. B signifies his assent
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to A to buy car for 2,00,000. B’s act amounts to acceptance of A’s offer.
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Who can accept. A specific offer can be accepted only by the person to
whom it is made. In other words, a specific offer can be accepted only by the
offeree. But a general offer, e.g., an offer made to the world at large can be
accepted by any member of the public who has knowledge of the offer. This
has been explained further later in this chapter.
How to make acceptance. Acceptance may be express or implied. If the
acceptance is made in words, written or spoken, it is called express
acceptance; and if it is made otherwise than in words it is called implied
acceptance. This has been explained further later in this chapter.
LEGAL RULES FOR A VALID ACCEPTANCE

The following are the legal rules for a valid acceptance :
1. Acceptance may be express or implied. Just as an offer may be
30 Business Laws
express or implied, acceptance may also be express or implied. As per S.

9, if the acceptance is made in words, written or spoken, it is called
express acceptance. If the acceptance is made otherwise than in words,
i.e. inferred from the conduct of the party, the acceptance is implied.
Examples : (i) A says to B, “Will you sell your car for 2,00,000? Then B says to
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A, “I am willing to sell the car to you for 2,00,000.” This is a case

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of express acceptance.
(ii) Delhi Transport Corporation runs buses on different routes to carry
passengers. A, a passenger boards the bus. This is a case of
implied acceptance by A.
2. Acceptance must be given only by the person to whom it is made.

An offer can be accepted only by the person to whom it is made. This is
clear from the language of Section 2(b) which states that, ‘When the
person to whom the proposal is made signifies his assent thereto’…… If
anyone else were to accept it, no agreement is formed, since the offeror
never intended to enter into an agreement with that person.
CASE : The leading case one this point is Boulton v. Jones [(1857) 157 ER 232], In
this case, A (Jones, the defendant), who was a customer of S and with whom he had a
right of set off, ordered some goods from S. B (Boulton, the plaintiff), who had taken
over the business of S, supplied the goods to A (Jones), without informing him that the
business had changed hands. When A came to know that the goods were supplied not
by S but by B, he refused to pay for the same. In a suit by B against A for the price of
the goods, it was held that A was not liable, since B knew that the offer was not
addressed to him.
If the offer is addressed not to a specific person, but to a particular class

of persons, it can be accepted by anyone of that class. However, in the case of
general offer, it may be accepted by any member of the public having
knowledge of the offer by performing the conditions of the proposal.
3. Acceptance must be absolute and unqualified. “In order to convert a
proposal into a promise, the acceptance must be absolute and unqualified”
[S. 7(1)]. To be absolute and unqualified, the acceptance should not depart
from the terms of the offer, and it should be unconditional. The word
‘absolute’ implies acceptance of the whole of the offer. The offeree
cannot accept a part of the offer which is favourable to him and reject the
rest of the offer. A person by accepting a part of the offer cannot say that
a contract has been made. The acceptance must be unconditional.
This means that the offeree should not attach any conditions to
the acceptance. A qualified or conditional acceptance is no acceptance
at all.
CASE : In the leading is Ramanbhai v . Ghasiram [ILR (1918) 42 Bom 595], a
person applied for shares in a company. The application for shares contained the
condition that he should be appointed cashier in the company. The company allotted
shares to him but he was not appointed cashier in the company. It was held that the
acceptance of his application was not valid as whole of the offer was not accepted.
If the offeree accepts such of those terms of the offer as are

favourable to him and rejects the others, such an acceptance is a
counter-offer or counter-proposal. Similarly, a qualified or
conditional acceptance is a counter-offer. Accordingly, acceptance of
only some terms of the offer, or all the terms subject to some condition
attached, or a variation of the terms of offer, or addition of some terms; are all
examples of counter-offer which, in turn, should be accepted by the original
proposer. If he does not accept the same, no agreement is formed between the
two. A counter offer puts an end to the original offer and it cannot be
revived by subsequent acceptance.
CASE : In the leading case Hyde v. Wrench [(1840) 3 Beav. 334], A (the defendant)
offered to sell his farm to B (the plaintiff) for £ 1,000. B replied ‘I will give you £ 950’.
This was refused by A. subsequently, B replied, ‘Very well, I will give you the £ 1,000
you ask’. When A declined to stick to his original offer, B sued him for specific
performance of the contract. The Court held that the offer to buy for £ 950 in response
to the offer to sell for £ 1,000 was only a counter-offer which amounted to rejection of
the original offer and it was not possible to revive the original offer. Hence, there was
no contract between the parties.
Examples : (i) A offers to sell his car and motor-cycle for 2,20,000. B accepts the
R
offer for the car only. The acceptance is not valid because it is not
for the whole for the offer.
(ii) A makes an offer to B to purchase certain goods at a certain price.
B accepts the offer, but subject to payment in advance. This is not
valid acceptance.
A provisional acceptance subject to final approval does not ordinarily

bind either party until the final approval is given. Meanwhile the offeror can
revoke his offer.
CASE : Somasundharam Pillai v. Provincial Government of Madras [AIR 1947

Mad 366], a forest crop was put to public auction for sale with a reserve price. B’s bid
was the highest but it was much below the reserve price. His bid was provisionally
accepted by the auctioner subject to confirmation by the Divisional Forest Officer. One
of the conditions of the auction sale was that the bid could not be withdrawn between
the date of provisional acceptance and final confirmation by the Divisional Forest
Officer. No confirmation was received after lapse of long time. B revoked his bid.
Subsequntly the Divisional Forest Officer sent confirmation, despite revocation by B. It
was held that B was entitled to withdraw his bid because prohibition against
withdrawal did not have the force of law as there was no consideration to bind
him down to the condition that once a bid has been made it could not be
withdrawn.
4. Acceptance must be expressed in some usual and reasonable

manner, unless the proposal prescribes the manner in which it is
to be made. Sub-section (2) of Section 7 of the Act clearly lays down that
“the acceptance must be expressed in the some usual and reasonable
manner, unless the proposal prescribes the manner in which it is to be
accepted.”
32 Business Laws
The proposer may prescribe the manner of acceptance. He may require

that acceptance be expressed orally or in writing, or be communicated to him
by post or telephone or through email or fax or by doing some other act. For
example, the offeror may ask the offeree to nod his head, clap his hands,
make a gesture of the hand, wave a flag, fire a gun, trace the lost goods for
the announced award etc.
In Trimex International FZE Ltd. v. Vedanta Aluminium Ltd.
[(2010) 3 SCC 1], the Supreme Court held that unconditional acceptance
conveyed through e-mail, of offer made through e-mail specifying terms and
conditions thereof, satisfied the requirements of section 4 and 7.
Section 7(2) further provides, “If the proposal prescribes the manner in
which it is to be accepted, and the acceptance is not made in such manner, the
proposer may, within reasonable time after the acceptance is communicated to
him, insist that his proposal shall be accepted in the prescribed manner, and
not otherwise; but if he fails to do so, he accepts the acceptance.” Thus, is case
of deviated acceptance, the proposer may insist that his proposal must be
accepted in the prescribed manner. This he should do, within a reasonable
time after acceptance is communicated to him. If the proposer fails to insist,
within a reasonable time on the offeree’s sticking to the mode prescribed, he
is deemed to have accepted the deviated acceptance.
It must be noted that the offeror cannot prescribe ‘silence’ as the
mode of acceptance. He cannot say that, in case offeree remains silent
without communicating his acceptance within the time stipulated, his silence
itself would amount to acceptance. This principle has been clearly brought
out in Felthouse v. Bindley. This case has been explained under the next
legal rule.
5. Acceptance must be communicated. Acceptance and communication
of acceptance of offer, are both necessary for a concluded contract. This is
clear from the language of S. 2(b), which has used the phrase ‘signifies his
assent thereto’. Signification of assent is obviously not a mental resolve
but some external manifestation. A mere intent to accept an offer or
even a mental resolve to accept an offer does not give rise to a
contract. There must be intent to accept and some external
manifestation of that intent by speech, writing or other act and
thus acceptance must be communicated to the offeror. This is so
even where the offeror has said that silence itself should be construed as
acceptance. Thus a mere mental acceptance is no acceptance in the eyes
of law. Further acceptance should be communicated only by the
person who has authority to accept. An unauthorized communication
will not be a valid acceptance.
CASES : ( i) In the leading case Brogden v. Metropolitan Railway Co. [(1877) 2AC
666], A made an offer to B to supply certain goods at a certain price. B wrote the letter
of acceptance and put the letter of acceptance in the drawer of his table and forgot all
about it. It was held that putting the letter of acceptance in the drawer did not
amount to communication of acceptance without any external manifestation of

the intention to accept the offer.
(ii) In the leading case Felthouse v. Bindley [(1862) 142 ER 1037], A (the plaintiff)
offered by a letter, to buy his nephew’s horse for £ 30-15-0 adding, ‘If I hear no more
about him, I shall consider the horse mine at £ 30-15-0.’ The nephew did not reply to
this letter, but told B (the defendant), an auctioneer, to keep the horse out of sale as he
intended to reserve it for his uncle. The auctioneer sold the horse by mistake and A
(the uncle) sued him for conversion. A (the uncle) did not succeed. The Court said, “It
is clear that the nephew in his own mind intended the uncle to have his horse,
but he had not communicated his intention to the uncle.” Thus, the nephew not
having signified his assent to the offer by his uncle, his mental acceptance
cannot be taken to be acceptance.
(iii) In the leading case Powell v. Lee [(1908) 99 LT 284], Powell applied for the post of
headmaster of a school. The board of managers of the school passed a resolution
appointing him. They did not officially communicate their resolution to him, but
Dismore, one of the managers, in his individual capacity, told Powell that he has been
appointed. Later, the matter was re-opened, and Parker, another candidate, who had
originally been rejected was appointed in Powell’s place. Powell, the plaintiff, thereupon
sued Lee, the chairman of the board of managers, for breach of contract. The Court
held that in the absence of authorized communication by the entire board, there would
not be a contract, and “there must be notice of acceptance from the contracting party in
some way. Information by an unauthorized person is as insufficient as overhearing from
behind the door.”
Acceptance by performing condition, or receiving consideration.

In case of an offer of reward performance of the conditions of a proposal is an
acceptance of the proposal. This is so because it is impossible for the offeree to
communicate his acceptance otherwise than by performing the conditions of
the proposal. Section 8 of the Act recognize acceptance by conduct. It says :
“Performance of the conditions of a proposal, or the acceptance of any
consideration for a reciprocal promise which may be offered with the proposal,
is an acceptance of the proposal. See Carlill v. Carbolic Smoke Ball Co.
case, given earlier.
6. Acceptance must be given within a reasonable time and before
the offer lapses or revoked. If the proposer has fixed any time for the
acceptance of his offer, the offeree should accept it within the time so
prescribed and in the absence of any time limit so prescribed, within a
reasonable time after the offer is communicated to him. In other words,
acceptance should be given before the offer lapses by the expiry of time
fixed or a reasonable time, or before it is withdrawn or revoked by the
offeror. An offer, once dead, cannot be accepted unless a fresh offer is
made.
CASE : In Ramsgate Victoria Hotel Co. Ltd. V. Montefoire [(1866) LR 1 Ex. Ch

109], A, the defendant, applied for shares in the plaintiff company on 8th June. The
company did not write to him allotting the shares until 23rd Nov., when he was informed
that shares were allotted to him. His refusal to accept the shares led to the dispute. It
was held that he was not bound to accept the shares as his offer lapsed owing to the
delay by the company in notifying its acceptance.
34 Business Laws
7. Acceptance must succeed the offer. Acceptance of an offer in

ignorance of the same, or performance of the conditions of an offer in
ignorance of the offer, is not a valid acceptance. This is true whether the
offer is specific or general. Acceptance should be induced by the offer. As
such, acceptance should follow the offer and not precede it.
COMMUNICATION AND REVOCATION
COMMUNICATION OF OFFER AND ACCEPTANCE

Section 3 provides that communication of proposal, acceptance of proposal
and revocation of proposal and acceptance, respectively, are deemed to be
made by an act or omission of the party proposing, accepting or revoking by
which he intends to communicate such proposal, acceptance or revocation.
Section 4 of the Act has prescribed following rules regarding
communication of offer and acceptance :
Communication of offer. According to Section 4. “The communication
of a proposal is complete when it comes to the knowledge of the person to
whom it is made.”
Example : A proposes, by letter, to sell a house to B at a certain price. The
communication of the proposal is complete when B receives the letter. (Illustration to S.4).
Communication of acceptance. Section 4 of the Act further lays down
that, “The communication of an acceptance is complete: as against the
proposer, when it is put in a course of transmission to him, so as to be out of
the power of the acceptor; as against the acceptor, when it comes to the
knowledge of the proposer.”
Example : A proposes, by letter, to sell a house to B at a certain price. B accepts A’s
proposal by letter sent by post. The communication of acceptance is complete, as against
A, when the letter is posted; as against B, when the letter is received by A. (Illustration to
S. 4).
Thus, where an offer is properly accepted by means of a letter

sent through post, the acceptance is complete, and a binding
contract made, as soon as the letter of acceptance is posted, even
though the letter is lost in transit and never reaches the offeror. The
rule is based on commercial expediency. Similar is the legal position in case of
acceptance of offer by telegram.
CASES : (i) In the leading case Adams v. Lindsell [(1818) 106 ER 250], A (the
defendant) offered, by a letter to B (the plaintiff) on 2nd Sept. 1817, to sell a certain
quantity of wool at a certain price, requiring the answer by post. B received the letter on
5th Sept. The offer was accepted immediately, but owing to delay in transit, the letter of
acceptance was received by A only on 9th Sept. Waiting for the letter till 7 th Sept. A sold
the wool to another person. In a suit by B for breach of contract, it was held that the
offer had been validly accepted. The contention of B that there could be no binding
contract till A’s letter of acceptance was actually received by him was rejected by the
court.
(ii) In Household Fire and Accident Insurance Co. v. Grant [(1879) LR 4 Ex. Div.], A
(the defendant) applied for shares in a company (the plaintiffs) on 13 th Sept. 1874. The
letter of allotment mailed by the company to A on 20 th Sept., 1874 never reached him.
Three years later, the company went into liquidation. When the liquidator demanded
payment, A contended that he was not a shareholder at all since his offer was not
accepted. It was, however, held that he was liable as a shareholder since the mere
posting of the letter of allotment by the company amounted to acceptance.
Thus, when acceptance is effected through the postal medium, the

proposer becomes legally bound by the acceptance, although the letter of
acceptance is delayed or lost, provided the letter of acceptance is properly
addressed, sufficiently stamped and proved to have been actually mailed.
The contract is deemed to have been made on the date of mailing the
letter of acceptance, and at the place where acceptance is made.
Contracts through Telephone or Telex

In case of instantaneous means of communication like telephone the
contract is complete only when the acceptance is received by the
offeror and at the place where acceptance is received. The offeree,
therefore, must make sure that his acceptance is heard and understood by
the offeror. Similar is the case in case of contracts through telex.
CASES : (i) In the leading case Entores Ltd. v. Miles Far East Corporation
[(1955) 2 All ER 493] A (the plaintiffs, an English company) made an offer by telex to B
(the defendants, an American company). A’s office in London could get into direct and
instantaneous communication with B’s office in Amsterdam, Holland. The offer was to
sell a quantity of metal, and B accepted the offer by telex. The question was whether
the contract was completed in Holland or England. It was held that, “the rule about
instantaneous communications between the parties is different from the rule about the
post. The contract is complete only when the acceptance is received by the offeror; and
the contract is made at the place where the acceptance is received.”
(ii) In the leading case Bhagwan Das Goverdhan Das Kedia v. Girdhari Lal
Parashottam Das & Co. [AIR 1966 SC 543], A (Girdhari Lal Purashottam Das & Co.,
the plaintiffs) made an offer from Ahmedabad by telephone to B (Bhagwan Das
Goverdhan Das Kedia, the defendants) at Khamgaon to purchase certain goods and B
accepted the offer by telephone. B failed to supply the goods. A instituted civil
proceedings against B at Ahmedabad. The Supreme Court by majority preferred to
follow the English rule as laid down in the Entores case and saw no reason for
extending the post office rule to telephonic conversations. The Court held that the
conversation between the plaintiffs and the defendants resulted in contract at
Ahmedabad and not at Khemgaon and therefore, the City Civil Court at
Ahmedabad had the jurisdiction to try the case.
The following points emerge from the cases cited above regarding
communication through telephone or telex :
(a) The rule regarding the formation of contract through telephone or
telex is same as in the case of an oral agreement entered into by the
parties when they are in the presence of each other.
(b) If the telephone lines goes dead when the offeree is speaking his
acceptance, no contract is concluded. The contract is formed only
36 Business Laws
when the offeree repeats his acceptance and it is heard by the offeror.
The contract is made not on the first time when the offeror does not
hear, but only the second time when he hears the acceptance. If the
offeree does not repeat the acceptances, there is no contract.
(c) In case of contracts through telephone or telex the question of
revocation does not possibly arise as a definite offer is made and
accepted at the same time.
Place of Completion of Contract

The place of formation or completion of contract depends upon the manner of
communicating acceptance. When the contracting parties are face to face
during their negotiations, then the contract is complete at the place where
they are at that time.
When the contract is made though post, i.e., letter or telegram the
contract is complete at the acceptor’s place [Adams v. Lindsell (Supra)].
When the contract is entered into by instantaneous means of
communication like telephone or telex, the contract is complete at the place
where acceptance is received, i.e., at the offeror’s place [Entors Ltd. v. Miles
Far East Corporation; Bhagwan Das v. Girdhari Lal ].
COMMUNICATION OF REVOCATION
According to Section 4 of the Act “Communication of revocation is complete, as
against the person who makes it, when it is put in a course of transmission to
the person who makes it; as against the person to whom it is made, when it
comes to his knowledge.”
Examples : (i) A proposes, by letter, to sell a house to B at a certain price. A
revokes his proposal by telegram. The revocation is complete as
against A when the telegram is dispatched. It is complete as against
B when B receives it. (Illustration to S. 4)
(ii) A proposes, by letter, to sell a house to B at a certain price. B
accepts A’s proposal by a letter sent by post. B revokes his
acceptance by telegram. B’s revocation is complete as against B
when the telegram is dispatched and as against A when it reaches
him. (Illustration to S. 4).
REVOCATION OF OFFER AND ACCEPTANCE

Revocation and Lapse of Offer
According to Sir William Anson, “Acceptance is to an offer what a lighted
match is to a train of gunpowder. It produces something which cannot be
recalled or undone.
But the powder may have laid until it has become dump, or the man who
laid the train may remove it before the match is applied. So an offer may
lapse for want of acceptance or be revoked before acceptance. Also the offeree
may decide to reject the offer.”
The lighted match analogy, not only brings out the effect of acceptance of
an offer, but also the circumstances in which an offer is terminated. An offer
is terminated in the following circumstances :
1. By notice of revocation. Section 6(1) provides that a proposal is
revoked “by the communication of notice of revocation by the proposer to
the other party.” So long as the offer remains unaccepted, the offeror is
free to revoke his offer at any time. Section 5 provides that a “proposal
may be revoked at any time before the communication of acceptance is
complete as against the proposer.” According to S. 4, the communication of
acceptance, as against the proposer is complete, when it is put in a course
of transmission to him so as to be out of power of the acceptor. Thus, the
offeror may revoke his offer before the letter of acceptance is posted. Mere
decision to withdraw the offer is not sufficient. The offeror, i.e., the
proposer, must give a notice of revocation to the offeree.
Example. A proposes by a letter to sell his house to B, and B accepts the proposal by
a letter, A may revoke his proposal at any time before or at the moment when B posts his
letter of acceptance, but not afterwards. (Illustration to S. 5).
CASE : In Henthorn v. Fraser [(1892) 2 Ch. 27], A (the defendant) offered to sell a
property for £ 750 giving B (the plaintiff) the right to accept the offer within 14 days. B,
who received the offer in person, took it away to his home-town. The next day, he
mailed his letter of acceptance at 5.30 p.m. The letter was received by A the next day
at 8.30 p.m. However, at about 1 p.m. A had posted a letter revoking his offer. The
letters of acceptance and of revocation crossed each other in post. B received the letter
of revocation at 5.30 p.m. In a suit by B, it was held that revocation was not effective.
Thus, the notice of revocation of offer should reach the offeree

before the letter of acceptance is posted. It is necessary that the
communication of revocation should be from the offeror or from his duly
authorized agent.
Agreement to keep the offer open for a specified period. Where an offeror
promises to keep the offer open for a fixed time the promise is mere nudum
p a c t u m , i.e., void, unless supported by consideration [Alfred v.
Muthunayna Chetti, (1892) 2 Mad LJ 57]. In the absence of the
consideration to keep the offer open, the offeror can withdraw his offer at any
time before acceptance.
In Mountford v. Scott [(1975) 1 All ER 198], the owner of a house
agreed, in consideration of one pound, to give the plaintiff an option to
purchase the house for ten thousand pounds within a stated period. It was
held that the offer was irrevocable for the specified period of time and the
offeree could accept it notwithstanding the purported revocation.
Revocation of bid. In case of sale by auction a bid may be retracted before
the hammer is down. Similarly, where a bid has been provisionally accepted
the bidder can withdraw it before confirmation takes place as the contract is
concluded when the bid is confirmed, and formal communication of it is given
to the bidder. [Hardwar Singh v. Begum Sumbrui, AIR 1972 SC 1242].
38 Business Laws
Revocation of general offer. Where a general offer is made through

newspapers, it may be withdrawn by the same or similar media. The
revocation will be effective even if a person, after the withdrawal of offer,
performs its terms in ignorance of the withdrawal.
Revocation of standing offer. Where a person offers to supply goods up to
a specified quantity or in any quantity which may be required, at a certain
rate, during a specified period, it is called a standing offer or continuing offer.
It may be accepted from time to time by placing an order for the required
quantity as per the terms of the tender. A contract arises only when an order
is placed on the basis of the tender. The offeror can revoke the standing offer
with regard to further supply of goods, at any time, by giving a notice to the
offeree, unless the tenderer has for some consideration promised not to
withdraw or where there is a statutory prohibition against withdrawal.
[Union of India v. Maddala Thattial, AIR 1966 SC 1724].
In case of standing offer, the offeree has the right not to place any order
after having approved the tender.
2. By lapse of time. Section 6(2) lays down that a proposal is revoked “by
lapse of time prescribed in such proposal for its acceptance or, if no time is
so prescribed, by lapse of reasonable time, without communication of
acceptance.”
An offer is revoked by lapse of time if the proposer has fixed a time within
which alone acceptance is to be effected, and the acceptance is not made
within that time. If, for instance, the offer stipulates that “this offer is to be
left open until Friday, 9 a.m., 12th June”, it should be accepted, if unrevoked,
at any time up to the hour named, after which the offer would lapse. In such
a case, it would just be sufficient if the acceptor has posted the letter of
acceptance before the time stipulated although the proposer may receive the
letter of acceptance after the expiry of the time.
If the offer does not stipulate any period of time for acceptance, the offer
may be accepted within a reasonable time. What is a reasonable time, will, of
course, depend upon the circumstances of each case and it is for the court to
determine the reasonable time.
CASE : In Ramsgate Victoria Hotel Co. v. Montefoire [(1866) LR Ex. Ch. 109], an
offer to purchase share made in June was not accepted till November. It was held that
the offer had lapsed because of the delay to accept it within reasonable time.
3. By failure of the acceptor to fulfill a condition precedent. S. 6(3)

provides that a proposal is revoked “by the failure of the acceptor to fulfill
a condition precedent to acceptance.”
A offers to sell certain goods. at a certain price, to B if he (B) stops selling
the product of A’s competitor. The offer stands revoked and cannot be
accepted by B, if B continues to sell the product of A’s competitor.
4. By death or insanity of the proposer. S.6(4) provides that a proposal

is revoked “by the death or insanity if the proposer, if the fact of his death
comes to knowledge of the acceptor before acceptance.” An acceptance in
ignorance of the death or insanity of the offeror gives rise to a contract.
Although S.6 of the Act does not say anything about the effect of death of
the offeree, it was observed in Reynolds v. Atherton [(1921) 125 LT 690],
that an offer ceases by operation of law on the death of the offeree because
the offer is not meant to be made to a dead person or his executors.
5. By rejection of offer. An offer lapses if it is rejected by the offeree. The
rejection may be express or implied. Implied refection takes place when
the offeree makes a counter proposal or gives conditional acceptance.
CASE : In the leading case Hyde v. Wrench, [(1840) 3 Beav. 334], A, made an offer
to sell a farm to B for £ 1,000. B offered £ 950. A refused the counter-offer. Later on, B
offered to purchase the farm for £ 1,000. it was held that there was no contract
because B by offering £ 950 has rejected the original offer.
6. By supervening impossibility. An offer lapses if the contract

contemplated by the offer become illegal or impossible to perform.
Example. A makes an offer to B to sell his car that a certain price and before the
acceptance of the offer by B the car is destroyed by fire.
Revocation of Acceptance
According to Section 5, “An acceptance may be revoked at any time before the
communication of acceptance is complete as against the acceptor, but not
afterwards.”
Since communication of the acceptance is complete as against the
acceptor, when it comes to be knowledge of the proposer as per Section 4 of
the Act, the acceptor is permitted to make use of this interval to revoke his
acceptance. In other words, if the acceptor wants to revoke his acceptance
after mailing the letter of acceptance, he should intimate his revocation to the
offeror earlier than the receipt of acceptance by the offeror.
Example. A proposes by a letter sent by post, to sell his house to B, B accepts the
proposal by a letter sent by post. B may revoke his acceptance at anytime before or at the
moment when the letter communicating it reaches A, but not afterwares. (Illustration to
Section 5.)
The illustration suggests that when the letter of acceptance and the letter
or telegram revoking the acceptance reach together it would be a case of
revocation of acceptance as they both cancel each other and as such there
would be no binding contract. Moreover in the illustration the expression
used is before or at the moment. It may be noted here that there is no
unanimity of this point and some authors believes that it would be a case of
revocation when the telegram revoking the acceptance is read first than the
letter of acceptance and a case of contract if the letter of acceptance is read
first than the letter or telegram of revocation.
40 Business Laws
If the letter of acceptance and letter or revocation of acceptance were

received together, the revocation was held to be effective. The Court said, “the
admission that the two letters were received together puts and end to the
case” [Countess of Dunmore v. Alexander (1890) 9 Court of Sessions 190].
COMMENT ON CERTAIN STATEMENTS

Agreement subject to contract
Where an offeree acceptance an offer “subject to contract” or “subject to final
contract” or “subject to contract to be prepared by the solicitors”, the matter is
still in the negotiation stage and parties do not intend to create legal relation
until a formal contract is prepared and signed by them.
CASE : A and B entered into an agreement for purchase of a residential flat by B

“subject to a proper contract” to be prepared by B’s solicitors. A document was
prepared by A’s solicitors and approved by B’s solicitors, but B refused to sign the
document. It was held that there was no contract [Chillingworth v. Eshe, (1924) 1 Ch.
97].
Agreement to agree in future

An agreement to agree in future is not a contract, because unless all the
terms of the contract are agreed there is no binding contract. Thus a contract
to enter into a contract is not a valid contract. In Foley vs. Classique
Coaches Ltd. [(1934) 2 KB 1], it was observed. “It is indisputable that unless
all the material terms of the contract are agreed there is no binding
obligation. An agreement to agree in the future is not a contract. Similarly
there is no contract if material term is neither settled nor implied by law and
the document contains no machinery for ascertaining it.” If an agreement
contains a machinery for ascertaining a vague term, the agreement is not
void.
CASE : In the aforesaid Foley’s as case 45 A sold a piece of land to a motor

company subject to an agreement that the company would buy petrol required for their
vehicles from A at a price to be agreed by the parties from time to time and in case of
any dispute by arbitration. The price was never agreed between A and the motor
company and the company refused to buy the petrol. It was held that there was a
binding contract to buy petrol of reasonable quality at a reasonable price to be
determined in case of dispute by arbitration
“Acceptance is to offer what a lighted match is to a train of gun

powder”
Sir William Anson says : “Acceptance is to offer what a lighted match is to
a train of gunpowder. It produces something which cannot be recalled or
undone. But the powder may have laid until it has become dump, or the man
who laid the train may remove it before the match is applied. So an offer may
lapse for want to acceptance, or be revoked before acceptance. Acceptance
converts the offer into a promise, then it is too late to remove”. This means that
as soon as a lighted match is brought in contact with a train of gunpowder,
the gunpowder explodes. When acceptance, which is compared to a lighted

match, comes into contract with a train of gun powder, it ripen into a contract
in exactly the same way as instantaneous explosion. An acceptance has, thus,
the same effect of turning the offer into a binding obligation. The lighted
match analogy, not only brings out the effect of acceptance of an offer, but
also the circumstances in which an offer is terminated.
REVIEW QUESTIONS
1. What is an offer? State the essentials of a valid offer.
2. Distinguish between an offer and an invitation to offer.
[B.Com., B.Com. (H), D.U.]
3. Define acceptance and state the legal rules for a valid acceptance.
4. “A mental resolve to accept an offer does not give rise to a contract.”
Comment. [B.Com. and B.Com. (H)]
5. “Acceptance is to offer what a lighted match is to a train of gunpowder.”
Discuss the statement in the context of acceptance of an offer.
6. “Performance of the conditions of a proposal is an acceptance of the proposal.”
Discuss the statement in the context of communication of acceptance in case
of general offer.
7. “Two manifestations of a willingness to make the same bargain do not
constitute a contract unless one is made with reference to the other.”
Comment. [Hint : Explain cross offers]
8. “Acceptance is more than a mere mental assent.” Comments.
9. “A contract to make a contract is no contract.” Comment.
10. How and on what grounds a proposal stands revoked ? Explain.
[B.Com., D.U.]
11. State the law relating to contracts by post and contracts by telephone.
[B.Com., D.U.]
12. Write short notes on the following :
(a) Invitation to offer (b) Cross offers (c) Counter-offer (d) Standing offer (e)
Lapse of offer.
13. “Special conditions of the offer must be communicated to the other party at
the time of formation of a contract.” Critically examine this statement giving
suitable examples. [B.Com. (H), D.U.]
14. State with reasons whether the following statement are true or false.
(a) A proposal when accepted always becomes a contract.
(b) All kinds of obligations created between the parties form part of
contracts.
(c) Communication of an offer is complete when the letter is posted though
it has not reached the person to whom the offer is made.
(d) Acceptance can be made even without the knowledge of the offer.
(e) A proposal may be revoked by the proposer before the posting of the
letter of acceptance by the acceptor.
[Ans. True : (e) False : (a), (b), (c), (d).]
15. Select the best answer :
(i) A sends a letter of offer on 12th July. It reaches B on 15th July. B posts
42 Business Laws
his letter of acceptance on 18th July. The letter of acceptance reaches A

on 21 st July. The communication of offer is complete on :
(a) 12 th July; (b) 15th July; (c) 18 th July; (d) 21 st July;
th
[Hint : (b) 15 July]
(ii) In the above question communication of acceptance is complete as
against B on :
(a) 15 th July; (b) 18 th July; (c) 21 st July; (d) none of these
[Hint : (c) 21st July]
PRACTICAL PROBLEMS
1. A writes to B and says: “I hear that you are thinking of selling your
television. If it is in good order and if the price if right, I would like to buy it.
Please advise by return post.”
B wrote back saying : “The television is in good working order and is cheap at
R 8,000”.
To this A replied saying: “I accept your offer and will buy television for
R 8,000.”
Shortly after receiving this letter from A, B received an offer of 10,000 from
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his friend. As a result B now wishes to sell the television to his friend.
(a) Advise B.
(b) Would your answer be different if B had said in his letter to A. “The
television is in good working order and cheap at 8,000. Please advise
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by return post whether you wish to have the television.”

[Hint : (a) No contract between A and B (Harvey v. Facey). (b) contract
between A and B.]
2. The dog of A was missing. He distributed handbills whereby he announced a
reward of 1,000 to any person who would trace the dog. B had not seen the
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handbills, traced the dog of A. Had B validity accepted the offer of A?

[Hind: B had not validly accepted the offer as he had not seen the handbills
(Lalman Shukla V. Gauri Dutt)]
3. The Figure Correction Company issued the following advertisement in the
newspaper:
“Any person who uses our latest invention. called “Fatloss” in accordance
with the prescribed conditions shall lose weight upon ten kilos in one month.
The company shall pay an amount of 1,000 to anyone who does not lose
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weight, as stated above, after using the ‘Fatloss’ for one month as required
above.”
The ‘Fatloss’ is purchased and used by ten persons, according to the
prescribed conditions, and all of them find that it is absolutely ineffective.
Discuss whether these persons can claim the promised reward from the
company.
[Hint : The persons can claim the promised reward from the company
(Carlill v. Carbolic Smoke Ball Co.).]
4. A offered to purchase the car of B for 1,50,000 through a letter dead July
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1.20x2. The letter also stated. “It I do not hear anything from you by July, 15,
20x2. I shall consider the car as mine at 1,50,000. B, who was badly in need
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of money, sold the car on July 10, 20x2, after receipt of A’s letter for
R 1,48,000. No reply was sent to B by A. A filed a suit against B on the ground
that under the contract the car had become his property as no reply was sent
by B to him. Decide.
[Hint : There was no contract between A and B for the purchase of car as
silence cannot be prescribed as the mode of acceptance (Felthouse v.
Bindley).]
5. A sends a letter on July 1, 20x2, by post, to B offering to purchase his house
for 5,00,000. The letter was received by B on July 4, 20x2. B posts his letter
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of acceptance to A on July 6, 20x2. The letter of acceptance is however, lost in

the transit and never reaches A. Is there a binding contract in this case?
[Hint : Yes (Household Fire Insurance Co. v. Grant)]
6. A posts an offer to B on July 1, 20x2. B posts his acceptance on July 5, 20x2.
In the meantime A posts his letter of revocation of offer to B on July 4, 20x2
which is received by B on July 6 20x2. Is there an enforceable contract in this
case?
[Hint : Yes, Revocation of offer is not effective in this case.]
7. Shop- owner declares a 50% reduction sale of all items displayed on the
counter. A picks up a shirt from the counter having original price tag of 350
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on it and offers 175 for it. The shop-owner refuses to sell it on the ground
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that it was not for sale. Advise.

[Hint : Shop-owner can refuse to sell (Pharmaceutical Society of Great
Britain v. Boots Cash Chemists (Southern) Ltd.).]
8. Land development authority advertised in the press for sale of plot of land by
auction on July 1, 20x2. Large number of people had come from far and
distance after spending lot of money. On the fixed date, an official of the
authority appeared on the venue of the auction and announced that auction
had been postponed by a month and express regrets for the inconvenience
caused to the prospective bidders. Can the bidders claim any compensation
from the authority for the inconvenience and damage caused to them by
postponement of the auction without any valid reasons?
[Hint : The prospective bidders cannot claim any compensation (Harris v.
Nickerson).]
9. A offered B to buy certain goods at 10,000. A again wrote to B’s agent
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asking whether his offer had been accepted and also stating that he (A) was
willing to pay even higher price if found reasonable. B’s agent replied that B
would not accept less than 15,000. A then wrote that he was willing to pay
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R 15,000. Whether there was a concluded contract in this case ?

[Hint : No (Mcpherson v. Appanna).]
10. On 28th November, 20x2 B wrote to A offering to sell and deliver to him 20
bags of rice of 50 kg. each at 1,500 per bag. On the same day, A wrote to B
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offering to buy 20 bags of rice of 50 kg. each at 1,500 per bag. The two
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letters crossed in post. A contends that there is a contract between himself

and B. Is A’s contention tenable ? Given reasons for your answer.
[Hint : A’s contention is not tenable. Cross offers.]
11. A offers to sell his cycle to B for 400. B offers to buy it for 350. A refuses to
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sell. B then says to A, “I accept your offer and shall purchase the cycle for
R 400.” Is A bound to sell the cycle to B for 400?
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[Hint : B’s acceptance is a counter-offer. A is not bound to sell the cycle.

(Hyde v. Wrench.)]
12. A offers to sell some goods to B for 10,000 and asks him to convey his
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acceptance by telegram. B accepts the offer and sends a letter to that effect. Is
a bound by B’s acceptance.
[Hint : Deviated acceptance. A is not bound if he intimates to B that he does
not acceptance the acceptance given in a different manner.]
44 Business Laws
13. A in Delhi rings up B of Mumbai offering to sell a machine for 1,00,000. B

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says that he accepts the offer but at that precise moment due to some
mechanical defect in A’s telephone, A does not hear B’s acceptance. Is there
binding contract between A and B?
[Hint : There is no contract. Acceptance has not been communicated
(Entorse Ltd. v. Miles Far East Corporation; and Bhagwan Das
Goverdhan Das Kedia v. Girdhari Lal Parashottam Das & Co.).]
14. A and B are standing in the opposite banks of a small river. A shouts offering
his scooter to B for 5,000. B hears the offer and shouts back that he accepts
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it. Unfortunately, at that precise moment, a low flying aircraft passes by and
B’s acceptance is not heard by A because of the noise. Is there is binding
contract between A and B ?
[Hint : No. Acceptance has not been communicated.]
15. A offered to pay 50,000 to any person who would swim one km. on Mumbai’s
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sea coast on the New Year’s Day of 20x2. A fisherman, without any
information about the offer, claimed 50,000 on swimming the distance to
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save his life after he was accidently thrown overboard by the rough sea
waves. Can the fisherman claim the money?
[Hint : No. There cannot be acceptance in ignorance of the offer (Lalman v.
Gauri Dutt).]
4 Consideration
LEARNING OBJECTIVES
After reading this chapter, you will be able to understand :
➥ Need for and Definition of Consideration
➥ Legal Rules as to Consideration
➥ Exceptions to the Rule “No Consideration, No Contract”.
➥ Privity of Contract
NEED FOR CONSIDERATION

Consideration is one of the most important essentials of a valid contract.
Section 10 of the Act declares that an agreement is enforceable by law only if
it is made for lawful consideration, and Section 25 lays down that an
agreement made without consideration is void. Accordingly an agreement
which is not supported by consideration is nudum pactum (a a bare
agreement) i.e. void, and no cause of action arises from a bare agreement.
Thus, barring the exception mentioned in section 25 of the Act and
elsewhere, consideration, as a rule, is necessary for the validity of an
agreement. The absence of consideration makes a promise gratuitous and a
gratuitous promise is not enforceable at law.
DEFINITION OF CONSIDERATION
Consideration is price of a promise, or something in return for the promise,
i.e., quid pro quo. Sir Frederick Pollock in Pollock on Contracts, 13th Ed., page
133, says: “Consideration is the price for which the promise of the other is
bought, and the promise thus given for value is enforceable” [(1975) LR 10 Ex.
153].
In Currie v. Misa, Lush, J. gave the most popular and influential
definition of consideration, which is as follows:
“A valuable consideration, in the sense of law, may consist either in some
right, interest, profit or benefit accruing to the one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other.”
Section 2(d) of the Act defines consideration comprehensively. It says:
“When at the desire of the promisor, the promisee or any other
person has done or abstained from doing, or does or abstains from
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doing, or promises do or to abstain from doing something, such act

or abstinence or promise is called a consideration for the promise.”
The analysis of the definition given in S.2 (d) shows that it consists of the
following components:
(1) The act, abstinence or promise which forms the consideration must be
done at the desire of the promisor; (2) it may be done by the promisee or any
other person; (3) the act or abstinence may have been already executed or in
the process of being done or may be still executory and (4) it need not be
adequate but it must be something of value in the eyes of law.
Examples : (i) A agrees to sell his house to B for 10,000. Here B’s promise to
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pay the sum of 10,000 is the consideration for A‘s promise to sell
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the house, and A’s promise to sell the house is the consideration for
B’s promise to pay 10,000. [Illustration ( a) to S.23]
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(ii) A promises his debtor B not to file a suit against him for six months
on B’s agreeing to pay him 100 more. The abstinence of A is the
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consideration for B’s promise to pay.

(iii) A says to B, “ If you drink 10 bottles of a cold drink in less than 2
minutes, I will give you a specific shirt. The consideration for B is
the shirt and for A the suffering taken up by B.
(iv) Two television companies enter into an agreement under which one
would not telecast movies on Saturdays and the other would not
telecast movies on Sundays for a specified period. The
consideration for both parties is the detriment placed on each other.
(v) A Ltd. enters into an agreement with its brand ambassador that he
will not endorse the brands of any rival company. A Ltd. would pay
him rupees one crore for this. The consideration for the brand
ambassador is rupees one crore, and that for A Ltd. is the detriment
placed on the brand ambassador.
CASE : In Chappell & Co. Ltd. v. Nestle Co. Ltd. [(1959) 2 All ER 701], Nestle Co.
Ltd. offered to supply gramophone records in exchange for three wrappers of
chocolates and a specified amount of money. It was held that wrappers formed part of
the consideration.
LEGAL RULES AS TO CONSIDERATION

An analysis of the definition of consideration given in Section 2(d) of the Act,
enables us to mention the following legal rules as to consideration:
1. Consideration must be furnished at the desire of the promisor.
The act, abstinence, or promise, which is the consideration for the
promise should be done, suffered, or promised to be done at the desire of
the promisor, as the opening sentence of the definition of consideration
lays down. The desire of promisor may be express or, it may be implied
from the conduct of the parties. An act done at the desire of a third party
is not consideration.
CASE : In the leading case Durga Prasad v. Baldeo [(1880) 3 All 221], A (the
plaintiff) constructed a market at the request of the District Collector. The persons (the
Consideration 47
defendants), who occupied the shops, promised to pay to A, the plaintiff, a commission
on articles sold in the market established by him. In suit by A for the recovery of
commission, it was held that the promise was not supported by consideration, since the
market was constructed not at the request of the shop-keepers but at the request of the
District Collector.
Promise to contribute to a charitable or religious cause. Where the

promisor has agreed to contribute to charitable or religious cause,
the promise becomes enforceable as soon as any definite steps have
been taken in furtherance of the object and on the faith of the
promised subscription. Such a promise is treated as equivalent of
consideration in connection with the law of charitable subscriptions.
CASES : (i ) In the leading Case Kedarnath Bhattacharjee v. Gorie Mohomed

[1866 ILR 14 Cal 64], the Commissioners of the Howrah Municipality started inviting
and collecting subscriptions from the public with a view to erecting a Town Hall at
Howrah. A (the plaintiff) was the Vice-Chairman of the Municipality. B (the defendant)
was one of the subscribers, having signed his name in the subscription book for 100.
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On the basis of promise made by the subscribers, (included B), A entered into a
contract with a contractor for the purpose of building the Town Hall. B did not pay the
amount promised. Therefore, he was sued by A as B was one of the persons who has
promised to subscribe for the specific purpose. B contended that there was no
consideration. He was, however, held liable. The act of A in entering into contract
with the contractor was done at the desire of B, the promisor (defendant), so as
to constitute consideration within the meaning of Section 2(d).
(ii) In Abdul Aziz v. Mosum Ali (AIR 1914 All 22), a person, (the defendant), promised
to pay 500 as subscription for rebuilding a mosque. He was held not liable to pay the
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subscription as nothing had been done to carry out the repairs and reconstruction of
the mosque.
However, promise to pay subscription in order to meet a liability

already incurred is not enforceable.
In Doraswami lyer v. Arunachala Ayyar [AIR 1936 Mad 135], the
repair of a temple was in progress. As the work proceeded more money was
required and to collect the required amount subscriptions were invited. A (the
defendant) promised to pay 125. Later the backed out. A suit was filed by
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temple authorities to recover the sum of 125. But no recovery was allowed
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by the Madras High Court as no fresh liabilities were incurred by the

promisee.
2. Consideration may move from promisee or any other person.

According to the definition laid down in Section 2(d), the act constituting
consideration may be done either by the promisee or any other person.
Thus, consideration may move from promisee or any other person.
Therefore, a stranger to consideration can sue on a contract,
provided he is party to the contract. The leading case on this point is
Chinnaya v. Ramayya.
Example : A, B and enter into a contract under which A pays B 5,000 for purchase
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of certain garments for C. Here, C is a stranger to consideration, but he can enforce the
contract against B as the consideration has been given by A.
48 Business Laws
CASE : In the leading case Chinnaya v. Ramayya [(1882) 4 Mad 137], on 9th April,
1877. A, an old lady, by way of gift, made over certain property to B (Ramayya, the
defendant), her daughter, by a registered deed of gift with a stipulation that the
daughter should pay annually 653 to C, the donor’s brother (Chinnaya, the plaintiff),
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as the mother was paying formerly, and the amount should be paid until the daughter
gave him a village which yielded the same amount. On the same date, B executed an
agreement in favour of C, the brother of the donor, promising to carry out the terms of
the deed of gift. Since B declined to fulfill her promise, C (the donor’s brother) filed a
suit. It was held, that the agreement was enforceable by C. C, the maternal uncle of
B, though a stranger to consideration was entitled to maintain his suit. It may be noted
that the consideration had moved from old lady and not from her brother.
In Nihal Singh v. State of Punjab [AIR 2013 SC 3547], the Supreme

Court also held that consideration for a contract need not always necessarily
flow from parties to the contract.
3. Consideration may be past, present or future. The usage of the
words, ‘has been or abstained from doing’, ‘or does or abstains from doing’,
‘or promises to do or to abstain from doing,’ in the definition of
consideration given in section 2(d) of the Act, clearly indicates that
consideration may be past, present or future.
Thus consideration may consists of either something done or not done in
the past or something done or not done in the present or something promised
to be done or not done in the future.
Past consideration. Past consideration is something done or not done, at
the desire of the promisor, before the making of the agreement. It always
consists of an act done or not done without any promise. In other words,
“When a promise is made by one person in favour of another for
something done by the latter in the past or something abstained from
being done in the past, the consideration is said to be past
consideration.”
Example : A’s warehouse has cought fire, B being an on-looker, is requested by A to
assist him in quenching the fire. Accordingly, B gratuitously assisting him. Subsequently, A
promises to pay 100 to B for the assistance he rendered. Here, the consideration is past
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since the act was performed before making the promise or before making the agreement.
Section 2(d) requires that the act is done at the desire of the promisor.
This presupposes the existence of a promise to pay for the act done. Even if a
subsequent promise is given the courts can infer an implied promise to pay.
According to the English law, past consideration is no consideration at all.
In India, past consideration is sufficient to support a promise, and this is
clear from the language of Section 2(d) of the Act. However, it should move at
the request of the promisor. A past voluntary service, on the other hand, is
governed by exception provided for in Section 25(2) of the Act.
Present or executed consideration. The consideration which moves
simultaneously with the promise is called present consideration. It consists of
an act for a promise. It is the act which forms the consideration. No contract
Consideration 49
is formed unless and until the act is performed, e.g., payment for a railway
ticket. In such a case, the liability is outstanding on one side only. In case of
present consideration the formation of contract and provision of
consideration by one of the parties takes place simultaneously. If the
consideration is executed on both sides it is a case of executed contract and
not of present consideration.
Examples : (i) A sells and delivers a bag of rice of 50 kg to B upon the latter’s
promise to pay 1,000 next week. A’s consideration for B’s promise
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is present or executed.
(ii) A reward is offered for finding a lost dog, the offer can be accepted
by producing the dog to the offeror and that is also the
consideration for the promise.
Future consideration. Where both parties to a contract have promised to

each other of doing or not doing something, the promise of one is the
consideration for the promise of the other, and consideration on both
sides moves at a future date. In such a case, consideration is said to be
future or executory.
Example. A promises to sell and deliver a bag of rice of 50 kg to B for 2,000 after a
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week, upon B’s promise to pay the amount to A at the time of delivery. The promise of A is
supported by promise of B and the consideration is executory on both sides.
Thus, in the case of future consideration, the consideration is outstanding
on both sides whereas in case of present consideration it is outstanding on
one side only.
CASE : In Upton Rural District Council v. Powell [(1942) 1 All ER 220], fire broke
out in the defendant’s farm. He believed that he is entitled to the free services of Upton
Fire Brigade and therefore, summoned it to put out the fire. The Brigade put out the fire.
The defendant’s farm was not within the free service zone of the Upton Fire Brigade.
Therefore, it claimed compensation for the services. The court said : “The truth of the
matter is that the defendant wanted the services of Upton; he asked for the services of
the Upton and Upton, in response to that request provided the services. Hence, the
services were rendered on an implied promise to pay for them.” Therefore, the
defendant was held liable to pay for the services rendered by the Upton.
4. Consideration may be an act, abstinence or promise. According to

S2(d) consideration may be an act, abstinence or promise. In other words
consideration may consists of either a positive act or an abstinence i.e. a
negative act or, it may consists of a promise.
(a) An act. It means doing of a positive act.
Example : A request B to sell and deliver certain goods on credit. B agrees to do so
provided C guarantees the payment of the price of the goods. C guarantees the payment
of the price. Here sale of goods by B to A is sufficient consideration for C’s promise to
guarantee the payment.
(b) An abstinence. It means abstaining from doing something. Thus,
forbearance to sue is a good consideration provided the plaintiff has
a bonafide belief that he has a reasonably good claim against the
50 Business Laws
defendant. Similarly, refraining from smoking, gambling or drinking

would supply consideration needed to support another’s promise to
pay a certain sum to the one who refrained.
In Debi Radha Rani v. Ram Das [AIR 1941 Pat 282], a wife’s
forbearance to sue her husband amounted to consideration for husband’s
agreement for payment of maintenance allowance.
Example : There is an agreement of loan between A, the lender, and B, the borrower.
The loan becomes due. B fails to pay the loan. B promises to raise the rate of interest from
10% to 12% per annum in consideration of A refraining from filing a suit against B for a
year. Here A’s abstinence is in consideration of B’s promise.
(c) A return promise. Consideration may be promise by one party in
return of a promise by the other party.
Example : A agrees to sell his house to B for 5,00,000. Here B’s promise to pay the
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sum of 5,00,000 is the consideration for A’s promise to sell the house, and A’s promise
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to sell the house is the consideration for B’s promise to pay 5,00,000.
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5. Consideration need not be adequate. Consideration need not be

adequate or equivalent to the promise. All that is necessary is that an
agreement should be supported by consideration, and the parties are free
to determine the appropriate consideration for a promise at the time of
making the bargain. Adequacy or otherwise of consideration is only the
look-out of the promisor.
CASE : In Bolton v. Madden [(1873) LR 9 QB 55], A agreed to sell to B a watch at a

much lower price than its worth. A’s consent to the agreement was freely given. The
contract was held enforceable although consideration was not adequate.
Explanation 2 to Section 25 of the Act states that, “An agreement to which

the consent of the promisor is freely given is not void merely because the
consideration inadequate; but the inadequacy of consideration may be taken
into account by the Court in determining the question whether the consent of
the promisor was freely given.”
Examples : (i) A agrees to sell a horse worth 1,000 for 10. A’s consent of the
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agreement was freely given. The agreement is a contract

notwithstanding the inadequacy of the consideration. (Illustration to
S. 25)
(ii) A agrees to sell a horse worth 1,000 for 10. A denies that his
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consent to the agreement was freely given. The inadequacy of the

consideration is a fact which the Court should taken into account in
considering whether or not A’s consent was freely given. [Illustration
to S. 25]
6. Consideration must be something of value in the eyes of law.

Consideration need not be adequate to the promise, but it must be of
some value in the eyes of law.
Example. A promise to B to give his new Rolls-Royce car to B, provided B shall fetch
it from the garage. The act of fetching the car cannot be called consideration for the
Consideration 51
promise. Such an act may satisfy the words of the definition, but it does not catch its
spirit.
CASES : (i) In White v. Bluett [(1853) 23 LJ], the promise by a father to release his
son from an outstanding loan if the latter refrained from boring with complaints that he
had not been treated equally with other children in the distribution of property, was
refused to be enforced, since the essential elements of a bargain were lacking. The
Court observed that, “It would be ridiculous to suppose that such promises could be
binding. In reality there was no consideration whatever.”
(ii) In Errington v. Errington and Woods [(1952) 1 KB 290], A, father bought a home
for his son B and daughter-in-law C to live in. He paid one-third of the purchase price
and borrowed the balance on mortgage. He told B and C that if they paid the weekly
instalments, he would convey the house to them when all instalments are paid. B and C
duly paid the instalments though they never contracted to do so. Payment of mortgage
debt by B and C was held to be consideration for A’s promise to give the house to
them.
Consideration must be lawful. It should not be uncertain or vague. It

should not be impossible.
7. Pre-existing Obligations. Consideration is illusory when a person

promise to do something which he is already bound to do by law or by
contract to the same party. Consideration must be something more than
what a promise is already bound to do. But doing or agreeing to do
more than one’s official duty will serve as consideration.
CASES : (i) In Collins v. Godefroy [(1831) 109 ER 1040], A(the plaintiff), who has
received summons to give evidence on behalf of B (the defendant) in a case in which
the latter was a litigant, had been promised by B six guineas for the trouble taken. In a
suit by A for the recovery of the promised amount, it was held that there was no
consideration for the promise.
(ii) In Stilk v. Myric [(1809) 2 Comp 317], two seamen deserted in the course of a
voyage from London to Baltic sea and back. As the captain could not find any
substitutes, he promised the rest of the crew members that wages of the two who had
deserted would be equally divided among them if they would work the ship home. On
their arrival at London, the extra pay was refused. Stilk (one of the rest of the crew
members) filed a suit for recovery of the extra wages. It was held that the seamen were
already under a duty to work the ship to its return journey to London . Therefore, they
were not entitled to the extra wages.
(iii) In Ramchandra Chintamani v. Kalu Raju [(1877) 2 Bom 362], The plaintiff, an
advocate, agreed to appear on behalf of client in a certain suit. Subsequently, the client
agreed to pay the advocate a certain sum in addition to his fees, if the suit was
successful. The client won the case. But he refused to pay the additional amount. The
advocate brought an action for recovery of the additional amount. it was held that the
plaintiff having accepted the vakalatnama was already bound to render his best service
as a pleader.
Example : A fire breaks out in D’s shop. He offers to pay an amount of 500 to R
anyone who would bring out his trapped son S safe. P, a fireman, at great risk to his life
brings out S alive. D is bound to pay the promised amount to P, as he is not bound to risk
his life in that rescue.
52 Business Laws
EXCEPTIONS TO THE RULE, “NO CONSIDERATION, NO CONTRACT”

The general rule as specified in S.25 is that, “An agreement made without
consideration is void”. But there are certain exceptions to this rule, where an
agreement without consideration will be enforceable. These exceptions are as
follows :
1. Agreement made on account of natural love and affection.
According to Section 25 (1), an agreement without consideration is valid
if, “it is expressed in writing and registered under the law for the time
being in force for the registration of documents, and is made on account of
natural love and affection between parties standing in a near relation to
each other.”
Section 25(1) lays down four essential requirements for validity of an
agreement made without consideration. They are : (a) agreement is expressed
in writing, (b) registered, (c) made on account of natural love and affection,
and (d) it is between parties standing in near relation to each other.
Example. A, for natural love and affection, promises to give his son B 1,000. A puts
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his promise to B in writing and registers it. This s a contract. (Illustration to S. 25)
The expression “near relation” means parties related by blood or
marriage. But nearness of relationship does not necessarily mean that there
is love and affection between the parties.
CASES : (i) In Rajlukhy Dabee v. Bhootnath Mukherjee [(1900) 4 Cal WN 488], a

Hindu husband, after referring to frequent quarrels between him and his wife, agreed
by a registered document, to pay her a fixed sum for her separate residence and
maintenance. In a suit by the wife to enforce the agreement, Calcutta (now Kolkata)
High Court held that the agreement was void for want of consideration, and the
agreement could not be said to have been made on account of natural love and
affection to attract the exception laid down in Section 25 (1).
(ii) In Ranganayakamma v. K.S. Prakash [(2008) 15 SCC 673], a power of attorney
was executed by sister relinquishing her right to share in joint family properties in
favour of her brother on receipt of rupee 1 out of love and affection for the brother
authorizing the brother to enter into partition on her behalf. The power of attoney was
registered. The Supreme Court held that the deed of partition was valid being in writing
and registered, not void in view of exception provided under Section 25.
2. Promise to compensate for voluntary service. Section 25(2) lays

down that an agreement made without consideration is valid and
enforceable if “it is a promise to compensate, wholly or in part, a person
who has already voluntarily done something for the promisor, or
something which the promisor was legally compellable to do.”
Examples : (i) A finds B’s purse and gives it to him. B promises to give 50. This
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is a contract. (Illustration to S. 25)

(ii) A supports B’s infant son. B promises pay A’s expenses in so doing.
This is a contract. (Illustration to S. 25).
In order to bring a promise within this statutory exception, it is necessary
to satisfy the certain conditions. These are:
Consideration 53
(a) Voluntary service. The services must have been rendered

voluntarily. If the services have been rendered at the desire of the
promisor, then it is covered under S. 2(d) and not under this
exception.
(b) For the promisor. The voluntary act should have been done for the
promisor and not for anybody else.
Example. W is bathing on the bank of a river. She slips into the water. B, a boatman
is able to save her voluntarily and she promises to pay him 1,000 for saving her life.
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Subsequently W refuses to pay the said amount to B. B sues W. B is entitled to recover

the amount under S. 25(2).
(c) Existence of promisor. The promisor must be in existence at the
time when the act was done. For example, where services are
rendered for a company by the promoter before the formation of the
company, a subsequent promise to pay for the services cannot be
brought within the exception except in certain cases as Specified in
the Specific Relief Act.
(d) Intention to compensate the promisee. The intention of the
promisor should have been to compensate the promisee. There
should not be any other motive.
CASE : A father, who was heavily indebted, transferred some immovable property to
his son in consideration of the son having sent money to his father from time to time,
not intending to make a loan. The transaction was held not to fall within this exception
as the real intention was not to compensate the son but to defraud the creditors of the
father [Abdullah Khan v. Purshottam, (1948) AIR Bom. 265].
(e) Contractual competence. The promisor may not be competent to

contract at the time of receiving service. It has been held that a
promise made after attaining majority to compensate a person, who
has already voluntarily done something for the promisor even at a
time when the promisor was minor falls within the purview of S. 25
(2) of the Indian Contract Act [Karam Chand v. Basant Kaur,
(1911) Punj Records No. 31]. However, if a minor makes a promise to
compensate during his minority for the voluntarily service rendered
for him, the promise shall not be binding.
In a leading case, a promise made by a person after attaining
majority to repay money advanced during his minority was held to
be invalid and outside the scope of S. 25 (2) of the Indian Contract
Act because a promise to repay a loan taken during minority cannot
be called a promise to compensate for a voluntary act [Indrani
Ramaswami v. Anthappa, (1906) 16 Mad LJ 422].
(f) Lawful services. The services rendered must be legal. A promise to
pay for past cohabitation with a woman whose husband is alive,
cannot fall under this exception because past cohabitation is deemed
to be adulterous [Alice Mary Hill v. William Clark, (1905) 27 All
266].
54 Business Laws
3. A promise to pay time-barred debt. A promise to pay a time-barred

debt cannot be enforced for want of consideration. However, S. 25(2) lays
down that a promise to pay, wholly or in part, time barred debt is
enforceable if the following conditions are satisfied :
(a) Written promise and signed by the promiser. The promise
should be in writing and signed by the promisor or his agent
authorised in that behalf. Neither an oral promise nor a mere
acknowledgment of liability is enforceable.
(b) Promise by a person liable for the debt. The promise should be
given by the person to be charged therewith, i.e., by the person who
was liable for the original debt. hence, a promissory note by the wife
for a time-barred debt of the husband, executed not as an agent but
in her personal capacity, is not covered by S. 25 (3).
(c) Law of limitation. The debt must be such of which the creditor
might have enforced payment but for law for the limitation of
suits.
Example. A owe B 1,000, but the same is barred by the limitation act. A signs a
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written promise to pay B 500 an account of the debt. This is a contract. (Illustration to S.
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25)
4. A completed gift. Explanation I to Section 25 of the Act has laid down
that, “Nothing in this section shall affect the validity, as between the donor
and donee, of any gift actually made.” Thus, in the case of a gift actually
made, no consideration is necessary. Agreement to make a gift is not
valid.
5. Agency. Section 185 of the Act states that “No consideration is necessary
to create an agency.”
6. Remission. Under Section 63 of the Act, no consideration is necessary for
an agreement to receive less than what is due. It is known as remission in
India and accord and satisfaction in England.
7. Promise to subscribe for a charitable or religious cause. A promise
to subscribe for a charitable or religious cause is sometime taken as an
exception to the doctrine of consideration although strictly speaking it is
not an exception. For details see first legal rule as to consideration.
8. Gratuitous bailment. The deteriminent suffered by the bailor in
parting with the possession of the goods is sufficient consideration for the
bailee to return the goods. Thus, it is also, strictly speaking not an
exception.
PRIVITY OF CONTRACT
As explained earlier, S. 2(d) provides that consideration may move from
promisee or any other person. It means that a stranger to consideration can
sue, provided he is party to the contract. But as regards stranger to
contract the general rule is that a person who is not a party to the
contract cannot sue. Thus, a stranger to consideration can sue, but a
Consideration 55
stranger to contract cannot sue. A person who is not a party to a contract

cannot claim right under the contract. This is called “Privity of Contract”.
CASES : (i ) In the leading case Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge &
Co. Ltd. [(1915) AC 847 (HL)], Dunlop Pneumatic Tyre Co. Ltd. (the plaintiffs) sold a
number of their tyres to Dew & Co., on the terms that Dew & Co., would not resell them
below the list price and that, in the event of sale to trade customers, they would obtain,
a similar undertaking from them. Dew & Co. sold the tyres to Selfridge & Co. (the
defendants) who undertook to observe the restrictions and to pay to Dunlop Co. £ 5 for
each tyre sold in breach of the agreement. Selfridge & Co. supplied tyres to two of their
customers below the list price. Consequently, Dunlop Co. sued Selfridge & Co. to
recover two sums of £ 5 each as liquidated damages and asked for an injunction to
restrain further breaches of agreement. The House of Lords gave judgement in favour
of Selfridge & Co. because Dunlop Co. was a stranger to the contract between Dew &
Co. and Selfridge & Co.
(ii) In Jamna Das v. Ram Avtar Pandey [(1911) 30 IA 7], A mortgaged certain
properties to B for 40,000. Later, A sold the properties to C for 44,000 and allowed
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the purchaser C to retain 40,000 of the price to pay B for redemption of the mortgage.
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B sued C for recovery of the mortgage money but he could not suceed as he was not a
party to the contract between A and C.
Similar was the decision of the Supreme Court in M.C. Chako v. State
Bank of Travancore [AIR 1970 SC 504].
Exceptions to the Rule of Privity of Contract

It is now a settled law in India that a stranger to a contract cannot sue on
the contract, i.e., third parties to a contract have no rights and no liabilities
under it owing to the rule of privity of contract. However, there are certain
well recognised exceptions to this rule. Accordingly, in the following cases, a
person who is not a party to a contract can sue upon it :
1. Beneficiary in case of trust or charge. Where a trust, express or

implied, is created by a contract, a beneficiary may enforce the rights
which the trust so created has given him. The basis of this rule is that
though he is not a party to the contract his rights are equitable and not
contractual. Similarly, when a charge is created on specific immovable
property in favour of a person, he can enforce the charge if he is a
beneficiary under the terms of the contract or gift deed.
CASE : (i) (Trust). In a case R, the appellant was appointed by his father as his
successor. He was given the possession of the entire estate. In consideration thereof
the appellant agreed with his father to pay a certain sum of money and to give a village
to the illegitimate son of his father, on his attaining majority. It was held that the
illegitimate son was entitled to claim the specified amount and the village as a trust was
created in his favour [Rana Uma Nath Baksh Singh v. Jang Bahadur, AIR 1938 PC
245].
(ii ) (Trust). It has been held that an addressee of insured articles can claim
compensation from the Central Government on non-delivery of insured articles as a
constructive trust is created in his favour [Post Master General v. Ram Kripal Sahu,
AIR 1955 Pat. 442]
56 Business Laws
(iii) (Charge). In the leading case Khawaja Muhmmad Khan vs. Hussaini Begum
[(1910) 37 IA 152] there was an agreement between K (father of boy) and L (father of
girl) that K’s son S and L’s daughter H would be married. Both S and H were minors at
that time. In consideration of the marriage, K (the defendant) promised to L that he will
pay to his daughter-in-law H (plaintiff) for her betel-leaf expenses (Kharch-i-Pandan)
from the date of the marriage. A specific property had also been charged for this
purpose. After certain number of years S and H separated on account of quarrel and
then H filed a suit against K to recover the arrears of allowance. K contended that H
being a stranger to contract could not sue on it. H was held entitled to sue as she was
the only person beneficially entitled under it. Although she was not party to the
document, she was clearly entitled to proceed in equity to enforce her claim.
2. Family arrangements. Where a provision is made for the maintenance

of female members on a partition of the joint family property, or for
settlement of claims between members of a family, or for the marriage
expenses of a female member, such members, though not parties to the
agreement, can sue on the footing of the arrangement.
CASES : (i) In Shuppu Ammal v. Subramaniyam [ILR (1910) 33 Mad 238], two
Hindu brothers, upon the partition of the family property agreed, at the time of partition,
that they should contribute 300 in equal shares, invest the amount on the security of
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immovable property and pay the interest towards the maintenance of the mother. In a
suit by the mother, the Madras High Court, held that the mother was entitled to
maintain the suit to enforce the terms of the deed.
(ii) In Daropati v. Jaspat Rai [(1905) Punjab Records 171], J’s (defendant’s) wife
deserted him due to his cruelty. He then promised her father that he would treat her
properly and in case of his failure to treat her property he would pay her monthly
maintenance and provide her a dwelling. She was again ill-treated and driven out. It
was held that she was entitled to enforce the promise made by J to her father.
3. Acknowledgment or estoppel. Where, in a contract between two

parties, the promisor, is required to make a payment to a third party, and
such promisor acknowledges the payment by conduct or otherwise to that
third party, the latter can sue the promisor, although there is no privity
of contract between the promisor and himself.
CASE : In Devaraja Urs v. Ram Krishnaiah [AIR 1952 Mys 109], A sold a house to
B and left a part of the sale price in the hands of B desiring him to pay this amount to C,
the creditor of A. B made part-payment to C, promising to pay the balance soon. B,
however failed to pay the amount and C sued him for the same. It was held that C was
entitled to sue B for recovering the balance amount.
4. Agency. A contract entered into by an agent can be enforced by the

principal.
5. Assignment. When rights under a contract are assigned, the assignee
can sue upon the contract for the enforcement of his rights.
6. Covenants running with land. A person who purchases land with
notice that the owner of the land is bound by certain duties created by an
Consideration 57
earlier agreement or covenants affecting the land, shall be bound by them

although he was not a party to the agreement.
CASE : In Smith & Snipes Hall Farm Ltd. v. River Douglas Catchment Board
[(1949) 2KB 500], the Board (the defendants) had agreed with certain land owners
adjoining a river to improve the banks of the river and to maintain them in good
condition. The board and the land owners were to share the expenses. Subsequently
one of the land owner sold his land to S (the plaintiff). There was negligence on the part
of the Board in maintaining the banks. The banks burst and land was flooded. The new
owner S was held entitled to sue the Board.
REVIEW QUESTIONS
1. Define the term ‘consideration’. What are the three main exceptions to the
rule that an agreement without consideration is void ? Give the essential
elements of each exception. [B.Com. and B.Com. (H), D.U.]
2. Define and explain the meaning of the term ‘consideration’ in the Contract
Act. What does the word ‘something’ means in the definition ? Illustrate.
3. Describe when would an agreement be a contract even when there is an
absence of consideration.
4. Discuss how far the performance of something which the promisee is already
under a legal obligation can form consideration for a promise.
5. “A mere promise to subscribe a sum of money or the entry of such promised
sum in a subscription list does not furnish consideration”. Comment.
6. “A stranger to consideration can sue but a stranger to contract cannot.”
Explain and give exceptions to the rule of privity of contract.
[B.Com. (H), D.U.]
7. Consideration need not be adequate but it must have some values in the eyes
of law.
8. “A stranger to consider can sue.” Comment.
9. “Past consideration is good consideration in India” Comment.
10. “Consideration in some cases is a mere technicality, neither reconcilable with
the business expediency nor with common sense.” Comment.
11. “An agreement without consideration is void.” Comment upon this statement
explaining its various exceptions.
12. “Insufficiency of consideration is immaterial, but an agreement without
consideration is void.” Comment. [B.Com. and B.Com. (H), D.U.]
13. “Gratuitous promises are not enforceable by law.” Comment.
14. State giving reasons whether the following statements are true or false :
(a) An act constituting consideration mush have been done at the desire of
the promisor or any other person.
(b) Past consideration is no consideration in India.
(c) The inadequacy of consideration may be taken into account by the court
in determining the question whether the consent of the promisor was
freely given.
(d) A stranger to consideration cannot sue.
(e) Nearness of relation by itself does not necessarily mean that there is
love and affection between the parties.
[Hint : True : (c), (e); False : (a), (b), (d)]
58 Business Laws

(i) A promise mode out of natural love and affection is enforceable if some
conditions are fulfilled. Which of the following conditions is not required?
(a) It must be in writing; (b) It must be registered; (c) It is made between
the parties standing in near relation to each other; (d) It is made by a
person having real or apparent authority over the other.
[Hint: (d)]
(ii) A promise to pay a time-barred debt is enforceable if some conditions are
fulfilled. Which of the following conditions is not required?
(a) It is in writing; (b) It is signed by the person to be charged therewith
or by his agent; (c) The debt must have become time-barred as per the
law for the limitation of suits; (d) It must be registered.
[Hint : (d)]
PRACTICAL PROBLEMS
1. X promises to donate 21,000 for the construction of a temple. The temple
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management enters a contract with a contractor for the construction of the

temple. X refuses to pay on the ground that there was no consideration for his
promise. Discuss the liable, if any, of X.
[Hint : X is liable to the promised subscription as on the faith of that the
temple management has entered into a contract with a contractor for
construction of the temple (Kedar Nath v. Gorie Mohammed).]
2. A, a landlord executed a gift of certain lands in favour of his son B, with a
direction that he should pay to his uncle C an annuity of 8,000/- for period
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of three years. On the same day B also executed a separate undertaking in

favour of C agreeing to pay the annuity. B subsequently refused to keep the
promise. C sued B to recover the amount due under the agreement. Decide,
giving reasons.
[Hint : C can recover from B as consideration may move from promisee or
any other person. (Chinnaya v. Ramaya).]
3. H and W (H’s wife) are bathing in a river. W slips deep into the water, and B,
a boatman is able to save W’s life and H promises to pay him 500 for saving
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her life. Subsequently H refuses to pay the said amount to B. On being sued
by B for the amount H contends that the promise to pay 500 is without
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consideration. How would you decide the case ?

[Hint : H is liable to pay the said amount to B under section 25 (2) of the
Indian Contract Act.]
4. S executed a sale deed in favour of A for 3,500. In the sale deed it was
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stated that S obtained 2,300 from A but left the balance of 1,200 with him
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under the direction that A would pay it to one C to whom S owed 1,200 R
under a promissory note. A did not pay 1,200 to C.C. filed a suit for recovery
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of 1,200 against A. Will C succeed ?

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[Hint : No. Stranger to contract cannot sue. It is not covered by any of the
exceptions to the rule of privity of contract.]
5. X, a client, promises to pay Y, his advocate, 11,000 in addition to his fees if
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he succeeds in the suit. X succeeds but refuses to pay the said amount of
R 11,000. Y files a suit against X for claiming the sum of 11,000. Decide.
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[Hint : Y is not entitled to the said sum of R 11,000 [Ramchandra

Chintamani v. Kalu Raju), (1988) 2 BOM 362]]
5 Capacity of Parties
LEARNING OBJECTIVES
After studying this chapter, you will be able to understand :
➥ Nature of Minor’s Agreements
➥ Nature of Contract with Persons of Unsound Mind
➥ Other Persons Disqualified from Contracting
The law does not infringe the freedom of a person to enter into contract or
prohibit him from making an agreement with anybody he likes. However, it
declares that certain classes of persons do not have the capacity to enter into
legally binding agreements. In doing so, the law seeks to protect their
interests from being exploited by unscrupulous persons.
Contractual competence is defined in Section 11 of the Act thus : “Every
person is competent to contract who is of the age of majority according to the
law of which he is subject, and who is of sound mind, and is not disqualified
from contracting by any law to which he is subject.”
Thus, this section disqualifies the following three classes of persons from
entering into a valid contract :
(1) Minors
(2) Persons of unsound mind, and
(3) Persons disqualified by any law to which they are subject.
WHO IS A MINOR
A minor is a person who has not attained the age of majority. According to
Section 3 of the Majority Act, 1875, every person domiciled in India, who has
completed his age of 18 years, is deemed to have attained his majority. In
computing the age of any person, the day on which he was born is to be
included as a whole day and he shall be deemed to have attained majority at
the beginning of the 18th anniversary of that day. It may be noted that
amendments were made in this Act in 1999. The amendments, inter alia,
deleted the provisions which fixed the majority age at 21 years in two
exceptional cases. Thus, now in all cases a person attains majority at the age
of 18 years.
It may be noted that Juvenile Justice (Care and Protection of Children)
Act, 2015 (w.e.f. January 15, 2016) allows children aged between 16 to 18
years to be tried as adults in case of heinous offences.
60 Business Laws
NATURE OF MINOR’S AGREEMENTS

1. An agreement with a minor is absolutely void. A minor is not
mature enough to understand the meaning of and consequences of any
agreement that he enters into. Due to his tender age, he does not have
intellectual capacity to form agreements. Therefore, an agreement with a
minor is absolutely void. It is essential that all contracting parties must
be competent to contract, A person, who by reason of infancy is
incompetent to contract, cannot make a contract within the meaning of
the Act.
CASE : In the leading case Mohori Bibi v. Dharmodas Ghose [(1903) 30 IA 114], a
minor executed a mortgage of some houses in favour of a moneylender to take a loan
of 20,000. A part of this amount, 8,000, was actually advanced to the minor on 20th
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July, 1895. Subsequently (on 10th September, 1895), a suit was filed on behalf of the
minor to get the mortgage cancelled. The moneylender contented that he should get
back his money already advanced to the minor. The Privy Council held that the
agreement was absolutely void and the moneylender was not entitled to get back
his money as he had given the loan with full knowledge that the borrower was a
minor.
Thus, an agreement with a minor is of no legal effect whatsoever from the

very beginning except as otherwise provided by statute. The policy of the law
is to protect the minors from the veils of unscrupulous persons who may
choose to deal with them.
2. The rule of estoppel does not apply against minor. S. 115 of the
Evidence Act, 1872 defines estoppel as follows :
“When one person has, by his declaration, act or omission, intentionally
caused or permitted another person to believe a thing to be true and to act
upon such belief, neither he nor his representative shall be allowed in any
suit or proceeding between himself and such other person or his
representative to deny the truth of that thing.”
According to Halsbury : “Estoppel arises when you are precluded from
denying the truth of anything, which you have represented as a fact, although
it is not a fact.”
In Sadiq Ali Khan v. Jai Kishore [AIR 1928 PC 152], The Privy
Council held that the rule of estappel does not apply against a minor.
Similarly, the Bombay High Court held that “where an infant represents
fraudulently or otherwise that he is of age and thereby induces another to
enter into a contract with him, in an action founded on the contract, the
infant is not estopped from setting up infancy” [Godigeppa v. Balangowda
Bhimangowda, AIR 1931 Bom 567].
It means that he can misrepresent his age. A minor may succeed in
misleading others about his age when he is tall and well built and close to 18
years.
Capacity of Parties 61
3. Doctrine of restitution prescribed in S. 64 and S. 65 is not

applicable against a minor but relief in equity is allowed in
certain cases. Restitution means the restoring of anything taken from
another.
The Privy Council in Mohori Bibi v. Dharmodas Ghose held that the
restitution under Section 64 of the Indian Contract Act cannot be granted
against a minor because a minor’s agreement is void and not voidable.
Similarly no relief can be granted against a minor under Section 65 as this
section is confined to cases where the agreement is discovered to be void or
where a contract becomes void. Sections 64 and 65 of the Indian Contract Act
which deal with restitution apply to contracts between competent parties and
not to minor’s agreements. Thus, a minor is not liable under Section 64
and Section 65 to repay any money or compensate for any benefit
that he might have received under a void agreement.
The Privy Council further held in the above case that Section 41 of the
Specific Relief Act, 1877 (now Section 33(1) (a) of the Specific Relief Act, 1963)
gives discretion to the court to require the party to whom relief of cancellation
of instrument is given to make compensation to the other which justice may
require. The relief is in equity and not on the contract. It is based on the
principle : “He who seeks equity must do equity.” In Mohari Bibi case the
moneylender was held not entitled to get back his money because he had
given the loan with full knowledge that the borrower was a minor.
In Jagar Nath Singh v. Lalta Prasad [(1908) 31 All 21], a minor was
allowed to recover possession of property sold by him only subject to the
condition that he restored the consideration received by him from the
defendant.
CASE : In Khan Gul v. Lakha Singh [AIR 1928 Lah 609 (FB)], A (the defendant),
while still a minor, by fraudulently representing his age, contracted so sell a plot of land
to B (The plaintiff). The minor received the purchase consideration of 17,500 and then
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refused to deliver the possession of the property. B sued A for delivery of the
possession of the property, or in the alternative, for a decree for recovery of the amount
paid. The Full Bench of the Lahore High Court held that when contract had been
induced by false representation made by an infant as to his age, he was not estopped
from pleading minority and he was not liable on the agreement. However, the judges
relied upon the equitable jurisdiction of the court to order restitution of 17,500R
to B.
Rules of Restitution as per Specific Relief Act, 1963

The rules of restitution in case of minor’s agreements are contained in
Section 33 of the new Specific Relief Act, 1963.
These rules are explained below :
(1) He who seeks equity must do equity. Where a minor comes to
the court as a plaintiff (i.e. when a minor files a suit against the other
party), he can be compelled to restore the benefits received from the
62 Business Laws
other party and make compensation to him which justice may

require. [S. 33(1) of the Specific Relief Act, 1963]
(2) Where a minor is brought before the court as a defendant (i.e.
when other party files a suit against the minor) he can be compelled
to restore such benefit, including money, to the other party to the
extent to which it has benefited him personally, such as education or
training, or it has benefited his estate. The benefit to the estate
means that there should be accretion to his estate. The money spent
by the minor on entertainment, eating and drinking cannot be
recovered as there is no benefit to him personally or to his estate. [S.
33(2)(b) of the Specific Relief Act, 1963].
Thus, the court may order the minor to return the benefit in case of
misrepresentation of age by him.
Example : A, a minor, tall and well built, represents to B, a money lender, that he is a
major and thereby induces B to extend him a loan of 40,000 on interest @ 15% per
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annum and executes a promissory note. A later on, when sued by B, takes the plea of
minority. Court can direct A to restore such benefit to B to the extent to which he or his
estate has benefited as per Section 33 (2) of the Specific Relief Act, 1963.
However, in the following cases restitution by a minor will not be allowed:

(a) Where the other party is aware of the minority so that he is not
deceived.
(b) Where the other party is unscrupulous in his dealings with the
minor.
(c) Where the other party is so zealous to enter into the transaction that
the false representation by the minor does not influence him.
(d) Where justice does not require the return of property or money by
the minor.
In England, in Leslie (R) Ltd. v. Sheill [(1914) 3 KB 607], an infant, by misrepresenting

his age, deceived some moneylenders and thus borrowed £ 400 from them. The
moneylenders could not recover the amount of principal and interest as damages for
fraud. The court said : “Whenever the infant is still in possession if any property in
specie which he has obtained by fraud, he will be made to restore to the former owner
and he cannot be made to repay money which he has spent.” In India, rules of
restitution as per the Specific Relief Act, 1963 (stated above) are applicable.
4. Beneficial contracts. The provisions of the law which make a contract

by a minor not binding are intended for the benefit of the minor.
Therefore, a minor is allowed to enforce in certain cases a
contract which is of some benefit to him and under which he is
not required to bear any obligation. For example a duly executed
transfer of immovable property by way of sale or mortgage in
favour of a minor who has paid whole of the consideration
money is not void, and it is enforceable by him or any other
person on his behalf.
The Hindu Minority and Guardianship Act, 1956 provides that a natural
guardian is empowered to enter into a contract on behalf of the minor and the
contract would be binding if it is for the benefit of the minor.
CASE : In the leading case Raghava Charior v. Srinivasa [(1916) 40 Mad 308], a
mortgage was executed in favour of a minor, the plaintiff, who has advanced the whole
of the mortgage money. The suit was filed for the recovery of a sum of 1100 odd due
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on the mortgage. The transaction was held to be enforceable by or on behalf of the

minor by the Full Bench of the Madras High Court.
Contract of Service
An agreement of service is not binding by or against a minor. Where
the contract of service is still executory or the consideration is still to be
supplied by the minor, it will be void as held in Raj Rani v. Prem Adib. In
this case, a contract of service entered into by the father on behalf of the
minor was held not enforceable.
CASE : In Raj Rani v. Prem Adib [AIR 1949 Bom 215], A (the plaintiff) was a minor
girl. There was a contract to employ the girl as an artist in B’s (defendant’s) concern
called Prem Adib Pictures for a period of one year commencing on 15th January, 1947
at the salary of 9500 to be paid in twelve equal monthly installments. The agreement
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was entered into by the father of the girl, Dhiraj Singh Muramal, on her behalf as she
was a minor. A worked for a few days and after that B gave the role to another girl. A
sued B for breach of agreement claiming damages being the difference between
R 9,500 as agreed upon and 791-5-4 already received by her. The agreement was
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held void because a minor‘s promise to serve would supply no consideration for
the promise of the other to pay him/her a salary.
Contract of Apprenticeship
The Apprentices Act, 1961 was passed for better enabling children to
learn trades, and crafts so that when they come to full age, they may gain a
livelihood. A contract of apprenticeship is valid and binding upon a
minor because such a contract is protected by the Apprentices Act,
1961, provided the case falls within the terms of that Act.
The conditions for applicability of the Apprenticeship Act are :
(i) Minor is an apprentice. According to this Act, ‘apprentice’ is a
person “who is undergoing apprenticeship training in pursuance of
apprenticeship in designated trade”. (ii) The minor must not be less than 14
years of age and the contract must be entered into on behalf of the minor by
his guardian.
In De Francesco v. Barnum [(1890) 45 Ch. D 430], was held that a contract of

apprenticeship which is more onerous than beneficial to the infant will impose no
liability upon him. In this case an infant, aged fourteen years, entered into a contract of
apprenticeship. The infant bound herself as apprentice to the plaintiff in the ‘art of
choreography’ for seven years. The plaintiff was to teach her the art of dancing and
during the period of apprenticeship the infant was not to take any professional
engagement without the consent of the plaintiff, nor was she to marry. She was to
64 Business Laws
receive payments for performance only. However, the plaintiff did not undertake to find
her any engagements. It was held that contract was not beneficial to the infant and
therefore it was not enforceable.
Contract of Marriage
A contract of marriage of a minor is supposed to be for his or her benefit. A
contract of marriage has been held enforceable against the other contracting
party at the instance of the minor but it cannot be enforced by the other
contracting party against the minor. In Ross Fernandez v. Joseph
Gonsalves [AIR 1925 Bom 97], a leading case, the father of a minor girl
entered into a contract with a boy whereby the boy promised to marry the
girl. Subsequently the boy refused to marry the girl. The girl filed a suit
against the boy for breach of contract. It was held that the contract was for
the benefit of the girl and therefore she was entitled to recover the damages
from the boy.
Now-a-days, courts take a serious view of marriage between minors. In
certain cases the teenage groom, his father and others have been arrested
under the Prohibition of Child Marriage Act, 2006 for promoting child
marriage. Therefore, the contract of marriage of a minor is subject to
the applicable laws as the age of marriage.
Note : The Prohibition of Child Marriage Act, 2006 (in short, PCMA) was passed by
the Parliament to overcome the constraints of the Child Marriage Restraint
Act, 1929. PCMA was notified on 10-01-2007. Under the PCMA, a girl below
the age of 18 years and a boy below the age of 21 are prohibited from getting
married.
5. A minor’s agreement cannot be ratified by him on attaining the

age of majority. Since a minor’s agreement is a nullity in the eyes of law,
the question of its ratification by the minor after attaining the age of
majority does not arise. Ratification relates back to the date of making the
agreement. An agreement with a minor is void ab initio. Therefore, there
is no question of its ratification. Hence, when he makes a contract after
attaining majority, fresh consideration becomes necessary.
CASE : In Suraj Narain v. Sukhu Ahir [(1928) ILR 51 All], a minor borrowed a sum
of money by executing a promissory note. He, after attaining majority, executed a
second bond in respect of the original loan plus interest. It was held that the suit upon
the second bond was also not maintainable as that bond was without consideration.
If certain services are rendered to a minor at his request and continued at

his request after attaining majority, forms a good consideration for a
subsequent promise by him in favour of the person who rendered the services
[Sindhu v. Abraham, (1895) 20 Bom 755].
A person after attaining majority may elect to pay a debt incurred by him
during his minority and if he does so, he cannot subsequently bring a suit for
the refund of that amount [Anant Rai v. Bhagwan Rai, AIR 1940 All 12].
6. Minor’s liability for necessaries. Section 68 of the Indian Contract Act

provides: “If a person incapable of entering into a contract, or any one
whom he is legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has furnished
such supplies is entitled to be reimbursed from the property of such
incapable person.” Thus, the liability of a minor for necessaries is not
personal; the other person is entitled to be reimbursed from the property
of the minor.
Examples : (i) A supplies B, a minor, with necessaries suitable to his condition in
life. A is entitled to be reimbursed from B’s property.
(ii) A supplies the wife and children of B, a lunatic, with necessaries
suitable to their condition in life. A is entitled to be reimbursed from
B’s property. [Illustration (b) to S. 68].
(iii) B, a minor, is injured in an accident and needs urgent medical
attention. A, a neighbour, takes him to a doctor for treatment. A is
entitled to be reimbursed from B’s property.
CASE : In Nash v. Inman [(1908) 2 KB1], A minor, a student in the Trinity College,
Cambridge, was supplied with clothes suited to his condition in life by his father. He
purchased from the plaintiffs ‘clothing of an extravagant and ridiculous style’ eleven
fancy waist-coats costing £ 145. The Court of Appeal gave verdict in favour of the
minor and dismissed the appeal by the plaintiffs to recover £ 145 being the cost of
clothing supplied by them as the fancy waist coats were not necessaries.
The items of food, clothing, shelter, funeral expenses of family members,

medicines, expenses incurred for marriage of female members of family,
expenses incurred for education and training of the minor have been held to
be necessaries.
7. Specific performance. Specific performance means the performance of
contract as per the terms of the contract. The general rule is that a
minor’s agreement being void cannot be specifically performed. However,
there is an exception. The following three conditions are required for
specific performance of a contract by or against a minor:
(a) It is entered into on behalf of the minor by his guardian.
(b) The contract is within the competence of the guardian to enter.
(c) It is for the benefit of the minor.
A transfer of inherited property by a minor’s guardian to pay an inherited
debt was held to be binding on him [Sri Kakulam Subramanyam v. K.
Subba Rao, (1948) 75 IA 115 (PC)].
8. Minor partner. A minor cannot be a partner in a firm since
partnership arises on the basis of a contract. However, in accordance
with Section 30 of the Partnership Act, 1932, a minor can be admitted to
the benefits of the firm. His liability is limited only to his share in the
firm’s assets, and he is not personally liable.
9. Minor agent. Although a minor is not entitled to employ an agent, he
can be an agent as per S. 183 of the Act. As an agent, he can represent
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the principal and bind him for his acts done in the course of agency.
However, minor is not personally liable for any wrongful act, although
the principal is responsible to third parties for acts of his minor agent.
10. Minor and insolvency. Since a minor is not personally liable he cannot
be adjudicated as insolvent.
11. Contract by minor and adult jointly. Where a minor and an adult
jointly enter into an agreement with another person, the adult is liable
on the contract, though the minor may not be liable. In Jamna Bai v.
Vasanta Rao [(1916) 39 Mad 409], A and B jointly passed a bond to C.
A was minor at the date of the bond. B was held liable on the bond.
12. Surety for a minor. Where in a contract of guarantee, an adult stand
as surety for a minor, the surety is liable as a principal debtor because in
such a case the contract of the so-called surely is not a collateral, but a
principal contract.
13. Position of minor’s parents. The parents of a minor are not liable for
the agreements entered into by a minor unless he acts as agent for the
parents.
14. Minor shareholder. It has been held that a minor is not expressly
forbidden by any law in force in India from holding shares in a company
provided he is properly represented by a guardian. Even then, minor
does not incur any liability to pay the call money and he can always
repudiate the contract even if he had fraudulently overestimated his age
at the time of becoming a member, or his name appears inadvertently in
the register of members.
15. Minor’s liability in tort. A tort is a civil wrong. Tortuous liability
arises from the breach of a duty primarily fixed by law which results in
an infringement of private legal rights of another and, for which, civil
action for unliquidated damages, injunction. etc. can be maintained.
CASE : An infant entered into a contract to hire a mare for riding. He rode the mare
negligently as a result of which she was injured. In an action against the infant, it was
held that he was not liable as the case arose out of a contract and not in tort [Jennings
v. Rundall, (1799) 8 TR 335]
PERSONS OF UNSOUND MIND

In India, an agreement with a person of unsound mind like that of minor,
is absolutely void. Section 12 of the Act defines a person of sound mind for the
purposes of contracting. It provides as follows:
“A person is said to be of sound mind for the purpose of making a contract
if at the time when he makes it, he is capable of understanding it and forming
a rational judgement as to its effect upon his interests.
A person who is usually of unsound mind but occasionally of sound mind,
may make a contract when he is of sound mind.”
A person who is usually of sound mind, but occasionally of unsound mind,

may not make a contract when he is of unsound mind.”
Section12 has specified two tests for soundness of mind at the
time of making a contract. They are (a) the person making a contract
should be capable of understanding it, and (b) he should be capable
of forming a rational judgement as to its effects upon his interest.
Examples : (i) A patient in a lunatic asylum, who is at intervals of sound mind, may
contract during those intervals. [Illustration (a) to S. 12]
(ii) A sane man, who is delirious from fever or who is so drunk that he
cannot understand the terms of a contract or form a rational
judgement as to its effects on his interests, cannot contract whilst
such delirium or drunkenness lasts. [Illustration (b) to S. 12]
Unsoundness may arise from the following :

1. Idiocy. An idiot is a very foolish or stupid person. Idiocy is of
permanent nature due to lack of development of brain. He is not competent to
contract.
2. Lunacy or Insanity. A lunatic or insane is a person who is mentally
ill or deranged. Lunacy is a disease of brain. A lunatic may have intervals
of sound mind. A lunatic may enter into a contract when he is of sound
mind.
3. Drunkenness or Intoxication. Unsoundness of mind may arise
from being drunk. (See example (ii) above). A drunkard is a person who is
under the influence of intoxication and it is so excessive that he is not able to
make a rational judgment as to the effect of a contract upon his interests.
Drunkenness may produce temporary incapacity till the drunkard is under
influence of intoxication.
CASE : In Chacko and Another v. Mahadevan [AIR 2007 SC 296], Chacko had
land to extent of 18 cents (3 cents = 1 acre). Chacko by a sale deed sold by a sale
deed dated 4th September, 1982, one cent out of it for a price of Rs. 18,000. There
after, Chacko sold another extent of three cents to Mahadevan, by a sale deed dated
11th July, 1983, for a price of Rs. 1,000. The suit was filed by Chacko and his wife
Annakutty seeking to set aside the sale deed on the ground that it was null and void
due to in capacity of Chacko to contract as he was plied with liquor by Mahadevan and
others. The supreme court held that sale deed null and void as Chacko was not of
sound mind at the time of entering into the contract.
4. Hypnotism. It is a state in which the person acts only on external

suggestion. It produces temporary incapacity to contract, till the person is
under the influence of hypnotism.
5. Mendal Decay. Mendal decay occurs on account of old age.
6. Delirium. Delirium is a disorderly state of mind. It may be due to
fever or intoxication. It may temporarily cause incapacity to contract.
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Burden of Proof. With regard to a person who is usually of sound mind,

but occasionally of unsound mind, the presumption is that he was of sound
mind when he made the contract. Therefore, any person who tries to show
that the contract was entered into at the time of temporary insanity, should
prove that unsoundness of mind existed at the time of contracting.
Effect of agreements made by a person of unsound mind. An
agreement by a person of unsound mind is treated on the same footing as
that of a minor and therefore it is absolutely void. According to S. 68 the
property of a person of unsound mind is liable for necessaries supplied to him
or to any one whom he is legally bound to support.
CASE : Inder Singh v. Parmeshwardhar Singh, [AIR 1957 Pat 491], A entered into
an agreement to sell his property worth about 25,000 for 7,000 only to B. A’s mother
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proved that he (A) was an idiot incapable of understanding the transaction and that he
mostly wandered about. The sale was held to be void. SINHA of the Patna Hig Court
said : “it does not necessary mean that a man must be suffering from lunacy to disable
him from entering into a contract. A person may to all appearances behave in a normal
fashion but, at the same time, he may be incapable of forming a judgement of his own,
as to whether the act he is about to do is to his interest or not. In the present case he
was incapable of exercising his own judgement.”
A person of unsound mind is disqualified from becoming a

partner of LLP. According to S. 5 of the Limited Liability Partnership Act,
2008, an individual who has been found to be of unsound mind by a court of
competent jurisdiction and that finding is in force, he cannot be a partner of
the limited liability partnership. There is no such provision in the Indian
Partnership Act, 1932.
OTHER PERSONS DISQUALIFIED FROM CONTRACTING

The third category of persons who are incompetent to contract are those who
are “disqualified from contracting by any law to which they are subject.”
Alien enemies, foreign sovereigns, ambassadors, convicts, insolvents and joint
stock companies and corporations incorporated under special Acts fall under
this category. They have been discussed below :
(a) Alien enemies. A person who is not a citizen of India is an alien. An
alien may be either an alien friend or an alien enemy. An alien living
in India can enter into contract with citizens of India when his
country is not at war with the Government of India subject to
restrictions imposed by the Government, if any.
When Government of an alien is at war with the Government of
India, the alien is called alien enemy. An alien enemy cannot enter
into a contract with an Indian citizen without the permission of the
Central Government on the ground of public policy. Contracts entered
into by an alien with an Indian citizen before the declaration of war
are suspended for the duration of the war.
(b) Foreign sovereign and ambassadors. Foreign sovereigns and

their accredited agents like ambassadors enjoy certain immunities
and privileges under the international law. They cannot be sued in
Indian courts without their consent. But they can sue Indian citizens
to enforce the contracts entered upon with them.
Thus it can be stated that contracts entered into with such persons do
not create any legal obligation upon them. Therefore, these persons
are said to be incompetent to contract in this limited sense.
(c) C o n v i c t s . A convict is a person who is found guilty and is
imprisoned. He is incompetent to contract during the continuance of
sentence of imprisonment. This inability comes to an end with the
expiration of the period of sentence.
A convict cannot sue on contracts made before conviction and the
Limitation Act is held in abeyance during the period of sentence.
(d) Insolvents. When a debtor is adjudged insolvent, his property vests
in the Official Receiver or Official Assignee as the case may be. He is
incompetent to contract relating to his property. He cannot sell his
property or otherwise transfer it to the disadvantage of his creditors.
He cannot sue and be sued on his behalf. However, he has the right to
enter into contracts for his maintenance and for that of his family. He
can be an employee. After the ‘order of discharge’ he becomes
competent to contract.
(e) Joint stock company and corporations incorporated under
special Acts. Joint stock companies and a corporations incorporated
under an Act passed by Parliament or State legislature are artificial
persons created by law. A joint stock company cannot enter into
contracts which are beyond its powers conferred upon it by its
Memorandum of Association. Similarly a corporation cannot enter
into contracts outside the powers conferred on it by the special Act
under which the corporation was incorporated. These artificial
persons cannot enter into contracts of marriage.
(f) Married person in respect personal property of the spouse.
There is no distinction between the contractual capacity of males and
females. It also does not depend on the marital status. Thus a woman,
married or unmarried, can enter into contract and bind her personal
property provided she is not a minor.
A married woman is entitled to enjoy and exercise absolute powers of
disposal over her property called stridhana. But a married woman
cannot enter into contracts with respect to her husband’s property
without his consent. Similarly a married man cannot enter into a
contract with respect to his wife’s property without her consent.
However, a married woman can bind her husband’s property for
necessaries supplied to her in certain cases.
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REVIEW QUESTIONS
1. What do you understand by contractual competency of parties? Discuss
briefly the position of a minor with regard to contracts entered into by him.
[B.Com., D.U.]
2. State the law relating to a minor’s agreements. [B.Com., D.U.]
3. Explain the legal effect of a minor’s misrepresentation of age while entering
into an agreement. [B.Com. D.U.]
4. What is the effect of agreements made by persons of unsound mind?
5. Describe the extent of the power of the court to order restitution where a
minor enters into an agreement with a person who is competent to contract
by making a fraudulent misrepresentation of age.
6. What are the rights of a person who supplies necessaries to a person who is
not competent to contract? [B.Com., D.U.]
7. “Lack of capacity goes to the root of the contract and invalidates it
completely.” Discuss the correctness of this statement.
(a) A contract with a minor is voidable at the option of the minor.
(b) An agreement with a minor can be ratified after he attains majority.
(c) a minor is personally liable for necessaries supplied to him.
(d) A lunatic can never enter into a contract.
(e) A person who is usually of unsound mind may enter into a contract
when he is of sound mind.
[Hint : True : (e) ; False : (a), (b), (c), (d)]
(i) The leading case in which it was held that a minor’s agreement is
absolutely void is:
(a) Mohinibibi v. Dharmodas Ghose.
(b) Balfour v. Balfour.
(c) Carlic v. Carbolic Smoke Ball Co.
(d) Entores Ltd. v. Miles Far East Corporation.
[Hint : (a)]
(ii) An agreement of service entered into by the father on behalf of the
minor is:
(a) Enforccable. (b) Not enforceable.
(c) Enforceable at the option of the minor. (d) None of these.
[Hint : (b)]
10. What protection is provided to minors by the Indian Contract Act ? In
what circumstances a minor is liable for goods supplied to him.
[B.Com. (H), D.U.]
11. Explain, citing case law, the legal position of a ‘minor-promisee’ under
the Indian Contract Act. Can a minor be a promisor ?
[B.Com. (H), D.U.]
12. ‘A minor’s agreement is absolutely void.” Explain the statement stating
necessary case law. How are the principles of estoppel and ratification
understood in this context ? [B.Com. (H), D.U.]
PRACTICAL PROBLEMS
1. A, a minor, borrows 5,000 and executes a promissory note for the amount in
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favour of B. After attaining majority, A executes another promissory note in

settlement of the first promissory note Will B succeed in recovering money
from A? Give reasons in support of your answer.
[Hint : No. The second promissory note requires fresh consideration. Minor’s
agreement cannot be ratified.]
2. A minor, falsely representing himself to be of age, enters into an agreement
to sell his property to B and receives from him as price a sum of 1,00,000 in
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advance. Out of this sum, the minor buys a motor cycle for 55,000 and
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spends the rest on a pleasure trip to Europe. After the minor has attained
majority, B sues him for the conveyance of the property or, in the alternative,
for the refund of 1,00,000 and damages. How would you decide the case?
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[Hint : B can claim only the motor-cycle if the court is of the opinion that the
doctrine of equitable restitution should be applied.]
3. A, a minor lends 10,000 against a promissory note executed in his favour. Is
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the borrower liable to repay the money.

[Hint : Yes. The borrower is liable to repay the money to the minor as the law
protects the rights of the minors.]
4. M lands a type-writer to N, an infant, for typing practice for a period of two
months. It was agreed that N would pay monthly hire charges of 100. At the
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end of two months N refuses to pay the hire charges. Advise M.

[Hint : M cannot recover the hire charges as that would amount to enforcing
a void agreement.]
6 Free Consent
LEARNING OBJECTIVES
After studying this chapter, you will understand :
➥ Meaning of Consent and Free Consent
➥ Definition and Effect of Coercion
➥ Definition, Burden of Proof, Presumption, and Effect of Undue Influence
➥ Definition, Essentials and Effect of Misrepresentation
➥ Definition, Essentials and Effect of Fraud
➥ Effect of Bilateral Mistake and Unilateral Mistake
Section 10 of the act lays down that free consent is one of the essentials of a
valid contract. For the enforceability of an agreement, it is not only necessary
that the parties to the agreement should have given their consent but their
consent should be free.
CONSENT AND FREE CONSENT

Consent
Section13 of the Act defines consent thus :
Two or more persons are said to consent when they agree upon the same
thing in the same sense.
Thus, the parties to an agreement should have identity of minds
regarding the subject matters of the agreement. When the parties are not ad
idem for whatever reason there is no agreement between them owing to
the absence of consent. Thus, consent means that both the parties have the
same thing in mind and the same thing is understood in the same sense by
them.
Example : A has two horses—one black and the other white. A wants to
sell black horse to B at a certain price. B thinks that A has made the offer to
sell his white horse and accepts the offer. There is no consent as both the
parties are not agreeing upon the same thing in the same sense. Therefore,
there is no contract.
CASE : In Raffles v. Wichelhouse [(1863) 2 H & C 906], two parties entered into an
agreement for the sale of cargo of cotton to arrive “ex-Peerless from Bombay”. There
were two ships of that name and both sailed from Bombay, but one left in October and
Free Consent 73
the other in December. Both the parties misled by similarly of name, had a different
ship in mind. It was held that the agreement was void for lack of consensus ad idem.
Meaning of Free Consent

The validity of an agreement depends not only on the consent of the
parties to it, but their free consent also. Section 14 of the Act deals with free
consent. It says:
“Consent is said to be free when it is not caused by :
(1) coercion, as defined in Section 15, or
(2) undue influence, as defined in Section 16, or
(3) fraud, as defined in Section 17, or
(4) misrepresentation, as defined in Section 18, or
(5) mistake, subject to the provisions of Section 20, 21 and 22.
Consent is said to be so caused when it would not have been given but for
the existence of such coercion, undue influence, fraud, misrepresentation or
mistake.”
Effect of following factors vitiating Free Consent

(Sections 19 and 19A)
Coercion Undue Influence Fraud Misrepresentation

(Section 15) (Section 16) (Section 17) (Section 18)
Voidable Contract
Figure 6.1
When consent to an agreement is caused by coercion, undue

influence, fraud or misrepresentation, there is “no free consent” and
the contract is voidable at the option of the party whose consent is so
caused. (Section 19 and 19 A).
This means that the party whose consent was not free may either enforce
or repudiate the contract.
Example : A threatens to kill B if he does not sell his plot of land to him. B agrees to
sell the plot to A. In this case, B’s consent is not free as it is obtained by coercion. The
contract is voidable at the option of B.
Effect of mistake on the validity of contract, has been discussed

later in the chapter.
74 Business Laws
COERCION
Definition of Coercion
Section 15 of the Act defines coercion thus : “Coercion is the committing, or
threatening to commit, any act forbidden by the Indian Penal Code, or the
unlawful detaining, or threatening to detain, any property, to the prejudice of
any person whatever, with the intention of causing any person to enter into an
agreement.”
The Explanation to the section states that, “It is immaterial whether the
Indian penal Code is or is not in force in the place where the coercion is
employed.” The definition is analysed as under :
(1) Coercion is the committing or threatening to commit, any act
forbidden by the Indian Penal Code with the intention of causing any
person to enter into an agreement.
Example : A threatens to kill B, if he does not sell his house to him for one lakh. B
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agrees to sell the house to A. The consent of B has been induced by coercion.
CASE : In Ranganayakamma v. Alwar Setty [(1889) 13 Mad 214], a person died

leaving a young widow. She was forced to adopt a boy of their choice by her relatives
who refused to remove the dead body of her husband unless she consented to the
adoption. It was held by the Madras High Court that the adoption was not binding on
her since her consent was not free but induced by coercion in as much as any person
who obstructed a dead body from being removed would be guilty of an offence under
Section 297 of the Indian Penal Code.
CASE : Threat to commit suicide. A threat to commit suicide has been held to be
coercion. In Chikham Ammiraju v. Chikham Seshamma [(1917) 41 Mad. 33], a
person held out a threat to his wife and son that he would commit suicide if they did not
execute a release deed with regard to certain property in favour of his brothers who
claimed the property as their own. Consequently, the wife and the son executed the
deed. It was held by the majority of 2 : 1 that the deed was not enforceable against the
wife and son as the same was obtained by coercion. It was observed that though a
threat to commit suicide is not punishable under the Indian Penal Codes, it must be
deemed to be forbidden as an abatement of suicide (S. 306 IPC) and an attempt to
commit suicide (S. 309 IPC) are punishable. It was held that the term “any act
forbidden by the Indian Penal Code” is wider than the term “any act punishable by the
Indian Penal Code”
Threat to file a false charge. In Askari Mirza v. Bibi Jai Kishori

alias Iqbal Rani [(1912) 16 IC 344], it was held, by the Privy Council that to
threaten criminal prosecution is not per se an act forbidden by the Indian
Penal Code. But a threat to file a false charge amounts to coercion.
(2) Unlawful detaining or threatening to detain any property to the
prejudice of any person whatever is also coercion.
CASE : In the leading case Muthiah Chettiar v. Karuppa [(1927) 50 Mad 786] an
agent refused to hand over the account books of business to the new agent unless the
principal released him from liability in respect of all the past transactions. It was held by
the Madras High Court that the release deed was voidable at the option of the principal
as it was given under coercion.
Free Consent 75
(3) The act or threat amounting to coercion may proceed either by a

party to the agreement or even by a stranger to it. It means that the
source of coercion may be stranger to contract.
Example : A threatens to kill B if he does not sell his house to C for One lakh. B
R
agrees. A’s threat amounts to coercion even though he is a stranger to contract between B
and C.
(4) The act or threat amounting to coercion may be directed either

against a party to the contract or any other person, i.e., victim may
be third person.
Example : A threatens to kill B’s son if B does not sell his house to A for R one lakh. B
agrees. A’s threat is coercion.
(5) The act or threat amounting to coercion must be done or given with
the intention of causing the other person to enter into a contract. If
there is no intention to induce the other person to enter into a
contract, there is no coercion.
Example : A threatens to take into possession the land belonging to B and not to
vacate it. This does not amount to coercion as there is no intention to enter into a contract.
(6) It is immaterial whether the Indian Penal Code is or is not in force

at the place where coercion is employed.
Example : A, on board an English ship on the high seas, causes B to enter into an
agreement by an act amounting to criminal intimidation under the Indian Panel code. A
afterwards sues B for breach of contract at Kolkata. A has employed coercion, although
his act is not an offence by the law of England, and although S. 506 of the Indian Penal
Code was not in force at the time when or place where the act was done. (Illustration to S.
15).
Effect of Coercion
1. Voidable contract. According to S. 19 a contract induced by coercion is
voidable at the option of the party whose consent was so caused.
2. Restitution in all cases. Section 64 provides that if the aggrieved party
opts to rescind the voidable contract he must restore the benefits received by
him, if any, to the person from whom it was received.
3. Punishment. The party guilty of coercion may be liable for criminal
action.
Burden of Proof
The burden of proof that the consent of the party was caused by coercion
lies on the party who wants to avoid the contract. In other words, the party
who wants to avoid the contract on the ground of coercion must prove it.
Example : A threatens to kill B if he does not sell his house for one lakh to him (A).
R
B agrees to sell the house and receives 50,000 as advance. Here, B’s consent has been
R
obtained by coercion. Therefore, the contract is voidable at the option of B. If B decides to

avoid the contract, he will have to return 50,000 which he had received from A.
R
76 Business Laws
UNDUE INFLUENCE
Undue influence is another vitiating element which renders a contract
voidable at the option of the party whose consent was procured by undue
influence.
Sometimes the parties to an agreement are so related to each other that
one of them is in a position to dominate the will of the other. The person who
is in a position to dominate the will of the other may prevail upon the other to
obtain his consent to an agreement due to his superior position. Such a
consent is said to be obtained by undue influence if unfair advantage is taken.
Thus, the person who has influence should not betray the confidence reposed
in him.
Definition of Undue Influence

According to Section 16(1) of the Act, “A contract is said to be induced by
‘undue influence’ where the relation subsisting between the parties are such
that one of the parties is in a position to dominate the will of the other and
uses that position to obtain an unfair advantage over the other.”
Sub-section (1) of Section 16 mentions two elements of undue influence.
They are :
(1) the relationship subsisting between the parties to a contract are such
that one of them is in a position to dominate the will of the other;
and
(2) he uses that position to obtain an unfair advantage over the other.
Examples: (i) A, having advanced money to his son B during his minority, upon B’s
coming of age obtains by parental influence, a bond from B for a greater amount than the
sum due in respect of the advance. A employs undue influence. [Illustration ( a) to S. 16]
(ii) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his
medical attendant, to agree to pay B, an unreasonable sum for his professional services.
A employs under influence. [Illustration (b) to S. 16].
A contract cannot be set aside on the ground of undue influence when one
of the parties is not in a position to dominate the will of the other.
Example : A applies to a banker for a loan at a time when there is stringency in the
money market. The banker declines to make a loan except at an unusually high rate of
interest. A accepts the loan on these terms. This is transaction in the ordinary course of
business, and the contract is not induced by undue influence [Illustration ( d) to S. 16].
Persons who are deemed to be in a position to dominate the will

of the other
According to S.16(2) a person is deemed to be in a position to dominate
the will of another in the following cases :
(a) Real of apparent authority. Where a person holds a real or
apparent authority over the other he is deemed to be in a position to
dominate the will of another. Apparent authority means that a
Free Consent 77
person may not have actual authority over the other but he may
project that he has such authority.
Persons in authority would include a police officer or a magistrate in
relation to an accused; an income tax officer in relation to an assessee;
a master in relation to his servant and the like.
(b) Fiduciary relationship. A person is deemed to be in a position to
dominate the will of the other where he stands in a fiduciary relation
to the other. A relationship of trust and confidence is a
fiduciary relation. In such cases confidence is reposed by one
party and influence exercised by the other.
It includes relationship of solicitor and client, trustee and beneficiary,
spiritual advisor and devotee, doctor or medical attendant and
patient, parent and child, guardian and ward, woman and her
confidential managing agent.
It has been held that there is no presumption of domination of will in case
of mother and daughter; grandson and grandfather; landlord and tenant and
creditor and debtor. In these cases dominance will have to be proved by
evidence based on facts and circumstances.
CASE : In the leading case Mannu Singh v. Umadat Pandey [(1890) 12 All 523],
the plaintiff, a Hindu, advanced in years, was induced to gift away the whole of his
property under the influence of his spiritual adviser. The only reason for the gift as
disclosed in the deed was the donor’s desire to secure benefits to his soul in the next
world. The Allahabad High Court set aside the gift on the ground that consent was
obtained by undue influence.
(c) Mental distress. A person is deemed to be in a position to dominate

the will of the other where he makes a contract with a person whose
mental capacity is temporarily or permanently affected by reason of
age, illness, or mental or bodily distress. Such a person is easily
persuaded to give consent to a contract which may be
disadvantageous for him.
CASE : In Ranee Annapumi v. Swaminatha [(1910) 34 Mad 7], the plaintiff, a poor
Hindu widow having no financial means, was in great need of money to establish her
right to maintenance, persuaded by a money lender to agree to pay 100 per cent
interest per annum. She borrowed 1,500. The Madras High Court held that it was an
R
instance of undue influence being exerted upon a person in distress. The Court allowed
the lender interest at 24 per cent per annum.
The dominant position may be furnished either by the presumption

arising under sub-section (2) of S. 16 or by evidence based on facts and
circumstances of the case.
Burden of Proof and Presumption of Undue Influence

The party seeking relief from the court must prove that (i) the other party
was in a position to dominate his will and (ii) he actually used his influence to
78 Business Laws
obtain unfair advantage. Both the conditions have ordinarily to be

established by the person seeking to avoid the transaction.
But in certain cases presumption of undue influence is raised. The effect
of the presumption is that once it is shown that a person was in a position to
dominate the will of the other it will be presumed that he must have used his
position to obtain unfair advantage. Therefore, where there is a presumption
of undue influence, the person who is in a position to dominate the will of the
other must prove that the other person freely consented. He can rebut the
presumption by proving that he made full disclosure of everything he knew
and contract was advantageous one to the other party.
The presumption of undue influence is raised in the following cases :
1. Unconscionable Bargain or Transaction
2. Contract with Pardanashin Woman
1. Unconscionable bargain or transaction. Sub-section (3) of
Section 16 provides : “Where a person who is in a position to
dominate the will of the another enters into a contract with him, and
the transaction appears, on the face of it or on evidence adduced, to be
unconscionable, the burden of proving that such contract was not
induced by undue influence shall lie upon the person in a position to
dominate the will of the other.”
Unconscionable transaction means a transaction which is so much to
the advantage of one party and disadvantage to the other that it
“shocks the conscience”. It can also be defined as an agreement as no
sane person would make and no honest person would take advantage
of.
Example: A, being in debt to B, the money-lender of his village, contracts a fresh loan
on terms which appear to be unconscionable. It lies on B to prove that the contract was
not induced by undue influence. [Illustration ( c) to S. 16].
CASE : A person, without having means of subsistence, in order to file an appeal

against a judgement, borrowed 3,700 on a bond promising to pay 25,000 within a
R R
year from the recovery of possession of an estate. The lender could recover only
R 3,700 plus interest [Chunni Kuar v. Rup Singh (1889) 11 All 57].
As between the parties on equal footing, the mere unconsionablencess of

the bargain does not create the presumption of undue influence [Raghunath
Prasad Singh v. Sanju Prasad, AIR 1929 PC 66; Subhash Chandra Das
v. Ganga Prasad Das, AIR 1967 SC 878.]
2. Contract with pardanashin woman. There is a presumption of
undue influence in case of contracts with a pardanashin woman. The
burden of proof lies on the other party to show that there was no
undue influence. He can discharge this burden by proving (i) that the
terms of the contract were fully explained to her, (ii) that she
understood the implications of the terms of the contract, (iii) that she
Free Consent 79
was in receipt of competent independent advice and (iv) she freely

consented to the contract. It should be established that it was not her
physical act but also her mental act.
Pardanashin woman here means a woman who, according to the custom

of her community, lives in complete seclusion from social interaction with
people outside her own family. In India pardanashin woman have been given
special protection in view of the special conditions of the times; they are
presumed to have an imperfect knowledge of the world, as, by the parda
system, they are practically excluded from communion with the outside
world.
CASE : In Moonshe Busloor Raheem v. Shamsoonisa Begum [(1867) MIA 551

PC], a widow remarried and after endorsing, delivered to her new husband certain
valuable Government papers for collection of interest. She filed a suit for recovery of
the papers. The husband contended that he had given full consideration for the notes.
The Privy Council held that the mere fact of endorsement and the allegation of
consideration were not sufficient to lift the presumption of undue influence. He should
have proved that the transaction was bonafide and that he gave full consideration for
the papers which he received from his wife.
Effect of Undue Influence

1. Voidable contract. Section 19 A provides that when consent to an
agreement is caused by undue influence, the agreement is contract voidable
at the option of the other party whose consent was so caused.
2. Restitution at court’s discretion. The section further provides that
any such contract may be set aside either absolutely or, if the party who was
entitled to avoid it has received any benefit thereunder, upon such terms and
conditions as to the Court may seem just. Thus, the special feature of this
section is that if a contract induced by undue influence is set aside, the court
has the discretion to direct the aggrieved part for refunding the benefit
whether in whole or in part or set aside the contract without any direction for
refund of benefit.
Examples (i) A’s son has forged B’s name to a promissory note. B, under threat of
prosecuting A’s son, obtains a bond from A for the amount of the forged note. If B sues on
this bond, the Court may set the bond aside. [Illustration (a) to S. 19A].
(ii) A, a money-lender advances 100 to B, an agriculturist, and, by undue influence,
R
induces B to execute a bond for 200 with interest at 6 percent per month. The Court may
R
set the bond aside, ordering B to repay 100 with such interest as may seem just.
R
[Illustration (b) to S. 19A].
DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE

In both coercion and undue influence, the consent of one of the parties is
not free. Therefore, the contract is voidable at the option of the party whose
consent was so caused. However, there are following points of difference
between the two :
80 Business Laws
Basis Coercion Undue Influence

1. Nature Consent is obtained by Consent is obtained by
committing or threatening to dominating the will of the
commit an act forbidden by the other.
IPC or by a unlawfully
detaining or threatening to
detain the property of another.
2. Type of force It involves the use of physical It involves the use of mental
force. force.
3. Relationship There may not be any There is usually some
between the relationship between the relationship between the
parties parties. parties so that one is in a
position to dominate the will of
the other.
4. Criminal The party exercising coercion The party does not commit a
liability may commit a criminal offence. criminal offence.
5. Burden of There is no prescription of There is presumption of under
proof coercion by law. The party who influence in certain cases.
alleges coercion must prove
this fact.
6. Restoration The party avoiding the The aggrieved party has the
of benefit contract has to restore any option to rescind the contract in
benefit he has received under accordance with S. 19A and the
the contract to the other party court has the discretion to set
as per S. 64. aside the contract absolutely,
or if the aggrieved party has
received any benefit, upon such
terms as it may deem fit.
7. Stranger to It may be exercised even by a It can be exercised only by a
contract stranger to the contract. party to the contract.
MISREPRESENTATION
A representation is a statement of fact made by one party to the other, either
before or at the time of entering into an agreement, with a view to inducing
the other party to enter into the agreement.
A representation which is false or misleading is known as
misrepresentation. Misrepresentation may be either innocent or intentional.
In the case of intentional misrepresentation, a fact is represented as being
true although it is false or without belief in its truth, with a view to deceiving
the other party to the agreement. If, however, a misrepresentation is made
honestly believing it to be true or without knowing that it is false, it is known
as innocent misrepresentation. In law, innocent misrepresentation is called
‘misrepresentation’ and intentional misrepresentation is called ‘fraud’.
Definition of Misrepresentation
Section 18 of the Act defines misrepresentation thus : “Misrepresentation
means and includes : (1) the positive assertion, in a manner not warranted by
Free Consent 81
the information of the person making it of that which is not true, though he
believes it to be true; (2) any breach of duty which without an intent to deceive
gains an advantage to the person committing it, or any one claiming under
him, by misleading another to his prejudice of any one claiming under him;
(3) causing, however innocently, party to an agreement to make a mistake as to
the substance of the thing which is the subject of the agreement.”
The section includes the following types of misrepresentation :
1. Positive assertion of unwarranted statements of material
facts believing them to be true. If a person makes a positive
statement of fact which he believes it to be true, on the basis of
information received from an untrustworthy source, or second-hand
information or hearsay, and the statement is not true, he is said to
have misrepresented the fact.
Example : A says to B who intends to purchase his land, “My land produces 50
quintals of rice per acre.” A believes the statement to be true although he did not have
sufficient ground to make the statement. B buys the land from A. It turns out that the land
produces 12 quintals of rice per arce. This is a misrepresentation.
CASE : In the leading case Benarsi Debi v. New India Co. [AIR 1959 SC 540], AIR
1959 SC 540, A. told B that C would be director of a company. A has obtained this
information not from C, but from another person, called D. The information proved to be
false. It was held that A’s statement was unwarranted because it was a second-hand
information which he derived from a third person D.
2. Breach of duty which brings an advantage to the person

committing it by misleading the other to his prejudice. If a
person commits a breach of duty without any intention to deceive the
other party, and thereby gains an advantage to himself to the
prejudice of the other party, the person committing the breach of
duty is said to be guilty of innocent misrepresentation.
Example : In a contract of life insurance an assured innocently states that his age is
45 years whereas in fact his age is 50 years and thereby induces the insurance company
to charge a lower premium. The assured honestly believes that his age is 45 years. It is a
case of misrepresentation by the assured as he has a duty to disclose his age correctly.
Further, a representation which was true when it was made, but
subsequently becomes false, should also be disclosed before the contract is
entered into. If the change in the circumstances making a true statement
untrue, is not disclosed to the other party without an intention to deceive, the
person making the statement will also be guilty of misrepresentation.
CASE : In With v. O’ Flanagan [1936) Ch. 575 CA], A (the defendant), while
negotiating the sale of his medical practice, represented to B (the plaintiff) that “his
practice was worth £2,000 a year”. The representation was true when a negotiations
took place but five months later when B actually bought the practice, it had gone down
to £5 a week, owing to the illness of A. A unintentionally kept quite. It was held that the
representation must be treated as continuing until the contract was signed and it was
the duty of A to communicate the change of circumstances to B. The contract was held
to be voidable as A failed to disclose the fall in the medical practice.
82 Business Laws
3. Causing mistake about the subject-matter innocently. It a

party to an agreement induces the other party, although innocently,
to commit a mistake as to the substance of the thing which is the
subject-matter of the agreement, he becomes guilty of
misrepresentation.
Example : In a contract of sale of 50 Kgs of sweets, the seller made the
representation that no foodgrain has been used in preparation of the sweets. Foodgrains,
however, had been used in 5 out of 50 Kgs of sweets and these were not separated. The
buyer would not have purchased the sweets but for the representation. There is
misrepresentation by the seller.
CASE : In Sorabshah Pestonji v. Secretary of State [AIR 1928 Bom 17], a list of
existing liquor shops was distributed amongst the bidders in an auction for liquor shops.
Relying on this statement about location of a particular shop six miles away, the plaintiff
purchased the licence of one shop. The statement did not mention that the other shop
had been relocated closer to the shop of the plaintiff. The contract was held to fall
under this cause, i.e., S. 18(3) as there was mistake as to the substance of the thing
contracted for.
Essentials of Misrepresentation
The following are the essentials of misrepresentation :
1. The representation must be one of fact and not a mere expression of
opinion.
2. It must be made before entering into the contract.
3. The representation must be innocently made without any intention
to deceive the other party.
4. The representation must have induced the other party to enter into
the contract. The Explanation to S. 19 provides that a
misrepresentation which did not cause the consent to a contract of
the party to whom such misrepresentation was made, does not
render a contract voidable.
5. If a person to whom the statement was not addressed, voluntarily
chooses to act upon it, he is not entitled to rescission. In the leading
case Peek v. Gurney [(1873) 6 LR 377 (HL)], the prospectus of a
company contained in false statement. Shares were allotted the
certain persons. The plaintiff purchased certain shares from the
allottee. He filed a suit against the promoters for the false statement
in the prospectus. It was held that he was not entitled to rescind the
contract as he was not the original applicant for the shares.
Effect of Misrepresentation
1. Voidable contract. When consent to an agreement is caused by
misrepresentation, the agreement is a contract voidable at the option of the
party whose consent was so caused. Therefore, the aggrieved party may
rescind the contract.
Free Consent 83
2. Aggrieved party may insist on performance and for restitution.

The aggrieved party may, if he thinks fit, insist that the contract shall be
performed, and that he shall be put in the position in which he would have
been if the representation made had been true (S. 19).
Example : A innocently tells B that his cellphone is made in Japan. B, thereupon buys
the cellphone. However, the cellphone turns out to be made in Singapore. A, is guilty of
misrepresentation. B may either avoid the contract or may insist on its carrying out. In the
latter case, B may ask for replacing the cellphone by another cellphone made in Japan or
may keep the cellphone made in Singapore and claim the difference in price of the two cell
phones.
Exception. If the party whose consent was caused by misrepresentation

had the means of discovering the truth with ordinary diligence, then the
contract is not voidable.
Example : A, by a misrepresentation, leads B erroneously to believe that 500 maunds
of indigo are made annually at A’s factory, examines the accounts of the factory, which
show that only 400 maunds of indigo have been made. After this B buys the factory. The
contract is not voidable on account of A’s misrepresentation [Illustration (b) to S. 19].
FRAUD
Fraud is an intentional misrepresentation of a material fact which induced
another to enter a contract. Fraud exist when a person makes a
misrepresentation of a material fact, known to him to be untrue, or made
recklessly without caring whether it is true or false, with the intention of
causing the other party to enter into a contract in reliance thereon, and the
other party enters into the contract relaying upon the same.
Definition of Fraud
According to Section 17 of the Act, “Fraud” means and includes any of the
following acts committed by a party to a contract, or with his connivance, or by
his agent with intent to deceive another party thereto or his agent; or to induce
him to enter into a contract :
(1) the suggestion, as to a fact, of that which is not true by one who does
not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of
the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be
fraudulent.
Let us now discuss these acts which constitute fraud :
1. The suggestion, as to a fact, of that which is not true by one
who does not believe it to be true. A false statement of fact
intentionally made is fraud. Lord Herschell, in the leading Derry v.
Peek [(1889) 14 App Cas 337], defined fraud as “a false statement
84 Business Laws
made knowingly, or without belief in its truth, or recklessly careless

whether it be true or false.”
CASE : In Derry v. Peek [(1889) 14 App Cas 337], a company submitted its plans to
the Board of Trade and then applied for a special Act of Parliament authorising it to run
trains in Plymouth by steam power. The Act which was ultimately passed provided that
the trams might be moved by animal power, or, if the consent of the Board of trade
were obtained, by steam or mechanical power. The directors believing that this consent
would be given, issued a prospectus stating that the company had the right to use
steam power instead of horses. A (the respondent) took shares upon the faith of the
statement. The Board of Trade did not give their consent to use steam or mechanical
power. It was held that there was no fraud. The directors honestly believed that the
consent of the Board of Trade was practically concluded by by passing of the Act.
Example : A, intending to deceive B, falsely represents that five hundred maunds of

indigo are made annually at A’s factory, and thereby induces B to buy the factory. The
contract is voidable at the option B. [Illustration ( a) to S. 19].
To constitute fraud, the representation must be one of fact, and not of
opinion. According to Sir William Anson, “Commendatory expressions, such
as advertisement to the effect that a soap powder, ‘washes whiter than white’
or that a certain brand of cigarette gives, ‘lasting satisfaction’, are not dealt
with as serious representations of fact.” They are merely puffing statements,
and not representations of fact.
2. The active concealment of a fact by one having knowledge or
belief of the fact. Active concealment is some positive act on the part
of a party to a contract to deliberately conceal a material fact, and
thus prevent the other party from knowing the truth. In the other
words, physical acts taken to conceal the true nature of the subject-
matter of a contract constitute fraud.
CASE : In Mithoo Lal Nayak v. LIC [AIR 1962, SC 814], Mr. Mahajan Deolal took
out an insurance policy on his life with the Life Insurance Corporation of India. He had
undergone treatment by a doctor for serious ailments just a few years back. He made a
false statement in the policy that he had not not been treated by any doctor. The
Supreme Court held that the appellant was guilty of fraud. It was further held that he
was not entitle to get back the premium paid by him. Thus, the Court does not entertain
an action for refund of money, where, in order to succeed, the plaintiff has to prove his
own fraud.
Example : B, having discovered a vein of ore on the estate of A, adopts means to

conceal, and does conceal the existence of the ore from A. Through A’s ignorance B is
enabled to buy the estate at an undervalue. The contract is voidable at the option of A.
[Illustration (d) to S. 19].
Mere non-disclosure is no fraud, where there is no duty to disclose.
Caveat Emptor or ‘Buyer Beware’ is the principle applicable in all such cases
of contracts of sale.
Example (i) : A sells by auction, to B, a horse which A knows to be unsound. A says
nothing to B about the horse’s unsoundness. This is not fraud in A. [Illustration ( a ) to S.
17].
Free Consent 85
Example (ii) : B is A’s daughter, and has just come of agree. Here the relations
between the parties would make it A’s duty to tell B if the horse is unsound. [Illustration ( b)
to S. 17].
3. A promise made without any intention of performing it. When

a party to a contract makes a promise which he has no intention of
performing it, there is fraud on his part. For example, buying goods
with the intention of not paying the price is fraud which entitles the
seller to rescind the contract.
CASE : In Delhi Development Authority v. Skipper Construction Co. (P) Ltd.

[AIR 2000 SC 573], a builder had made bookings for three times the number of units
actually available. He promised to give flats to all of them. It was construed to be a
fraud under this clause of S. 17, as this amounted to a promise which could never be
performed.
4. Any other act fitted to deceive. Clause (4) is intended to bring

within the purview of Section 17, all such acts which, though at first
sight, do not appear to be misrepresentation of fact may amount to
fraud, taking the facts of the case into consideration. Since man’s
dishonesty in adopting unsuspicious method of perpetuating fraud is
unlimited, this clause, which is only for the sake of abundant
caution, covers all such contingencies.
5. Any such act or omission as the law specially declares to be
fraudulent. Clause (5) of Section 17 brings within its fold, the
relevant provision of the Companies Act and Transfer of Property
Act relating to fraudulent preference and full disclosure which, if
committed or not complied with, amounts to fraud. For instance,
under Section 55 of the Transfer of Property Act 1882 the seller of
immovable property must disclose to the buyer all material defects in
the property or in the seller’s title. If these are not disclosed, it
amounts to fraud.
Example : A fraudulently informs B that A’s estate is free from encumbrance. B
thereupon buys the estate. The estate is subject to mortgage. This is a case of fraud by A.
Essential Elements of Fraud

1. The act constituting fraud must have been committed by a party to
the contract or with his connivance or by his agent.
2. The act constituting fraud must be covered by any one of the five
sub-sections of S-17 of the Act. (discussed above).
3. The representation must be made with an intention to deceive the
other party to the contract or his agent or to induce him to enter into
the contract.
CASE : A bought shares in a company on the faith of a prospectus which contained
a deliberate untrue statement that a particular person is director of the company. A had
never heard of that person. Thus the statement was immaterial for him. A filed a suit for
86 Business Laws
claiming damages. The suit was dismissed [Smith v. Chandwick (1884) 9 App. Cas
187].
4. The plaintiff should have acted on the representation and suffered

damage. The aggrieved party cannot complain of fraud and seek
relief, if he has not been deceived by the misrepresentation.
Example : A, with a view to inducing B to make a contract with him fraudulently tells
him that C had offered 15,000 for his motor car, and B knows that C had offered only
R
R 10,000 and yet buys A’s car, B has no ground to complain that he was deceived in the
transaction and suffered a loss of 5,000. One who knows he is being deceived can
R
hardly be deceived.
CASE : In Horsfall v. Thomas [(1862) 1 H&C 90], A (the defendant) bought a

cannon from B (the plaintiff). The canon had a defect and in order to conceal the same,
B inserted a metal plug into the weak spot of the gun. A accepted it even without
inspecting it. When he used it, the gun burst. he refused to pay for it on the ground of
fraud. The court observed that, “If the plug, which it was said was put in to conceal the
defect, had never been there, his position would have been the same, for, as he did not
affect him.” Therefore, the court held that as A was not deceived; the attempted fraud
had no operation upon his mind, he could not successfully set up a plea of fraud.
This rule is applicable where a seller of specific goods purposely conceals

a fault by some means, in order that the buyer may not discover it if he
inspects the goods, but the buyer does not, in fact, make any inspection.
Hence “an attempt to deceive which has not in fact deceived the party
can have no legal effect on the contract, not because it is not wrong in
the eyes of the law, but because there is no damage.”
Is Silence Fraud
The Explanation to S. 17 provides :
“Mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud, unless the circumstances of the case are such that,
regard being had to them it is the duty of the person keeping silence to speak,
or unless his silence is, in itself, equivalent to speech.”
Therefore, the general rule is : The mere silence as to facts likely
to affect the willingness of a person to enter into a contract is not
fraud. This is because, there is no general duty cast upon a party to a
contract to disclose to the other party material facts within his knowledge,
but which are unknown to the other party and which might influence him in
coming to a decision about the contract. In contracts of sale of goods this
principle is know as caveat emptier or ‘buyer beware’. According to this
principle, the seller is under no duty to disclose to the buyer defects in the
articles he is selling.
Examples : (i) A sells by auction, to B, a horse which he knows to be unsound. A
says nothing to B about the horse’s unsoundness. This is not fraud in A. [Illustration (a) to
S. 17].
Free Consent 87
(ii) A and B, being traders, enter upon a contract. A has private information of a
change in prices which would affect B’s willingness to proceed with the contract. A is not
bound to inform B. [Illustration (d) to S. 17].
CASE : It was held by the Supreme Court in Shri Krishan v. Kurikshetra

University [AIR 1976 SC 376], that there was no fraud. In this case a candidate for a
university examination did not mention the fact of his attendance shortage in the
application form, although he knew that he was short of attendance. The University was
stopped from cancelling his examination on the ground that there was no fraud, and it
was the duty of the University to verify the facts with reference to the relevant records.
Exceptions
(a) Silence is fraudulent if the circumstances of the case cast a
duty upon the person keeping silence to speak (Explanation to
S. 17).
Duty to speak arises in contracts of ‘utmost good faith’, i.e., contracts of
uberrimae fidei. Duty to disclose also arises when one of the parties has
absolutely no means of discovering the truth, and as such, has to depend
upon the other party to the contract. The duty to disclose may also arise due
to the relationship of the parties.
These cases are discussed below :
(i) Contracts in which fiduciary relationship exists. If the parties to a
contract stand in fiduciary relationship, the relationship requires
fullest disclosure by the party in whom confidence is reposed. The
relationship between a trustee and beneficiary, guardian and ward,
agent and principal, solicitor and client etc., fall under this category.
Example : (i) A sells to B, horse which A knows to be unsound. B is A’s daughter and
has come of age. Here the relation between the parties would make it A’s duty to tell B if
the horse is unsound.
(ii) A broker is employed to buy shares for a client and the broker sells his own shares
to the client without disclosing this fact. The client can avoid the contract.
(ii) Contracts of insurance. All contracts of insurance are contracts of

utmost good faith. It is, therefore, necessary for the person taking
out a policy to disclose all material facts which are known to him.
The insurer is entitled to be put in possession of all material
information possessed by the insured. Failure to fulfill this
obligation renders the contract voidable at the option of the insurer.
(iii) Contracts to subscribe for shares in companies. Since a contract to
take up shares in a company depends upon the statements made in
the prospectus, those who are responsible for its preparation and
issue are under a legal obligation to make the fullest disclosure of all
the material facts likely to affect the willingness of those who are
desirous of contracting with the company. Non-disclosure of a
material fact gives the right to the aggrieved party to set the
contract aside.
88 Business Laws
(iv) Contracts of family arrangement. A contract of family arrangement is

one of utmost good faith. Hence, when members of a family make
arrangements for the settlement of the family property, every
member of the family must disclose all material facts within his
knowledge, and which might affect the judgement of the others in
entering into a compromise. The arrangement will not be binding on
those members who are kept in the dark due to concealment of
material facts by the other members.
(v) Contracts for the sale of immovable property. In the case of contracts
of sale of immovable property, the vendor is under the obligation of
disclosing to the buyer any material defect in the property or in the
seller’s title, of which the seller is, and the buyer is not aware, and
the buyer could not discover with ordinary care. The omission to
make such a disclosure is fraudulent. However, this obligation is
limited only to latent defects but not to patent defects.
Example : A discovers a vein of ore on the estate of B and does not disclose this to B
and purchases the estate at an undervalue, B can avoid the sale.
(vi) Contracts to marry. Strictly speaking, contracts of marriage are not
contracts of utmost good faith. However, in Ahmad Yarkhan v.
Abdul Gani Khan [AIR 1937 Nag 270], the Nagpur High Court
observed that, “But contracts to marry may also come under this
category though the case law on the subject is meagre and
conflicting.” In this case, a contract of marriage was allowed to be
broken off as the girl’s side had concealed the fact hat the girl
suffered from epileptic fits.
(vii) Contracts of partnership. Partners must maintain absolute good
faith. They are bound to be just and faithful to each other as per S. 9
of the Partnership Act, 1932.
(b) Silence is fraudulent where silence in itself is equivalent to
speech (Explanation to S. 17).
Example : B says to A — “if you do not deny it, I shall assume that the horse is
sound”. Here, A’s silence is equivalent to speech. Here the relation between the parties
would make it A’s duty to tell B if the horse is unsound. [Illustration (c ) to S. 17].
(c) Half truths

If the party keeping silent, volunteers to disclose a state of facts partly, as
a result of which the undisclosed part renders the disclosed part false, there
is a duty cast upon him to disclose the full facts.
CASE : In Bimla Bai v. Shanker Lal [AIR 1959 MP 8], it was held that when a
person speaks of another as his ‘son’ he holds him out as his legitimate — natural or
adopted son. It cannot possibly include an illegitimate son. Therefore, the
representation was fraudulent when a Hindu father represented his illegitimate son as
his son.
Free Consent 89
(d) Change of circumstances

Again, a representation which was true at the time when it was made,
may become false subsequently, owing to change in circumstances. In such a
case, it is the duty of the person who made the representation, to disclose the
change in circumstances to the other party. See the case With v. O’ Flangan
given earlier under Misrepresentation.
Effect of Fraud
A party whose consent has been caused by fraud has the following
remedies :
1. Voidable contract. When consent to an agreement is caused by
fraud, the agreement is a contract voidable at the option of the party
whose consent is so caused. Thus, the aggrieved party can rescind the
contract (S. 19). But a fraud which did not cause the consent to a
contract of the party on whom such fraud was practised, does not
render a contract voidable.
2. The aggrieved party may insist on performance and ask for
restitution. Alternatively, a party to contract, whose consent was
caused by fraud, may, if he thinks fit, insist that the contract shall be
performed, and the he shall be put in the some position in which he
would have been if the representation made had been true (S. 19).
Example : A fraudulently informs B that A‘s estate is free from encumbrance. B
thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the
contract or may insist on its being carried out and mortgage-debt redeemed. [Illustration
(c) to S. 19].
3. Damages. The aggrieved party can also sue for damages if he suffers
some loss.
Example : A sells a horse to B by making a false statement that the horse is sound. B
suffers an injury due to unsoundness of the horse. B is entitled to demand compensation
from A.
DISTINCTION BETWEEN MISREPRESENTATION AND FRAUD

In both misrepresentation and fraud there is misrepresentation of fact,
and in both the cases, the agreement is a contract voidable at the option of
the party whose consent was caused by misrepresentation, whether innocent
or fraudulent. Yet, the following are the points of distinction between the two:
Basis Misrepresentation Fraud
1. Belief The person making the false False statement is made by a
statement honestly believes it person who knows that it is false,
to be true. or recklessly, without caring
whether it is true or false.
2. Intention There is no intention to There is intention to deceive the
deceive the other party. other party.
90 Business Laws
3. Damages The contract is voidable. The contract is voidable and

aggrieved party can claim
damages for fraud.
4. Discovery The party cannot avoid the In case of fraud, except, fraud by
of truth contract, if he has the means silence, the contract is voidable
of discovering the truth with even though the party whose
ordinary diligence. consent was so caused had the
means of discovering the truth
with ordinary diligence.
LOSS OF RIGHT OF RESCISSION

When a contract is induced by coercion, under influence, fraud or
misrepresentation it is voidable at the option of the party whose consent was
so caused. But in some cases defaults or acts or delay on the part of the
aggrieved party would disable him from rescinding the contract. In the
following cases the right of rescission is lost :
(i) Affirmation. Where the party, after becoming aware of his right to
rescind, affirms the contract expressly or impliedly, the right to
rescind the contract is lost. A person loses his right to rescind the
contract where he appropriates to his use the goods received under a
voidable contract or sells or attempts to sell them.
(ii) Lapse of time. Right to rescind the voidable contract must be
exercised within reasonable time.
CASE : In re Christineville Rubber Estates Ltd. [(1911) 81 LJCR 63], A person

was allotted shares on the basis of a misleading prospectus in July. He wanted to set
aside the contact in December. But he could not do so as the unexplained delay of five
months was held to be unreasonable time for rescinding the contract.
(iii) Restitution not possible. Section 64 provides that “the party

rescinding a voidable contract shall, if he has received any benefit
thereunder from another party to such contract, restore such benefit,
so far as may be, to the person from whom it was received.”
Thus, if a party who wants to rescind the voidable contract is not in a
position to restore the benefits received thereunder, the right to rescind the
contract is lost. For example if the goods have been consumed or destroyed,
the right to resind the contract is lost.
(iv) Right of third parties. The right of rescission is lost as soon as a
third party bonafide and for value acquires rights in the subject
matter of the contract. See Phillps v. Brooks case under the heading
‘Mistake as to identity’.
Mode of communicating or revoking rescission of voidable
contract
Section 66 provides that the rescission of voidable contract may be
communicated or revoked in the same manner, and subject to the same rules,
as apply to the communication or revocation of proposal.
Free Consent 91
Party rightfully rescinding contract entitled to compensation

According to S.75, a person who rightfully rescinds a contract is entitled
to compensation for any damage which he has sustained through the non-
fulfilment of the contract.
MISTAKE
Mistake
Mistake of Law Mistake of Fact
Mistake of Mistake of Bilateral Unbilateral

Indian Law Foreign Law Mistake Mistake
Existence of Mistake as to
subject matter identity of
person
Identity of
subject matter Mistake as to
nature of
Qualiy or substance transaction
of subject matter
Quantity of
subject matter
Title of subject matter
A false and fundamental

assumption
Possibility of
performance
Figure 6.2
NOTES :
1. Mistake of Indian Law : The contract is binding.
2. Mistake of Foreign Law : The agreement is void in case of bilateral
mistake.
3. Bilateral Mistake of Fact : The agreement is void.
4. Unilateral Mistake of Fact : The contract may be valid, violable or void
depending on the circumstances.
92 Business Laws
Mistake may be defined as an erroneous belief concerning something. It

may be of the following two kinds :
(I) Mistake of law; and
(II) Mistake of fact.
MISTAKE OF LAW
Mistake of law may be of the following two types :
(1) Mistake of law in force in India.
(2) Mistake of foreign law.
(a) Mistake of law in force in India. Section 21 lays down that, “A
contract is not voidable because it was caused by mistake as to any
law in force in India, but a mistake as to any law not in force in India
has the same effect as a mistake of fact.” Accordingly, no relief can be
granted on the ground of a mistake of the law of the land. This is
based on the principle that “ignorance of law is no excuse”. Since it is
the duty of every citizen to know either by professional advice or
otherwise, so much law as concerns him for the matters he is
transacting, he cannot avoid the contract he has entered into on the
ground of mistake of Indian law.
Example : A and B make a contract grounded on the belief that a particular debt is
barred by Indian Law of Limitation; the contract is not voidable. [Illustration to S. 21].
(b) Mistake of foreign law. Since no one is expected to be conversant

with foreign law, mistake of any such law is deemed to be mistake of
fact as per Section 21. Mistake of foreign law renders the agreement
void if there is a ‘bilateral mistake’.
MISTAKE OF FACT
Mistake of fact may be of the following two types :
(1) Bilateral mistake; and
(2) Unilateral mistake.
1. Bilateral Mistake
Section 20 enacts that where both the parties to an agreement are under
a mistake of fact essential to the agreement, the agreement is void. The
following conditions must be satisfied for the application of the section :
(a) There must be mistake of fact.
(b) The fact must be essential to the agreement, that is, the mistake
must be of a material nature, and must be the determining ground of
transaction.
(c) The mistake must be by both the parties.
Example : A agrees to buy from B a certain horse. It turns out that the horse was
dead at the time of the bargain though neither party was aware of the fact. The agreement
is void. [Illustration (b ) to S. 20].
Free Consent 93
CASE : In Tarsem Singh v. Sukhminder Singh [(1998) 3 SCC 471], there was a
contract for sale of land where one party thought in terms of area in bighas and the
other in karnals. There was a dispute between the parties with regard to the area of
land which was the subject matter of the agreement for sale. The agreement was held
to be void under S. 20 by the Supreme Court. The Court said that the area of the land
was as much essential to the agreement as the price, which was to be calculated on
the basis of the area.
Instances of Bilateral Mistake of Fact (both common and mutual)

(a) Existence of the subject-matter. A contract entered into on the
assumption that the subject-matter of the contract exists at the time
of the contract, becomes void, if, unknown to the parties, the subject
matter has ceased to exist or has never been in existence at the time
of the contract.
Example : A agrees to purchase a specific article from B. Unknown to both the
parties, the article has already perished. The contract in such a case is void.
(b) Identity of subject-matter. Where one party intends to contract
with regard to one thing, and the other with a different one, then
there is no agreement. In a case like this, there is no consensus
between offer and acceptance, the parties are at cross purposes and
the absence of consensus ad idem affects the very formation of the
agreement.
Example : A has two horses — (i) white and (ii) black. A wants to sell the white horse
to B at a certain price. B thinks that A has made the offer to sell his black horse and
accepts the offer. The agreement is void.
(c) Quality and substance of the subject matter. If there is a
mistake of both parties and it is as to the existence of some quality
which makes the thing without the quality essentially different from
the thing as it was believed to be, the agreement is void.
CASE : In Nursing Das Kotari v. Chuttoo Lall Misser [ILR (1923 50 Cal 615], a
person agreed to sell his land to another. But, unknown to the parties, the land had
been notified for acquisition at the time of the contract. The sale of land was held to be
void.
(d) Quantity of the subject matter. Mistake as to the quantity of the

subject-matter arises when the quantity of subject-matter contracted
to be sold and bought is fundamentally different from the quantity
intended to be sold and bought.
CASE : In Nicholson and Vern v. Smith Marriott [(1947) 177 LT 189 KB], the seller
described a set of table clothes as linen napkins as dating from 17th century and as
‘the authentic property of Charles I. The table clothes and napkins were later on found
to be Georgian. The agreement was held to be void as there was mistake as to quality
of the subject-matter.
CASE : In Henkel v. Pape [(1870) LR 6 Ex 7], A (the defendant), after enquiring

about the price of rifles, ordered by telegram three rifles. Owing to mistake of telegraph
94 Business Laws
clerk, the message was transmitted as ‘the rifles’. Since the previous negotiations
indicated that this should mean fifty rifles, B (the plaintiff) sent fifty rifles. A accepted
only three and returned the rest. It was held that there was no contract although the
mistake was caused by the negligence of a third party.
CASE : (i) In the leading case Earnest Beck & Co. v. K.S. Owski & Co. [(1924) AC
43], A agreed to buy from B 2000 gross of reels of sewing thread, each reel containing
200 yards of thread. B, the seller believed that a reel contains 200 yards of thread.
After obtaining delivery, A found that each reel contained about 6% less thread. The
agreement was held void as there was mistake on the part of both the parties about the
quantity of the subject-matter.
(e) Title of the subject-matter. If a person agrees to buy property

from another, and neither of them knows that it already belongs to
the buyer, there is a mistake, since a person cannot in law buy his
own property.
CASE : In Cooper v. Phibbs [(1867) LR 2 HL 149], a person had told his nephew,
not intending to misrepresent anything, but being in fact in error, that he (the uncle) was
entitled to a fishery. The nephew, after the uncle’s death, acting in the belief of the truth
of what the uncle had told him, entered into a n agreement to rent the fishery from the
uncle’s daughters the (defendants) whereas it actually belonged to the nephew himself.
Subsequently, he sought to avoid the contract on the ground of mistake that he
ignorantly thought that it belonged to the defendants. The House of Lords held that the
agreement was void.
(f) A false and fundamental assumption. Where the parties enter

into a contract, under a false and fundamental assumption, going to
the root of contract, the agreement is void.
CASE : In the leading case Galloway v. Galloway [(1914) 30 TLR 53], A (the
plaintiff) and B (the defendant), believing themselves to be lawfully married, entered
into a separation agreement by which B agreed to pay A £ 1 a week. They were not, in
fact, validly married. In an action by A for arrears of the weekly payment, it was held
that the agreement was void as there was a mutual mistake of fact which was material
to the existence of agreement.
(g) Possibility of performance. Where there is bilateral mistake

regarding the possibility of performance of the contract, the
agreement in such a case is void. The impossibility may either be
physical or legal.
CASE : In Griffith v. Brymer [(1903) 19 TLR 434], an agreement for the hire of
seats from the defendant to watch the coronation procession of Edward VII, made in
ignorance that the procession had already been cancelled, was held to be void.
2. Unilateral Mistake of Fact

Unilateral mistake is the mistake of one of the parties to contract as to a
matter of fact. Section 22 of the Act lays down that, “A contract is not voidable
merely because it was caused by one of the parties to it being under a mistake
as to a matter of fact.”
Free Consent 95
Accordingly, unilateral mistake is not a valid ground for avoiding the

contract. A person is bound by an agreement to which he has expressed a
clear assent unless the unilateral mistake is caused by misrepresentation or
fraud.
CASE : In A. A. Singh v. Union of India [AIR 1970 Mani 16], the Government sold
by auction the right of fishery and A (the plaintiff) offered the highest bid under the
impression that the right was sold for three years, when in fact, it was for one year only.
A could not avoid the contract because of the unilateral mistake caused by his own
negligence as he ought to have ascertained the tenure of fishery before bidding at the
auction.
Exceptions
In the following two cases of unilateral mistake the agreement is void :
(a) Mistake as to identity of the person contracted with; and
(b) Mistake as to character of a written document.
(a) Mistake as to identify. Mistake as to the identity of the person
contracted with, is said to occur when one of the parties to an
agreement represents himself to be some other person than he really
is.
A mistaken belief by A that he is contracting with B, whereas in fact he is
contracting with C, will negate consent where it is clear that the intention of
A was to contract only with B. Accordingly, there is no contract if the identity
of B is a material element of the contract and C knows it. However, if A
intends contracting with B, but would have been content with C as long as he
got performance of the contract, the contract with C becomes binding. But if
B’s personality is a vital element in the contract, the contract becomes void.
The party who pleads mistake according to Chestine, Fifoot and
Furmston’s Law of Contract, 12th Ed. 1992, Page 251, must prove the
following:
“(i) that he intended to deal with some person other than the person
with whom he has apparently made a contract;
(ii) that the latter was aware of this intention;
(iii) that at the time of negotiating the agreement, he regarded the
identity of the other contracting party as a matter of crucial
importance; and
(iv) that he took reasonable steps to verify the identity of that party.”
CASE : In Cundy v. Lindsay [(1878) 3 AC 459], Lindsay and Co. (the plaintiffs) had
regular dealings with a respectable firm Blenkiron & Company carrying on business at
123, Wood Street, Cheapside. A person named blenkarn, writing from ‘37 Wood Street,
Cheapside’ offered to buy goods from Lindsay and Co. and he signed his letter in such
a way that his name appeared to be ‘Blenkiron & Co. Lindsay and Co., who were aware
of the high reputation of Blenkiron & Co., accepted the offer and supplied goods. These
were received by Blenkrn, and in turn he sold them to Cundy & Co., the defendants,
96 Business Laws
who took them in good faith. On detecting Blenkarn’s fraud Lindsay and Co. sued
Cundy & Co. for conversion. The Court of Appeal held that the presumed contract
was void for mistake and since no title had passed to Blenkarn, none could pass to
Cundy & Co., though they were innocent. The House of Lords affirmed this decision.
Mistaken identity arises only when a person bearing a particular identity

exists within the knowledge of the plaintiff, and the plaintiff intends to deal
with him only. If the assumed name is fictitious, there will be no mistake as to
identity. Similarly, there will be be no mistake as regards identity if the
plaintiff intends to deal with the person present.
CASE : In King’s Norton Metal Co. Ltd. v. Edridge, Merrett & Co. Ltd. [(1897) 14
LTR 98], a person by name Wallis, wrote to the plaintiff company under the assumed
name ‘Hallam & Co.’ asking for quotations for metal wire. Although there was no such
firm as Hallam & Co., the letterhead which was used by Wallis had the picture of a
large factory and list of overseas depots. On receiving the quotations, an order was
placed by Wallis in the name of Hallam & Co. for the metal wire. The plaintiff company
supplied the wire and Wallis sold the same to the defendants, who acted in good faith.
The plaintiffs sued the defendants contending that the contract with Hallam & Co. was
void and as such the wire was still their property. The contract between the plaintiff
company and Wallis was only voidable for fraud but not void on the ground of
mistake.
CASE : In Phillps v. Brooks Ltd. [(1919) 2 KB 243], on April 15, 1919, a man called
North, entered a jeweller’s (the plaintiff’s) shop and saw some pearls and rings. He
selected pearls worth £ 2,550 and a ring of the value of £ 450. He produced a cheque
book and wrote out a cheque for £ 3,000. In signing it, he said : “You see who I am, I
am Sir George Bullough”, and he gave an address in St. James Square. The jeweller
knew that there was such a person as Sir George Bullough, and finding on reference to
a directory that Sir George lived at the address mentioned, he allowed North to take
away the ring which North said he wanted it for his wife’s birthday. The cheque was
dishonoured, and subsequently, North was convicted.”
In the meantime. North had pledged the ring with Brooks Ltd. (the defendants), who,
bona fide and without notice, advanced £ 350 on it. The jeweller (Phillips) sued Brooks
ltd., who mere pawnbrokers, for the return of the ring, or alternatively, its value, and
damages for its detention. The question before the Court was whether or not the
properly in the ring passed to North so as to entitle him to give a good title to the
defendants who gave value and acted bona fide without notice. It was held that there
was no mistake as regards identity of the person contracted with. Therefore, there was
passing of property to North entitling him to give a good title to the defendants.
Horridge J. observed that “… I think the seller intended to contract with the person
present, and there was no error as to the person with whom he contracted,
although the plaintiff, would not have made the contract if there had not been
fraudulent misrepresentation.”
Note : It should be kept in mind that in case of a voidable contract, before

it is repudiated, one can pass a good title to a bona fide purchaser for value.
CASE : In Said v. Butt [(1920) 3 KB 497], A (the defendant), the managing director
of a theatre, gave instructions that no ticket were to be sold to B (the plaintiff), who was
Free Consent 97
a bad critic of all the plays of A. B knew that if he presented himself at the box office he
would be refused a ticket. His knowledge was based on his past experience. He,
therefore, sent a friend to buy a ticket for him. With this ticket, he went to the theatre,
but he was refused admission. Consequently, he sued for damages for breach of
contract. It was held that there was no contract since A never intended to contract
with B.
(b) Mistake as to the character of a written document. Mistake as

to the essential nature of a written contract occurs when one of the
parties to a contract does not disclose to the other the true nature of
the document and fraudulently induces him to sign the same, and
the other party signs it under the mistaken belief that he is signing a
document of different nature altogether. In such a case, the contract
becomes wholly void for want of consent.
CASE : In Dularia Devi v. Janardan Singh [AIR 1990 SC 1173], the Supreme Court
held that where a document containing an agreement obtained by fraud or
misrepresentation as to the character of the document itself, the contract is void and
not voidable. In this case A (the plaintiff), as illiterate woman wanted to execute a gift
deed in favour of her daughter. Her thumb impression was fraudulently taken on two
documents, one being gift deed in favour of B and C (the defendants), who were her
daughter’s husband and his brother. While putting the thumb impression she honestly
believed that she was executing a gift deed only in favour of her daughter. The sale
deed was held void.
The rule of law is that where the mind of the signer did not accompany the
signature, that is, he never intended to sign and therefore, in contemplation of
law never did sign the document to which his name is appended, the
agreement is void ab initio.
CASE : In the leading case Raja Singh v. Chaichoo Singh [AIR 140 Pat 201], A
(the plaintiff) fraudulently induced B (the defendant) to put his thumb impression upon a
deed which was in fact a gift of land on the representation that it was a lease of his land
to A. The deed was held to be void ab initio.
However, if there is a unilateral mistake as regards contents of a

document, the transaction is voidable, and not void.
CASE : In the leading case Ningawwa v. Byrappa [AIR 1965 SC 956], there was no
fraudulent representation as to the character of the gift deed but the husband
fraudulently included in the gift deed two more plots without the knowledge of his wife
and obtained her signature. The Supreme Court held that the transaction of gift was
voidable and not void. Ramaswami, J., said : “The authorities make a clear distinction
between character of the document and fraudulent misrepresentation as to the
contents thereof. With reference to the former it has been held that the transaction is
void, while in the case of latter, it is merely voidable.”
REVIEW QUESTIONS
1. Write a short note on Difference between consent and free consent.
2. Define consent. When can it be said to be free ?
98 Business Laws
3. Define undue influence. Distinguish between coercion and undue influence.

[B.Com. and B.Com. (H), D.U.]
4. How is ‘Undue Influence’ defined in S. 16 of the Contract Act ? Describe when
a person is presumed to be in a position to dominate the will of another. On
whom lies the burden of proving that undue influence has vitiated free
consent in a contract ? What is the rule regarding the shifting of the burden
of proof ? Explain with the help of relevant case law.
5. Discuss the essential ingredients of ‘undue influence’ and explain how the
court should proceed in a case where there is allegation of ‘undue influence.
6. Discuss the law relating to ‘unconscionable bargains’.
7. What is ‘misrepresentation’? Distinguish it from ‘fraud’. [B.Com., D.U.]
8. Define ‘fraud’. What is its effect on the validity of a contract.
9. What is meant by ‘mistake’ undue the Indian Contract Act ? State the various
types of mistakes and explain the provision relating to the same.
10. Comment on the following :
(a) “Mere silence as to facts is not fraud.”
(b) “An attempt at deceit which does not deceive is no fraud.”
[B.Com. (H), D.U.]
(c) “The law of mistake is a comedy of errors.”
11. “A contract caused by unilateral mistake may be valid or void.” Explain.
12. Explain and illustrate mistake as regards identity of the person contracted
with.
13. State with reasons whether the following statements are true or false :
(a) A threat to commit suicide amounts to coercion.
(b) There is no presumption of undue influence between husband and wife.
(c) A threat amounting to coercion must necessarily proceed from a party to
the contract.
(d) A mere silence as to facts likely to affect the willingness of a person to
enter into a contract is not fraud.
(e) Where both the parties to an agreement are under a mistake as to a
essential matter of fact, the agreement is voidable.
[Ans : True : (a), (b), (d); False : (c), (e),]
(i) When consent of a party is obtained by undue influence, the contract is :
(a) void (b) voidable
(c) unenforceable (d) none of these
[Hint : (b)]
(ii) Fraud is defined in section …… of the Indian Contract Act, 1872. Fill up
the blank from the following
(a) S. 15 (b) S. 16
(c) S. 17 (d) S. 18
[Hint : (c)]
15. Distinguish between :
(a) Coercion and undue influence. [B.Com. and B.Com. (H), D.U.]
(b) Fraud and misrepresentation. [B.Com. and B.Com. (H), D.U.]
16. What is undue influence ? State three situations where the presumptions of
undue influence exists. [B.Com. (H), D.U.]
Free Consent 99
PRACTICAL PROBLEMS
1. A threatens to shoot B if he does not sell his house to him (A) for 2,00,000. B
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agrees to sell and signs the documents for sale. Is the contract valid ?
[Hint : No. The contract is voidable due to coercion.]
2. A offers to sell his factory to B stating that the factory produces 500 articles,
per day. B checks the account books and finds that only 400 articles are
produced a day. B accepts the offer but later on refuses to purchase the
factory on the ground that it produces only 400 articles per day while A has
represented that it produces 500 articles a day. Decide giving reasons.
[Hint : The contract is binding on B under exception to S. 19]
3. The Manager of a theatre gave instructions that no tickets were to be sold to
S. S, knowing this, asked a friend to buy a ticket from him. With this ticket S
went to the theatre but was refused admission. He filed a suit for damages for
breach of contract. Would he succeed ?
[Hint : No. Mistake as regards identity of person contracted with, Said v.
Butt.]
4. A, an old man of feeble sight, indorsed a bill of exchange for 5,000 thinking
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it was a guarantee. Is he liable on the Bill of Exchange ?

[Hint : Not liable. The plea of non est factum. i.e., Unilateral mistake as to
the nature of written document, Foster v. Mckinnon.]
5. A offers to sell a painting to B, which A knows is the copy of a well-known
master piece. B, thinking that the painting is the original one, agrees to buy
it at a very high price. Is this a valid contract ?
[Hint : Yes. The rule of caveat emptor is applicable in case of unilateral
mistake as regards quality of the subject-matter.]
6. A offer to sell a painting to B, which both believe to be the work of a well-
known painter. B agrees to purchase the painting at a high price. The
painting turns out to be only modern copy. Is this a valid contract ?
[Hint : No. The contract is void as there is mutual mistake of both the parties
as regards an essential fact. Section 20.]
Legality of Object and
7 Consideration
LEARNING OBJECTIVES
➥ What Considerations and Objects are Unlawful
➥ Agreements Opposed to Public Policy
➥ Effect of Unlawful or Illegal Agreements
➥ Object or Consideration Unlawful in Part.
Section 10 lays down that all agreements are contracts if made for lawful
consideration and with a lawful object. Section 23 provides what kinds of
considerations and objects are not lawful. If the object or consideration of an
agreement is unlawful, the agreement is illegal and therefore void.
The words ‘consideration’ and ‘object’ used in S. 23 are not synonymous,
that is, they mean two different things. Consideration is the act, abstinence
or promise made at the desire of the promisor, whereas, object is the
‘purpose’, or ‘design’ for which the agreement is made.
Example 1 : A, B and C enter into an agreement for the division among them of gains
acquired or to be acquired by them by fraud. The agreement is void, as its object is
unlawful. [Illustration (e) to S. 23].
Example 2 : A promise to obtain for B and employment in the public service, and B
promises to pay R 1,000 to A. The agreement is void, as the consideration for it is
unlawful. [Illustration (f ) to S. 23].
WHAT CONSIDERATIONS AND OBJECTS ARE UNLAWFUL

According to Section 23 of the Act. “The consideration or object of an
agreement is lawful, unless it is forbidden by law; or is of such a nature that,
if permitted, it would defeat the provisions of any law, or is fraudulent; or
involves or implies injury to the person or property of another; or the Court
regards it as immoral, or opposed to public policy.”
“In each of the above cases, the consideration or object of an agreement is
said to be unlawful. Every agreement of which the object or consideration is
unlawful is void.”
Thus, the object or consideration of an agreement is unlawful in the
following circumstances:
1. If it is forbidden by law. If the consideration or object of an
agreement is forbidden by law the agreement is void. The acts
Legality of Object and Consideration 101
forbidden by law consist (a) of acts punishable under the Indian

Penal Code and (b) of acts prohibited by special legislation, or by
regulations or orders made under authority derived from the
Legislature.
CASE : In the leading case K.M. Kamath v. K.R. Baliga & Co. [AIR 1959 SC 78], it
was held that sale of liquor without licence is forbidden by law. If a person, without
licence, sells liquor, the sale is void and the price cannot be recovered.
CASE : In Bhikan Bhai v. Hiralal [(1900) 24 Bom 622], A (the plaintiff) was a lessee
of certain tolls under the Bombay Tolls Act, 1875. One of the conditions of the lease
was that the lessee should not sublet the tolls to any other person without the
permission of the collector. A fine of 200 was payable for breach of the condition. A
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contracted with B (the dependent) to sublet the toll without obtaining the necessary
permission from the Collector. The sub-lease was held not void as the object of the
statute was not to forbid such transaction. The Act was passed for benefit of
revenue.
Example : Sale of goods for the purpose of smuggling is forbidden by law. Purchase
of smuggled goods is also forbidden by law. If a person purchases the smuggled goods or
sells goods for the purpose of smuggling the agreement would be unlawful.
2. If it is of such a nature that, if permitted, it would defeat the

provisions of any law. Although the consideration or object of an
agreement may not be forbidden by law, if the same indirectly
defeats the provisions of any statute, Hindu or Mohammadan Law,
or other rules of law for the time being in force, the consideration or
object of the agreement is unlawful. Unlawful agreement is void,
under this clause of Section 23.
Example : A’s estate is sold for arrears of revenue under the provisions of an Act of
the Legislature, by which the defaulter is prohibited from purchasing the estate. B upon an
understanding with A, becomes the purchaser, and agrees to convey the estate to A upon
receiving the price which B has paid. The agreement is void, as it renders the transaction,
in effect, a purchase by the defaulter, and would so defeat the object of the law.
[Illustration (i) to S. 23].
CASE : In Fateh Singh v. Sanwal Singh [(1878) 1 All 751], A, the accused (plaintiff
in this case) was required to furnish surety of 5,000 for his good behaviour as
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required under the Code of Criminal Procedure. B, the defendant agreed to become the
surety on the condition that the amount should be deposited with him. Accordingly, A
deposited the amount with B, and after the expiry of the period of suretyship, he sued
the latter to recover the deposit. It was held that A was not entitled to recover the
deposit since the agreement defeated the provisions of the Code of Criminal
Procedure.
3. If it is fraudulent. An agreement entered into between parties with

a fraudulent purpose is unlawful within the meaning of this clause of
Section 23, and hence void.
Example 1 : A, B and C enter into an agreement for the division among them of gains
acquired, or to be acquired by them by fraud. The agreements is void, as its object is
unlawful. [Illustration (e) to S. 23].
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4. If it involves or implies injury to the person or property of

another. According to this clause of Section 23, an agreement, the
object of which is to injure the person or property of another, is
unlawful. An agreement to commit a crime such as assault, or to
indemnify a person against the consequences of tortuous act like
publication of libel is unlawful under this clause.
Example 1 : An agreement to put the house of another on fire is unlawful and
therefore void.
CASE : 1. An agreement to commit an assault or to beat a person has been held

unlawful and hence void. [Allen v. Rescous, 1 H & N 73].
Example 2 : A agrees to pay B R 50,000 for planting a bomb at a particular place in a

busy market.
CASE : 2. A debtor who owed 100 executed a bond by which he was required to
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put forth manual labour until the amount was repaid, and in the case of default, he has
to pay exorbitant interest. The Court held that, “such a condition is indistinguishable
from slavery” and, as such, the contract involved injury to the person of the debtor
[Ram Sarup v. Bansi Mandar, (1915) 42 Cal 742].
5. If the court regards it as immoral. An agreement whose object or

consideration is immoral is illegal and hence void. What is “immoral”
depends upon the standards of morality prevailing at a particular
time and is approved by courts.
Example 1 : A agrees to let her daughter to B for concubinage. The agreement is
void because it is immoral, through the letting may not be punishable under the Indian
Penal Code. [Illustration (k) to S. 23]
CASES : (i ) In Pearce v. Brooks [(1866) LR 1 Ex 213], A (the plaintiff) agreed to

supply B (the defendant) with a new miniature brougham on hire. At the time of
entering into the agreement, A knew that B was a prostitute, that the brougham would
be used by her for carrying on her immoral vocation, and that she would pay the hire
charges out of her receipts as such prostitute. On her failure to pay the hire charges, A
brought an action to recover the money. The Court held the view that A was not
entitled to recover the money, and the honorable Judge observed that, “I have
always considered it as settled law, that any person who contributes to the
performance of an illegal act by suppling a thing with the knowledge that it is going to
be used for that purpose, cannot recover the price of the thing so supplied.”
(ii ) In the leading case Baivijli v. Nansa Nagar [(1885) 10 Bom 152], A (the plaintiff)
advanced money to B (the defendant), a married woman, to enable her to obtain a
divorce from her husband. B agreed to marry A as soon as she could obtain a divorce.
In a suit by A to recover the money, it was held that A was not entitled to recover
back the amount, as the agreement had for its object the divorce of the defendant
from her husband and the promise of marriage given under such circumstances was
interference with marital relations.
In Gherulal Parekh v. Mahadeo Das Maiya [AIR 1959 SC 781],

Supreme Court observed that, “What is immoral depends upon the standard
of immorality approved by the courts. The Court further held that, “The case
law both in England and India confines the operation of the doctrine to sexual
immorality, e.g., settlements in consideration of concubinage, contracts or sale
of hire of things to be used in a brothel or by a prostitute for purposes
incidental to her profession, agreements to pay money for future illicit
cohabitation, promises in regard to marriage for consideration, or contracts
facilitating divorce.” The Supreme Court held in this case that a wagering
agreement could not be regarded as immoral.
6. If the court regards it as opposed to public policy. The last
clause of Section 23 refers to agreements, the consideration or object
of which is unlawful on grounds of public policy.
The term ‘public policy’ is not defined anywhere in the Act. In simple
terms, public policy may be defined as that policy of the law which prevents
the enforceability of agreements that are inimical to the interests of the
community i.e. injurious to the society.
However, almost every jurist is of the view that this concept of the
common law is very difficult to define as it is elastic, vague, and its scope ill-
defined. It has been described as ‘untrust worthy guide’, ‘variable quality’,
and unruly horse’, etc.
It is governed by precedents. the principles have been crystalised under
different heads. However, in Central Inland Water Transport
Corporation Ltd. v. Brojo Nath Ganguli [AIR 1986 SC 1571], the
Supreme Court held that new heads of public policy can be evolved in the
light of Fundamental Rights and Directive Principles in the Constitution of
India. In this case the Supreme Court observed that “the courts will not
enforce and will, when called upon to do so, strike down an unfair and
unreasonable contract, or an unfair and unreasonable clause in a contract,
entered into between parties who are not equal in bargaining power.”
AGREEMENTS OPPOSED TO PUBLIC POLICY

Agreements which are held void on the ground that the consideration or
object is opposed to public policy, are as follows :
(a) Trading with an alien enemy. Agreements entered into with alien
enemies are illegal, unless made with the special permission of the
Central Government. It is so because these agreements tend to aid
the economy of the enemy country.
It is not only unlawful to enter into a contract with a person who is an
alien enemy, it is equally unlawful to perform a contract entered into with
him before war broke out between his country and ours. In the latter case,
however, the contract is either suspended or dissolved. An agreement to
promote hostile action in a friendly state is also illegal and void being
opposed to public policy.
(b) Agreements interfering with the course of justice. Any
agreement intended to obstruct legal process of interfere in any
104 Business Laws
manner with the course of justice, is void, Agreements for using

improper influence of any kind with judges or officers of the court, to
bribe witnesses or to promise them payment of money if they give
evidence favourable to the party promising, or inducing witnesses to
give false evidence, etc., are opposed to public policy.
(c) Agreements for stifling criminal prosecution. An agreement
which seeks to absolve an offender of the criminal liability, either by
promising not to prosecute him for his offence, or withdraw a
criminal case pending against him is known as an agreement to
stifle prosecution. While compoundable offences may be withdrawn
by agreement, non-compoundable, i.e., serious offences, enumerated
in the Criminal Procedure Code cannot be withdrawn by agreement.
Example : A promises B to drop a prosecution which he has instituted against B for
robbery, and B promises to restore the value of the things taken. The agreement is void,
as its object is unlawful. [Illustration (h) to S. 23].
CASE : In the leading case Ouseph Poule v. Catholic Union Bank [AIR 1965 SC
166], A took a loan from the respondent bank and pledged certain goods as security.
The bank found that the goods in the godown, which were pledged to it, were either
fraudulently overvalued or withdrawn in collusion with the bank officials. A (the
borrower) agreed to make up the deficiency by hypothecating more goods as security.
Some delay took place in hypothecation. The bank filed a complaint which was
withdrawn after hypothecation was completed. It was held that the agreement did
not involve any idea of stifling prosecution as the agreement was entered into
before filing the complaint. The Supreme Court held that it was not proved that the
party had executed the document in consideration of the withdrawal of complaint.
(d) Maintenance and champerty. These are agreements that tend to

promote litigation.
‘Maintenance’ is an agreement by which a person who is himself not
interested in the litigation, assist financially or otherwise, another in
bringing or defending a suit. The idea behind such an agreement
may be to forment litigation which is not bona fide but speculative.
‘Champerty’, on the other hand, is an agreement whereby one party
supplies the necessary funds for bringing an action, in return for a
share in the proceeds of the action. It is, thus, a bargain for a share in
the proceeds of the action.
Maintenance and Champerty are not per se opposed to public policy in
India. Enforceability of such agreements depends on the facts and
circumstances of the case. The courts will refuse to enforce such agreements
only when (i) they are found to be extortionate and unconscionable so as to be
inequitable against the other party, or (ii) they are not made with the bona fide
object of assisting a claim believed to be just of the person unable to carry on
the litigation himself.
Example : There is an agreement between A and B (the financier) whereby A is to
transfer 75 paise in a rupee to the financier as his share in the property, if recovered. The
agreement is void as the terms are unreasonable.
CASE : An agreement provided that the financier should bear all expenses of the
case and in return therefore get a three-anna (3/16th) share of the immovable property
recovered provided that it should be increased to four-anna (4/16th) share, if the case
go up to the Privy Council. The agreement was held to be valid [Ram Swarup v. Court
of Wards, (1940) Lah 1 (PC)].
(e) Trafficking in public offices. Agreements falling under this head

are those that interfere with the free exercise of governmental
functions. They include agreements to influence public officers by
promising illegal gratification, to provide money to a member of the
Parliament for presenting his case on a certain legislation, sale of
public offices and appointments, to procure a title of honour for
reward, etc.
Example : A promises to obtain for B an employment in the public service, and B
promises to pay 1,000 to A. The agreement is void as the consideration for it is unlawful.
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[Illustration (f) to S. 23].

CASE : A paid a sum of money to B to enable him to procure a seat in a medical
college. The agreement was held illegal being opposed to public policy. The Madras
High Court did not permit the recovery of the money paid [N.V.P. Pandian v. M.M.
Roy, AIR 1979 Mad 42]
(f) Marriage brokerage agreements. An agreement to procure the

marriage of a person in consideration of a sum of money is called
marriage brokerage agreement. Such agreements are illegal and void
as being opposed to public policy. Agreements to procure marriage
for rewards are void on the ground that the person concerned may
not act in best interests of the boy or the girl as the case may be.
CASE : A purohit was promised 200 in consideration of procuring a wife for the
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defendant, the agreement was held invalid and the money could not be recovered
[Pitambar v. Jagjiwan, AIR 1949 Pat. 250].
An agreement to pay dowry is void and punishable under the Dowry

Prohibition Act, 1961. An agreement for the sale of a girl is illegal [Girdhari
Singh v. Neelandhar Singh, (1972) 10 Allo LJ 159]. Similarly, an
agreement to pay money or property (i.e., dowry) to the parents of the
bridegroom for their agreeing to the contract of marriage is illegal. However,
the validity of the marriage is not affected in such cases. Where the marriage
is solemnised, money if actually paid cannot be recovered and if not paid, it
cannot be claimed by filing a suit, as the agreement to pay the dowry is
illegal. However, the money and other things paid or given can be recovered if
the marriage is not solemnised.
It may be noted that marriage bureaus and matrimonial parties
are legal. They provide certain services. They are not marriage
brokerage enterprises.
(g) Agreements tending to create interest against duty. If an

agreement entered into by or with a public servant and the same
imposes an obligation upon such a public servant to do something
106 Business Laws
which is inconsistent with his official duty, the agreement is void as

being opposed to public policy.
If an agent, for instance, deals in the matter of agency on his own account
without the principal’s knowledge, his interest conflicts with his duty and as
such, any agreement entered into by him without the knowledge of the
principal is void. On the same principle, a contract by a newspaper proprietor
not to comment upon the conduct of a particular person is void.
(h) Agreements interfering with parental duties. Agreements
which contemplate an absolute transfer of the rights of parents over
their children, as to their custody, education, and religious training
are void as being opposed to public policy. Although the father, who
is the natural guardian of his minor children may, at his descretion,
entrust the custody and education of his children to another, the
authority thus transferred is essentially revocable. As such, he can
always get back such authority inspite of the existence of the
contract.
CASE : An agreement whereby a father transferred guardianship of his two minor

children in favour of a lady was held to be void although the father agreed not to revoke
the authority of the lady [Annie Basant v. Giddu Narayanish, AIR 1914 PC 42].
(i) Agreements restraining personal liberty. An agreement which

unduly restricts the liberty of the individual is illegal and thus void.
CASE : A borrowed money from B, a moneylender, and agreed that he would not,
without the written consent of B, change his address, or his employment, or part with
his property or borrow money. It was held that the agreement was illegal as it unduly
restricted the liberty of A [Harwood v. Miller’s Timber and Trading Co., (1917) 1 KB
305].
(j) Agreement between all the competing bidders to peg down

the price. Where there is an agreement between all the competing
bidders at an auction sale to peg down the price and to purchase the
property at knock out price is opposed to public policy and hence
illegal. [Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79]
(k) Agreements tending to create monopolies. Agreements tending
to create monopolies are opposed to public policy and therefore
illegal. [Somu Pillai v. The Municipal Council, Mayavaram,
(1905) 28 Mad 520].
(l) Agreement to refund taxes. The agreement by the government to
refund tax, which is due under a statute and has been realised in
accordance with law, was held by the Supreme Court to be violative
of public policy and void under S. 23 [Amrit Banaspati Co. Ltd. v.
State of Punjab, AIR 1992 SC 1075].
(m) Unconscionable agreements. Unfair or unconscionable
transactions caused by economic duress, but falling short of undue
influence or coercion, have been struck down by courts on the ground

of public policy. This principle is applied to agreements which
contained ‘terms which are unfair and unreasonable that they shock
the conscience of the court’ [Central Inland Water Transport
Corp. Ltd. v. Brojo Nath Ganguli, AIR 1986 SC 1571].
CASES : (i ) A company entered into a scheme of arrangement with a government

company with the approval of the High Court. Under the scheme, an officer of the
company could accept the job of the government company (the appellant), or in the
alternative leave the job and receive a meager amount by way of compensation. The
rules of the government company provided that the services of the officers could be
terminated by giving three months’ notice. The petitioner challenged this rule as
arbitrary and alleged that the term in the contract was unfair, unreasonable and
unconscionable. The Court observed that such contracts ought to be adjudged void
[Central Inland Water Transport Corp. Ltd. v. Brojo Nath Ganguli, AIR 1986 SC
1571].
(ii ) See Lily White v. R Munnuswami, AIR 1966 Mad 13 in Chapter 3 of this book.
EFFECTS OF UNLAWFUL OR ILLEGAL AGREEMENTS

The following are the consequences of illegal agreements :
(1) Every agreement of which the object or consideration is
unlawful under S. 23 is void ab initio and thus not
enforceable.
(2) The principle of restitution is not applicable in case of illegal
agreements. Money paid or goods supplied under an illegal
agreement cannot be recovered. Similarly, the buyer who has paid
the price cannot sue for non-delivery of the goods.
(3) The collateral transactions to an illegal agreement are also
void if the parties were aware of the illegal purpose. This is
not so in case of void agreement which is not illegal.
Example 1 : A lends money to B for the purpose of enabling B to enter into smuggling
of goods agreement with C. The agreement between B and C is illegal being forbidden by
law. The contract of loan between A and B is a collateral transaction to the illegal
agreement. If A knows the illegal purpose of the loan. He cannot recover the money from
B because the collateral transaction to the illegal agreement is also void.
Example 2 : B and C enter into a wagering agreement. B loses the bet and takes a
loan from A to pay C. A knows the purpose of the loan. A can recover the money from B
as the collateral transaction to a void agreement is also void.
(4) When the parties are ‘in pari delicto’ (equally guilty) the
defendant is in a better position than the plaintiff.
OBJECT OR CONSIDERATION UNLAWFUL IN PART

Section 24, 57 and 58 of the Contract Act deal with cases if the same
agreement contains both legal and illegal terms, that is, it is partly legal and
partly illegal. These are as follows :
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(1) Agreement is void if considerations and objects unlawful in part. If

any part of a single consideration for one or more objects, or any one
or any part of the any one of several considerations for a single
object, is unlawful, the agreement is void (S. 24)
Example : A promises to superintend, on behalf of B, legal manufacturer of indigo,
and an illegal traffic in other articles. B promise, to pay A a salary of 10,000 rupees a year.
The agreement is void, the object of A’s promise and the consideration for B’s promise
being in part unlawful. [Illustration to S. 24].
(2) Reciprocal promise to do things legal, and also other things illegal.
Where persons reciprocally promise, firstly, to do certain things
which are legal, and secondly, under specified circumstances, to do
certain other things which are illegal, the first set of promises is a
contract, but the second is a void agreement (S. 57).
Example : A and B agree that A shall sell to B a house for 10,000 rupees, but that if B
uses it as a gambling house, he shall pay A 50,000 rupees for it. The first set of reciprocal
promises, namely, to sell the house and to pay 10,000 rupees for it, is contract. The
second set is for an unlawful object, namely, that B may use the house as a gambling
house, and is a void agreement. [Illustration to S. 57].
(3) Alternative promise, one branch being illegal. In case of an alternate

promise, one branch of which is legal and the other illegal, the legal
branch alone can be enforced (S. 58).
Example : A and B agree that A shall pay B 1,000 rupees, for which B shall
afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver
rice and a void agreement as to the opium. [Illustration to S. 58].
REVIEW QUESTIONS
1. Explain the circumstances when the object or consideration of an agreement
are unlawful.
2. What is meant by public policy ? What are the agreements opposed to public
policy ? Explain any three agreements opposed to public policy.
3. Distinguish between void and illegal agreements. [Hint : See Chapter 2]
4. What do you understand by illegal agreement ? What are the effects of illegal
agreements on main transaction and collateral transaction ?
5. Examine the validity of the agreements with object and consideration
unlawful in part.
6. State with seasons whether the following statements are true or false :
(a) If the consideration or object of an agreement is doing of an act forbidden
by law, the agreement is void but not illegal.
(b) If the agreement is fraudulent, the contract is voidable.
(c) The collateral transaction to an illegal agreement are also illegal.
(d) An immoral agreement is illegal and hence void.
(e) Heads of public policy are not closed.
[Ans. True : (a), (e); False : (a), (b), (c).]

A collateral transaction to an illegal agreement is :
(c) valid (d) none of these
[Hint : Void]
PRACTICAL PROBLEMS
1. A promises to give certain money to induce B to give false evidence. B gives
false evidence but refuses to give money. Is A bound to pay the money to B.
[Hint : No. The agreement is illegal as it interferes with the course of justice.]
2. A and B agree that B will murder C for which A will pay 10,000 to B. B kills
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C and demands 10,000 from A. A borrows 10,000 from D telling him about
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the agreement with B. Can D subsequently recover 10,000 from A ?

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[Hint : No. An illegal agreement taints collateral transactions also.]

3. A and B enter into a partnership to carry on wagering agreements with other
firms. A enters into such agreements on behalf of the firm with C and Co. The
net result of the transactions is a loss. A pays the entire amount due to C and
Co. B denies his liability to bear his share of loss on the ground that the
agreement between A and B is unlawful under S. 23 of the Contract Act.
Decide.
[Hint : The partnership is not unlawful within the meaning of S. 23 of the
Contract Act. The agreement is not forbidden by law. It is neither immoral
nor opposed to public policy. Gheulal Parekh v. Mahadco Das Maiya,
(1959)]
Agreements Expressly
8 Declared Void
LEARNING OBJECTIVES
After studying this chapter, you will be able to understand provisions relating to :
➥ Agreements in Restraint of Marriage, Trade and Legal Proceedings
➥ Uncertain Agreements
➥ Wagering Agreements.
“An agreement not enforceable by law is said to be void”. [S.2(g)]. A void

agreement does not give rise to any legal consequences and is void ab-initio,
that is, void from the beginning. The following types of void agreements have
already been discussed in the preceding chapters :
1. Agreements by a minor or by a person of unsound mind (S. 11). An
agreement with a minor was held to be absolutely void in Mohori
Bibi case.
2. Agreements made under a bilateral mistake of fact essential to the
agreement (S. 20).
3. Agreements of which the consideration or object is unlawful (S. 23).
4. Agreements of which the consideration or object is unlawful in part
(S. 24).
5. Agreements made without consideration (S. 25).
In this chapter the following agreements which have also been ‘expressly
declared’ void by the Indian Contract Act have been discussed :
1. Agreements in restraint of marriage (S. 26).
2. Agreements in restraint of trade (S. 27).
3. Agreements in restraint of legal proceedings (S. 28).
4. Uncertain agreements (S. 29).
5. Wagering agreements (S. 30).
6. Agreements contingent on impossible events (S. 36).
7. Agreements to do impossible acts (S. 56).
According to the last essential laid down in Section 10 of the Act, an
agreement becomes a contract only when it is “not hereby expressly declared
to be void”. Accordingly, since the agreements listed above are void, they are,
if entered into, not enforceable. It may be noted that the agreements
discussed below are not unlawful. They are only void.
Agreements Expressly Declared Void 111
1. AGREEMENTS IN RESTRAINT OF MARRIAGE

According to Section 26 of the Act. “Every agreement in restraint of the
marriage of any person, other than a minor is void.”
The law considers marriage as the ordinary right of an individual. the
restraint may be general or partial. As such, an agreement restraining a
person from marrying at all or marrying a particular person or a class of
persons or from marrying for a fixed period is void.
Example : A agrees with B for some consideration that she will not marry C. It is a
void agreement.
CASE : A contracted under seal with B that he would not marry anyone other than B
and would pay her £ 2000 if he did so. It was held that the deed was void. [Lowe v.
Peers, (1768) 4 Burr 2225].
However, an agreement restraining the marriage of a minor is valid

under this section. Further, an agreement to marry a particular person is
valid contract.
2. AGREEMENTS IN RESTRAINT OF TRADE

An agreement which infringes the right of a person to carry on a lawful
business, profession, or trade is an encroachment upon his liberty. This
liberty or freedom guaranteed by Article 19 of the Constitution can neither be
interfered with nor bartered by an agreement or by contracting out. Section
27 of the Act, in the context lays down that, “Every agreement by which any
one is restrained from exercising a lawful profession, trade or business of any
kind is to that extent void.”
The restraint of trade may be partial or total. Whether the restraint is
general or particular, unqualified or qualified, if the agreement is in the
nature of restraint of trade, it is void. Thus the section is applicable even
when the restraint is for a limited period only or is confined to a particular
area.
CASE : In the leading case Madhab Chander v. Raj Coomar [(1874) XIV BLR 76],
A (the plaintiff) and B (the defendant) were rival shopkeepers in a locality in Kolkata. B
agreed to pay a sum of money to A if he would close the business in that locality. A
accordingly closed the business, but B refused to pay. A sued B for the money
contending that the restraint in this case was only partial as he was restrained from
carrying on the business in one locality. It was held that S.27 intended to prevent not
merely a total restraint but also a partial restraint.
If an agreement can be broken into parts, it will be valid in respect of

those parts which are not in restraint of trade.
EXCEPTIONS
Section 27 of the Indian Contract Act has provided only one statutory
exemption to the rule that an agreement in restraint of trade is void. This
112 Business Laws
exception relates to the sale of goodwill. Besides this, there are also other
statutory exceptions mentioned in the Indian Partnership Act, 1932. There is
another set of exceptions arising from judicial interpretation of Sec. 27. The
exceptions are discussed below :
I. Statutory Exceptions
(a) Sale of goodwill. According to this exception mentioned in S. 27 of
the Indian Contract Act, “One who sells the goodwill of a business
may agree with the buyer to refrain from carrying on a similar
business, within specified local limits, so long as the buyer, or any
person deriving title to the goodwill from him carries on a like
business therein; provided that such limits appear to the Court
reasonable, regard being had to the nature of the business.”
CASE : In Chandra Kanta Das v. Parasullah Mullick, [(1921) 48 IA 508], the seller
of ferry business along with the goodwill contracted with the buyer that he would not
carry on a similar business in the same place for a period of three years. It was held by
the Privy Council that the contract was valid as it fell within the exception.
CASE : In Goldsoll v. Goldman, [(1915) 1 Ch. 292], A, who carried on a business in

London of imitation jewellery, sold his business to B and agreed that for a period of two
years, he ( i.e. A) would not deal. (i) in imitation jewellery in England, (ii) in real jewellery
in England and ( iii) in real and imitation jewellery in the USA and in certain other
countries of Europe. It was held that the restraint ( i) was valid but the other two
restraints [i.e. (ii) and (iii)] were void as they were unreasonable.
(b) Partners’ agreements. the other statutory exceptions mentioned in

the Indian Partnership Act are :
(i) Restriction on existing partner. An agreement amongst the
partners whereby a partner undertakes not to carry on any
other business than that of the firm while he continues to be a
partner. [Section 11 (2)].
(ii) Restriction on outgoing partner. An agreement between a
retiring partner and the continuing partners whereby a retiring
partner agrees not to carry on any business similar to that
carried on by the firm within a specified period or within
specified local limits. [Section 36(2)].
(iii) Restriction on partners upon or in anticipation of the
dissolution of firm. An agreement amongst the partners that
upon dissolution of the firm some or all of them agree not to
carry on a similar business within a specified period or within
specified local limits. [Section 54].
(iv) Restriction in case of sale of goodwill of firm. An agreement
between any partner and the buyer of the firm’s goodwill that
such partner will not carry on any business similar to that of

the firm within a specified period or within specified local
limits, provided the restrictions imposed are reasonable.
[Section 55(3)].
II. Exceptions arising from Judicial Interpretation

(a) Trade combinations. If the primary objective of a trade
combination is to regulate business and not to restrain it, the
agreement is valid. But a combination which tends to create
monopoly, it would-be void.
The business combinations, the primary object of which is to regulate

business, is often desirable in the interest of trade itself and also for the
promotion of public interest. They bring about standardised goods, fixed
prices and eliminate ruinous competitions. Therefore, an agreement between
traders or manufacturers not to sell their goods below a certain price, or pool
output or profit and divide these in an agreed ratio does not amount to an
agreement in restraint of trade.
CASE : In S. B. Fraser & Co. v. The Bombay Ice Manufacturing Co. Ltd. [(1905)
ILR 29 Bom 107], A (the appellant), B (the respondent) and two other ice
manufacturers of Bombay entered into an agreement relating to manufacture and sale
by the them of ice. The agreement fixed the minimum price for sale of ice, the
proportion of manufacture which each was to bear and of profits each was to receive,
some of them were restrained from selling at Pune and some others at steamers. The
Court held that “The scheme of the agreements was no doubt to limit competition and
to keep up prices, but that does not necessarily bring them within the term of S. 27.”
The agreement was held to be valid contract.
(b) Solus or exclusive dealing agreements. An agreement between a

manufacturer or producer and a sole-selling agent or distributor,
whereby the manufacturer agrees to sell all his output to the sole-
selling agent who in turn, agrees not to buy his requirements from
any other source, does not ordinarily amount to an agreement in
restraint of trade under of S. 27. But where a manufacturer or
supplier, after meeting all the requirements of the buyer (the sole-
selling agent), has surplus to sell to others, he cannot be restrained
from doing so.
CASE : 1. A agreed to see all the mica produced by him to B (the plaintiff) and not to
sell them to any other person and not to keep in stock. The agreement was held valid
because such negative stipulation do not restrain the manufacturer [Subha Naidu v.
Haji Badsha Sahib, ILR (1902) 26 Mad 168].
CASE : 2. R entered into an agreement with 29 out of 30 manufacturers of combs of
Patna whereby the manufacturers undertook during their life time to sell their product to
R and his heirs and not to sell the same to any one else. R had the option of not
accepting combs if he did not find a market for the same. The agreement was held
void as being in restraint of trade. The Court said: “It bound the manufac-turers from
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generation to generation; it was unrestricted both as to time and place; it was

oppressive, it was intended to create a monopoly [Shaikh Kalu v. Ram Saran Bhagat,
[(1908) 8 CW 388].
Franchise Agreement
In Gujarat Bottling Co. Ltd. v. Coca Cola Co. [(1995) 5 SCC 545],
condition restricting the right of the franchisee to deal with competing goods
was not regarded as in restraint of trade.
(c) Negative stipulations in service agreements. Agreements of
service often contain negative stipulations preventing the employee
from working elsewhere.
The courts have drawn a distinction between restraints applicable :
(1) during the term of the contract of employment and
(2) those that apply after the termination of service.
“Negative covenants operating during the period of employment when the
employee is bound to serve his employer exclusively are generally not
regarded as restraint of trade and therefore do not fall under S. 27 of the
Indian Contract Act [Niranjan Shankar Golkari v. Century Spinning
and Manufacturing Co. Ltd., AIR 1967 SC 1098]. However, the restriction
beyond the period of employment would not, be valid [Brahmputra Tea Co.
Ltd. v. Scarth, (1885) 11 Cal 545].
CASES : (i ) A doctor agreed to work as an assistant of another doctor for three

years in Zanzibar. The agreement contained a stipulation that he will not practice for
the duration of the agreement. The doctor left the job after a year and started his own
practice. He was disallowed from doing so for the remaining period of the three years.
[Charleworth v. Macdonald, (1893) ILR 23 Bom 103].
(ii ) A person agreed not to employ himself or to engage himself in any similar business
as that of his employer within 40 miles from Assam, for a period of five years from the
date of termination of his service. The Calcutta (now Kolkata) High Court held that the
aforesaid clause in the agreement was void [Brahmputra Tea Co. Ltd. v. Scarth,
(1885) 11 Cal 545].
Thus, liberty to trade is not an asset which a person can barter

away for money except in special circumstances and within well
recognised limitations.
3. AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS

S. 28 declares the following kinds of agreements void :
(a) Agreements restricting absolutely from enforcing legal
rights. An agreement by which a party is restricted absolutely from
enforcing his rights under or in respect of a contract by usual legal
proceedings in the ordinary tribunals is void. In other words the
section makes void those agreements which absolutely restrict a
party to a contract from enforcing the rights under that contract in
ordinary tribunals. Thus, Section 28 is applicable in case of
‘absolute’ restraint and not in case of ‘partial’ restraint. The

restraint is ‘absolute’ if the parties are wholly precluded from
enforcing their rights in ordinary tribunals.
There may be two or more competent courts which can entertain a suit
consequent upon a part of the cause of action having arisen within their
jurisdiction. In such a case if the parties to the contract agreed to vest
jurisdiction in one such court to try the dispute the agreement would
be valid [Hukam Singh v. Gammon (Indian) Ltd., AIR 1971 SC 740].
Thus S. 28 does not prevent the parties to the contract from selection one of
the two competent courts for the disposal of their disputes. Similarly, an
agreement restraining a party from appealing to a higher court is
valid being partial restraint [Kedar Nath v. Sita Ram, AIR 1969 Bom
221].
CASE : In Hukam Singh v. Gammon (India) Ltd. [AIR 1971 SC 740], A, a

businessman of Delhi agreed to purchase goods through his agent in Calcutta from B,
a businessman of Calcutta. A requested B to deliver the goods to the Railway
Company. Accordingly B delivered the goods to the Railway Company. A failed to pay
for the goods. B had the option to file the case for recovery of the price either in Delhi
or in Calcutta. But the agreement contained a clause that in case of dispute the suit can
be filed in Delhi only. The clause was held valid.
(b) Agreeements curtailing the period of limitation. Every

agreement which provides that a suit should be instituted within a
shorter period than that prescribed by the Limitation Act, is void.
Since the Limitation Act has prescribed the period of limitation
within which alone a suit should be brought for the enforcement of
rights, the parties cannot, by agreement, either restrict or extend the
period of limitation.
For example, an action for a breach of contract may be brought within
three years form the date of the breach, as provided for by the Indian
Limitation Act. If the parties mutually agree that the action should be
brought within two years of the breach but not later, a clause to that effect in
agreement would be hit by Section 28, and hence void as being in restraint of
legal proceedings.
Similarly, a clause in the agreement extending the period within which
an action for a breach should be brought, is illegal and hence void according
to Section 23 of the Act, since the agreement, if permitted, would defeat the
provisions of the Indian Limitation Act.
(c) Agreement extinguishing rights or discharge of liabilities.
Clause (b) of S. 28 was introduced in 1997 by the Indian Contract
(Amendment) Act, 1997. It provides that every agreement which
extinguishes the rights of any party thereto, or discharges any party
thereto, from any liability, under or in respect of any contract on the
expiry of a specified period so as to restrict any party from enforcing
his rights, is void to that extent. Thus, the effect of the amendment is
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that all clauses which reduced the normal period of limitation would
be void to that extent.
For example, if a clause in a fire insurance policy provides that “no suit
shall be brought against the insurance company in connection with the policy
later than one year after the time when the cause of action accrues” would be
void. Similarly a clause in an insurance contract stipulating that “In no case
whatever shall the company be liable for any loss or damage after the
expiration of twelve months from the happening of the loss a damage unless
the claim is the subject of pending action or arbitration” would be void.
Exceptions. The following are the exceptions to the rule laid down in
this section. They are :
(a) Reference of future disputes to arbitration. A contract between
two or more persons to refer to arbitration any dispute that may
arise between them and to recover only the amount awarded in such
arbitration in respect of the dispute so referred, and
(b) Reference of existing dispute to arbitration. A contract to refer
to arbitration any questions which has already arisen.
In the aforesaid two exceptional cases, the contract is not void since an
agreement to refer disputes to arbitration is not an attempt to oust the
jurisdiction of a court, but it only stays the plaintiff’s hand till some
particular amount of money has been first ascertained by reference.
However, an agreement between the parties stipulating that the award of
the arbitrator shall not be called in question on any ground whatsoever before
any court of law, is void as being in absolute restraint of legal proceedings
since courts have power, regardless of such a stipulation, to modify or set
aside an award.
(c ) Agreements prescribing jurisdiction. As stated earlier, the
parties to a contract may agree that one of the two competent courts
will have jurisdiction for the disposal of their disputes which may
arise between them.
(d) Guarantee agreement of a bank or a financial institution.
Section 2 will not render a contract in writing by which any bank or
financial institution stipulate a term in a guarantee for
extinguishment of the rights or discharge of any party thereto from
any liability under such guarantee on the expiry of a specified period
which is not less than one year from the date of occurring or non-
occurring of a specified event for extinguishment or discharge of such
party from the said liability. (This exception has been inserted w.e.f.
18-01-2013).
4. UNCERTAIN AGREEMENTS
According to Section 29, “Agreements, the meaning of which is not certain or
capable of being made certain are void.”
Accordingly, an agreement to agree in future is void unless the terms of

the proposed agreement are made clear.
Examples : (1) A agrees to sell to B “a hundred tons of oil.” There is nothing
whatever to show what kind of oil was intended. The agreement is void for uncertainty.
[Illustration (a) to S. 29].
(2) A, who is dealer in coconut-oil only, agrees to sell to B “One hundred tons of oil”.
The nature of A’s trade affords an indication of the meaning of the words, and A has
entered into a contract for the sale of one hundred tons of coconut-oil. [Illustration (c) to S.
29].
(3) A agrees to sell to B “my white horse for rupees five hundred or rupees one
thousand.” There is nothing to show which of the two prices was to be given. The
agreement is void. [Illustration (f ) to S. 29].
CASE : A (the appellant) was a tenant of the B (the respondent). She was occupying
a portion of the house. There was an agreement to sell between the A and the B but
description of the property to be sold was not precisely given by annexing map though
map was referred to in the agreements nor description satisfactorily proved in the suit
for specific performance. The Supreme Court held the agreement to sell as uncertain.
[Vimlesh Kumari Kulkrestha v. Sambhajirao, (2008) 5 SCC 58].
An agreement “to enter into an agreement in future” is void due to

uncertainty. An agreement to pay certain amount after deductions as would
be agreed upon between the parties is void for uncertainty. Thus a contract to
enter into a contract is not valid.
5. WAGERING AGREEMENTS OR WAGER

Wagering agreements or Wagers are betting agreements. Sir William Anson
defines a wager as “a promise to give money or money’s worth upon the
determination or ascertainment of an uncertain event.”
Similarly, in Thacker v. Hardy, (1878) 4 QBD 685, Cotton, L.J. observed
that, “The essence of gaming and wagering is that one party is to win and the
other to lose upon a future event which at the time of the contract is of an
uncertain nature … that is to say, if the event turns out one way A will lose;
but if it turns out the other way he will gain.”
Example : A and B enter into an agreement which provides that if Australian cricket
team wins a particular one day international match, A will pay B 500, and if it loses B will
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pay 500 to A. This is a wagering agreement.

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Essentials of Wager
An examination of the above definitions brings out the following essential
features of a wagering agreement :
(i) Promise to pay money or money’s worth. There must be a
promise to give money or money’s worth.
(ii) Uncertain event. The event, upon the determination of which, one
shall win from the other, should be an uncertain event. A wagering
agreement usually contemplates a future uncertain event. However,
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a wager may be in respect of a past event if the parties do not know

in what way it has happened. Thus, a wager may concern a past or
present fact or event.
(iii) Mutual chances of gain or loss. Another essential feature of a
wager is that, upon the determination of the contemplated event,
each party must stand either to win or lose. If one of the parties
alone is to win but cannot lose, or he may lose but cannot win, or if
he can neither win nor lose, the agreement is not a wager.
(iv) Stake must be the only interest. To constitute a wager, the
parties to the agreement should have no other interest in the
agreement than the sum of money or the stake he may win or lose. If
either of the parties has any proprietary interest in the subject-
matter of the agreement, the same ceases to be a wagering
agreement, but becomes enforceable as a contract. It is on this basis
that we distinguish between a wagering agreement and a contract of
insurance.
(v) Neithr party has control over the event. None of the parties to
the agreement should have any control over the happening or not
happening of the event.
Certain distinctions and special cases

(a) Insurance contracts. An insurance contract is not a wager
due to the following points of difference between the two :
Difference between Insurance contract and Wagering Agreement
Basis Insurance Contract Wagering Agreement
1. Meaning A contract of insurance is one in A wagering agreement or
which one party, in wager is an agreement to
consideration of sum of money pay money or money’s worth
called premium, undertakes to on the happening of an
pay to another a sum of money uncertain event.
on the happening of a specified
event.
2. Enforceability An insurance contract is A wagering agreement is not
enforceable. enforceable.
3. Insurable In an insurance contract, the Stake is the only interest of
Interest insured should have insurable the parties to the wagering
interest in the subject-matter of agreement.
insurance i.e. in the life and
property to be insured.
4. Indemnity An insurance contract except A wagering agreement is not
life insurance contract, is a a contract of indemnity
contract of indemnity. because it results in gain to
one and loss to the other
party.
5. Public An insurance contract is of A wagering agreement is not

Welfare immense benefit to the public. beneficial to the public.
6. Scientific In case of insurance contract, In case of wager, neither the
the risk undertaken is based on risk is calculated
mathematical theory of scientifically nor the
probability which is scientific. amount. It is a mere gamble.
7. Purpose The purpose of insurance The purpose of wagering
contract is to indemnify the agreement is to earn profit
party for the loss incurred on the by betting.
happening of specified event.
8. Amount Amount payable by the Amount payable by one
payable insurance company depends on party to the other is fixed at
the loss incurred in case of the time of agreement.
general insurance
(b) Chit fund. In the case of chit fund, a certain number of persons
come together, contribute a fixed amount for a specified period, and
at the end of a predetermined period, usually a month, the amount
so contributed will be paid to one of the members. Chit funds are
not wagers.
The mode of operation differs from plan to plan. In some cases, the
amount is paid to the person who bids for the lowest amount, and the
difference between the amount collected and the amount bid will be
disbursed amongst the members as interest. In some others, lots are
drawn and whoever is lucky, gets the full amount minus a certain
percentage for meeting the day-to-day expenses.
(c) Lottery. A lottery is a game of chance in which the event of either
gain or loss of the absolute right to prize or prizes by the person
concerned is made wholly dependent upon the drawing of lots. The
necessary effect of this is to beget a spirit of speculation and gaming.
It is not a game of skill. Accordingly, lottery is a wager.
According to Section 294 A of the Indian Penal Code, it is an offence to
conduct lottery business if it is not authorised by the Government. However,
authorisation by the Government does not mean legalising a void transaction
but it only absolves the person conducting lottery business and also the
persons who buy lottery tickets of the criminal liability, the lottery
nevertheless remaining a wager.
(d) Crossword puzzles. These may or may not be wagers,
depending on the circumstances. Crossword puzzles, picture
competitions, literary and athletic competitions in which prizes
are awarded on the basis of skill and intelligence are games
of skill as opposed to games of chance. Hence, such competitions are
outside the purview of Section 30, provided the prize money does not
exceed Rs. 1,000 as per Prize Competition Act, 1955.
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However, crossword puzzles, in which prizes depend upon the

correspondence of the competitor’s solution with a previously
prepared solution kept with the editor of a newspaper is a lottery
and hence a wagering transaction, according to the view expressed
by the Supreme Court in State of Bombay v. R.M.D.
Chamarbaughwala [AIR 1957 SC 699].
(e) Commercial transactions. Purchase and sale of common
commodities of commerce without actual delivery, resemble a wager.
However, whether they are genuine commercial transactions or
wagers depends upon the intention of the parties, and the court has
to decide from the circumstances of the particular case whether
actual delivery was intended or not. If the parties to such a
transaction do not intend to perform the contract by giving
or taking delivery, but merely deal in differences, the
transaction becomes a wager. However, options and futures in
certian specified shares as introduced by the SEBI in 2001 are valid.
Similarly the select index futures and commodities futures are also
valid.
(f) Quiz competitions on Television. Quiz competitions on television
are not wagering agreements because they are games of skill and
knowledge and the participants do not suffer loss. One participant or
a few participants win prize money but do not incur loss.
In Bimalendu De v. Union of India [ITR 2001 Cal 30], it was held
that Kaun Banega Crorepati program is a game of skill and does not
involve any gambling. Therefore, it is not a wager. Further, it does
not fall within the definition of “prize competition” under the prize
Competition Act, 1955. Therefore, the limit of Rs. 1,000 is not
applicable to the program.
Legal effects of a wagering agreement

Section 30 of the Act lays down that, “Agreements by way of wager are
void; and no suit shall be brought for recovering any thing alleged to be won
on any wager, or entrusted to any person to abide the result of any game or
other uncertain event on which any wager is made.” This section clearly lays
down that wagering agreements are void and they cannot be enforced
between immediate parties.
Thus, the winner of a bet cannot sue to recover the amount deposited by
the loser with the stake-holder. However, the loser can recover his deposit
before the stake-holder has paid it to the winner.
Example : A and B enter into a wagering agreement and each deposits 1,000 with
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X instructing him to pay the total amount to the winner. The winner is not legally entitled to
claim the amount from X or from the other party to the agreement. Further, if X had paid
the amount to the winner, the loser cannot legally claim 1,000 from the winner or from
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the stake-holder X. If the loser demands 1,000 from the stake-holder X before he (stake-
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holder), has paid to the winner, he (loser) can recover his 1,000 from the stake-holder X.
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A wagering agreement is void and unenforceable but it is not

forbidden by law. Therefore, the collateral transaction to a wagering
agreement is not void.
CASE : In the leading case Gherulal Parekh v. Mahadeo Das Maiya [AIR 1959 SC
781] G (the appellant) and M (the respondent) entered into a partnership to carry on
wagering contracts with two firms of Hapur. They agreed to make the contracts in the
name of M on behalf of the firm and to divide the profit and loss resulting from the
transaction in equal shares. M entered into 32 such contracts and the net result of
these was a loss. Since M had to pay the full amount due to the merchant at Hapur, he
wanted G to bear his share of the loss. Since G denied his liability, the firm was
dissolved and M sued G. G pleaded that the partnership agreement was unlawful under
Section 23 of the Contract Act. The partnership was held not unlawful. The Court said :
“Though a wager is void and unenforceable it is not forbidden by law.
Similarly, a broker can recover his brokerage even in a wagering

agreement brought about by his efforts. Again, where a person who has lost
on a wager is desirous of paying the winner the promised amount, and
borrows money for that purpose, the lender is entitled to recover the amount.
Law in the Bomay Presidency (i.e. in Maharashtra and Gujarat). It is
necessary to note in this context that the local enactment, Act III of 1865, has
declared that all gaming or wagering agreements are illegal and no suit shall
be allowed in any court of justice for recovering any commission, brokerage,
fee or reward in respect of the knowingly effecting or carrying out of any such
agreements by way of gaming or wagering. Consequently, in the states of
Maharashtra and Gujarat, even collateral transactions are not
enforceable.
Thus states where wagering agreement are banned, they are not only
void but illegal also. Consequently, the collateral transactions are also void in
those states.
Exception to Section 30. There is only one exception made by this
section in respect of certain prizes for horse racing. It states that an
agreement to contribute towards a plate, prize or sum of money, of the value
of R 500 or more to be awarded to the winner(s) of horse-race is not void.
Thus, a bet on horse race carrying a prize of R 500 or more to the winners is
valid.
In a landmark verdict, the Supreme Court on 12th January, 1996 held
that the business of horse-races in the country did not constitute either
gambling or gaming but was “a game of mere skill”.
6. AGREEMENTS CONTINGENT ON IMPOSSIBLE EVENTS

Section 36 lays down that, “Contingent agreements to do or not to do
anything, if an impossible event happens are void whether the impossibility of
the event is known or not to be parties to the agreement at the time when it is
made.”
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Example 1 : A agrees to pay B 1,000 rupees (as a loan) if two straight lines should
enclose a space. The agreement is void. [Illustration (a) To S. 36, the words in the bracket
added].
Example 2 : A agrees to pay B 1,000 rupees (as a loan) if B will marry A’s daughter
C. C was dead at the time of the agreement. The agreement is void. [Illustration ( b) to S.
36; the words in the bracket added].
7. AGREEMENTS TO DO IMPOSSIBLE ACTS

According to Section 56 “An agreement to do an act impossible in itself is
void.”
Example : A agrees with B to discover treasurer by magic. The agreement is void.
[Illustration appended to Sec. 56].
REVIEW QUESTIONS
1. “An agreement in restraint of trade is void.” Examine the statement stating
the exceptions, if any. [B.Com. (H), D.U.]
2. “Liberty to trade is not an asset which a person can barter away for money
except in special circumstances and within well recognised exceptions.”
Discuss.
3. What are the essentials of a wagering agreement ? Discuss the effect of a
wagering agreement. [B.Com. D.U.]
4. Distinguish between a wager and an insurance contract. [B.Com., D.U.]
5. Discuss briefly expressly declared void agreements under the Indian Contract
Act.
6. State with reasons whether the following statements are true or false :
(a) A lottery always remains a wager, though it may not be illegal.
(b) Every agreement in restraint of marriage of any person, other than a
minor, is void.
(c) A suit can be brought for recovering anything which is won on a wager.
(d) Collateral transactions to a wagering agreement are void.
[Ans. True : (a), (b); False : (c), (d) ]
A collateral transaction to a wagering agreement is :
(c) valid except in Maharashtra and Gujarat (d) none of these
[Hint : (c)]
8. Liberty to trade is a right which the law will not permit a person barter
except in special circumstances. [B.Com. (H), D.U.]
9. What are the essentials of a wager ? Distinguish between a wagering
agreement and an insurance contract. [B.Com. (H), D.U.]
10. Write a note on Wagering Agreements. [B.Com., B.Com. (H), D.U.]
PRACTICAL PROBLEMS
1. A promises B in consideration of 1,00,000, never to marry throughout his
R
life. Is this a valid contract ?

[Hint : No. The agreement is in restraint of marriage.]
2. A and B are rival traders in Chandni Chowk, Delhi. A agreed to pay B

R 10,00,000 if B closes his business in Chandni Chowk. B accordingly did so
but A refused to pay. Can B claim the sum.
[Hint : No. The agreement is in restraint of trade.]
3. Miss Rita agreed to sing at a certain theatre for a period of three months
beginning 1st January, 20x2. She further agreed not to sign at any other
theatre during this period. Is this contract enforceable against her.
[Hint : Yes.]
4. A employs B as his assistant for a period of three years with a condition that
he will not serve any person for a period of one year after retiring from A’s
service. Is this agreement enforceable ?
[Hint : Agreement is in restraint of trade.]
5. A, in Bombay, bets with B and loses; applies to C for a loan in order by pay B.
C gives the loan to A to enable him to pay B. Can C recover the amount of the
loan from A ? Would it make a difference to your answer if this transaction
had taken place in Delhi ?
[Hint : No. In Bombay a wagering agreement renders a collateral agreement
also void. If the transaction had taken place in Delhi, C could recover the
money, as the agreement is only void but not unlawful or illegal.]
9 Contingent Contracts
LEARNING OBJECTIVES
After studying this chapter, you will be able to understand :
➥ Definition of Contingent Contracts
➥ Rules regarding performance of Contingent Contracts
➥ Difference between Wagering Agreement and Contingent Contract.
DEFINITION
Section 31 of the Act defines a contingent contract thus : “A contingent
contract is a contract to do or not to do something if some event, collateral to
such contract, does or does not happen.”
Example 1 : A contracts to indemnify B upto rupees five lakh in consideration of B
paying an annual premium of 10,000, if B’s shop is burnt.
R
Example 2 : A contracts to sell certain goods to B at a certain price, if the ship by

which they are coming arrives safely.
Contracts of insurance, indemnify and guarantee are the examples of
contingent contracts.
The following are the essential features of a contingent contract :
(i) The performance of a contingent contract depends upon the
happening or not happening of uncertain event. If the
performance of the obligation under a contract is made to depend on
an event which must happen at some time a other, it will not make a
contract contingent. The event contemplated under the contract
must be uncertain.
(ii) The event must be collateral to the contract. It means that the
event on the happening or not-happening of which, the performance
of the contract is dependent, is neither a performance directly
promised as part of the contract, nor the whole of the consideration
for the promise.
Absolute and conditional contracts. An absolute contract is one in
which the parties must perform their reciprocal promises independently of
any condition or contingency, and default by one of them, gives a cause of
action to the other. Accordingly, a contract which must be performed in any
event is known as an absolute or unconditional contract.
However, if the promisor binds himself to perform the contract only on
the happening or not-happening of an uncertain event and which is collateral
Contingent Contracts 125
to the contract, the contract is said to be contingent. If performance is made

to depend upon a condition which must happen at some time or other, will not
make a contract conditional.
If, for example, a agrees to pay B R 10 for doing a particular job, the
contract consists of a promise by A to pay R 10, and a promise by B to do the
specified job. A’s promise is the consideration for B’s promise and B’s promise
is the consideration for A’s promise. These reciprocal promises together go to
constitute the contract, a n d a s such, the contract i s absolute and not
contingent, although B’s promise is condition precedent to the payment by A.
This absolute contract may be converted to a contingent contract by
twisting the example. If A promises to pay R 10 to B for doing a particular
job on the condition that the job should be certified by a specified engineer,
the contract becomes contingent. In this case, the event, namely, certification
by the engineer, is an event collateral or incidental to the contract and does
not becomes a part of the contract as a reciprocal promise. Hence, although B
accomplishes the job, he cannot enforce the contract until his work is
certified.
According to the illustration appended to Section 31, ‘A contracts to pay
B R 10,000 if B’s house is burnt. This a contingent contract.’ In this
illustration, the contingent event is uncertain. Further, the event is collateral
to the contract in the sense that A contracts to pay B not in any event, but
only after the happening of the contingent event. Accordingly, B can enforce
the promise only after his house is burnt and not before. In other words, the
burning of B’s house is a condition precedent to A’s promise to pay.
RULES REGARDING PERFORMANCE OF CONTINGENT CONTRACTS

Sections 32 to 36 of the Act have laid down the rules regarding the
performance of contingent contracts. They are explained below :
1. When enforcement of contract depends upon the happening
of an event. According to Section 32, “Contingent contracts to do or
not to do anything if an uncertain future event happens cannot be
enforced by law unless and until that event has happened.” The
section further provides that if the event becomes impossible such,
contract becomes void.
Example 1 : A makes a contract with B to buy B’s horse if A survives C. This contract
cannot be enforced in law unless and until C dies in A’s life time. [Illustration ( a) to S. 32].
Example 2 : A makes a contract with B to sell a horse to B at a specified price, if C to
whom the horse has been offered, refuses to buy him. The contract cannot be enforced by
law unless and until C refuses to buy the horse. [Illustration ( b) to S. 32].
Example 3 : A contracts to pay B a sum of money (as a loan) when B marries C. C
dies without being married to B. The contact becomes void. [Illustration (c ) to S. 32; the
words in the bracket added].
2. When performance depends on the non-happening of event.
Section 33 provides : “Contingent contracts to do or not to do
anything if an uncertain future event does not happen can be enforced
when the happening of that event becomes impossible and not before.”
126 Business Laws
Thus, enforceability depends upon the impossibility of the contingent

event. Until the event becomes impossible, the contract cannot be enforced.
Example : A agrees to pay B a sum of money (as insurance claim after charging
premium) if a certain ship does not return, and the ship is sunk. The contract can be
enforced when the ship sinks and not before. [Illustration to S. 33; the words in the bracket
added].
3. When performance depends on the events linked with future
conduct of a living person. Section 34 of the Act lays down that,
“If the future event on which a contract is contingent is the way in
which a person will act at an unspecified time, the event shall be
considered to become impossible when such person does anything
which render it impossible that he should so act within any definite
time, or otherwise than under further contingencies.”
Example : A agrees to pay B a sum of money (by way of loan) if B marries C, C
marries D. The marriage of B to C must now to be considered impossible, though it is
possible that D may die and that C may afterwards marry B. (Illustration to S. 34; the
words in the bracket added.]
In this example, A’s obligation to pay comes to an end when C marries D.
Consequently, even though there is possibility of C marrying B after the
death of D, the obligation of A cannot be revived.
4. When the performance of the contract depends on the
happening or not-happening of an event within a fixed time.
Section 35 of the Act lays down that, if a person has undertaken to
perform something within a fixed time provided an event happens,
he is bound to perform his promise if the event happens within the
fixed time. If the time fixed elapses and the event does not happen,
or the event becomes impossible before the time fixed, the contract
becomes avoid.
Example : A promises to pay B a sum of money if a certain ship return within a year.
The contract may be enforced if the ship returns within a year, and becomes void if the
ship is burnt within the year. [Illustration (a) to S. 35].
If a promise is to be performed within a fixed time provided an event does
not happen, such a promise may be enforced if the event does not happen,
within the fixed time or the time expires without the event happening.
Example : A promises to pay B a sum of money if a certain ship does not return
within a year. The contract may be enforced if the ship does not return within the year, or
is burnt within the year. [Illustration (b) to S. 35].
5. Promises which depend upon the happening of an impossible
event. Section 36 of the Act states the effect of agreements
contingent on the happening of impossible events. It states that,
“Contingent agreements to do or not to do anything, if an impossible
event happens, are void, whether the impossibility of the event is
known or not to the parties to the agreement at the time when it is
made.”
Example 1 : A agrees to pay B 1,000 rupees (as a loan) if two straight lines should
enclose a space. The agreement is void. [Illustration (a) to S. 36; the words in the bracket
added].
Contingent Contracts 127
Example 2 : A agrees to pay B 1,000 rupees (as a loan) if B will marry A’s daughter
C. C was dead at that time of the agreement. The agreement is void. [Illustration (b) to S.
36; the words in the brackets added].
DIFFERENCE BETWEEN WAGERING AGREEMENTS AND

CONTINGENT CONTRACTS
The following are the points of difference between the two:
Basis Wagering Agreement Contingent contract
1. Meaning A wager is an agreement to pay A contingent contract is a
money or money’s worth on the contract to do or not to do
happening or not happening of something if some event,
an uncertain event. collateral to such contract,
does or does not happen.
2. Interest in The parties usually do not have The parties have some
the subject any interest in the happening or interest in the happening or
matter not happening of the event. Their not happening of the event.
interest is only in the winning or
losing the amount of the wager.
3. Future Future uncertain event is the Future event is only collateral
event sole determining factor of the to the contract.
agreement.
4. Nature All wagering agreements are All contingent contract such
contingent in nature. as, insurance, indemnity and
guarantee are not wagers
5. Reciprocal A wagering agreement consists of A contingent contract does not
promises reciprocal promises. necessarily consist of
reciprocal promises.
6. Validity A wagering agreement is void. A contingent contract is valid.
7. Event The event might have occurred in The event must be future
the past or may occur in the event.
future.
REVIEW QUESTIONS
1. State the provision of the Contract Act in respect of contingent contracts.
2. What are contingent contracts ? Distinguish between a contingent contract
and a wagering agreement. [B.Com., B.Com. (H), D.U.]
PRACTICAL PROBLEMS
1. A agrees to construct a building for B for five lakh. The payment is to be
R
made by B only on the completion of the building. Is this a contingent

contract ?
[Hint : No. The event is not collateral]
2. A agrees to sell land to B at a price to be fixed by C. C refuses to fix the price.
Is the contract enforceable. [Hint : No.]
Quasi Contracts or
Certain Relations
10 Resembling those
Created by Contract
LEARNING OBJECTIVES
Afrter studying this chapter, you will undersgtand :
➥ Meaning and Rationale of Quasi-Contracts
➥ Provisions regarding Quasi-Contracts
MEANING AND RATIONALE

An agreement springs from offer and acceptance, and it becomes
enforceable by law if it gives rise to legal obligation. An obligation arising
from a contract is known as a contractual obligation. Such an obligation is
undertaken by a party to an agreement voluntarily. There are also
obligations which do not spring from agreement. Such obligations include
recognizance, torts and quasi-contracts. Thus, a quasi-contractual obligation
is imposed by law. A quasi-contractual obligation is similar to the obligation
created by contract. Therefore, they have been termed as ‘certain relations
resembling those created by contract’ in the Indian Contract Act, 1872 and
they are known as ‘quasi-contracts’ in English law. In case of quasi-contract
there is neither agreement, nor consensus ad idem. But yet, the law imposes
an obligation on one party and confers a right on the other. It is based on the
doctrine of ‘unjust enrichment’.
A quasi-contractual obligation does not arise from a contract, nor does it
arise from tort. It rests on the doctrine of ‘unjust enrichment, that is,
enrichment of one person at the cost of another. The principle applied is : “No
one ought to enrich himself at the expense of others”. Lord Mansfield, who is
considered to be the real founder of such obligations, applied the doctrine of
unjust enrichment for the first time in Moses vs. Macferlan [(1760) 2 Burr
1005], In this case, M/s Lordship observed that, ‘The gist of this kind of
action, is that the defendant, upon the circumstances of the case, is obliged by
the ties of natural justice and equity to refund the money. “Under a quasi-
contract a person is liable to give back to another the money or some benefit
received to which the law regards another person better entitled.”
Similarly, in Fibrosa vs. Fairbain [(1943) AC 32], Lord Wright observed
that “any civilised system of law is bound to provide remedies for cases of
Quasi Contracts or Certain Relations Resembling Those Created … 129
what has been called unjust enrichment or unjust benefit, that is, to prevent
a man from retaining the money of, or some benefit derived from, another
which it is against conscience that he should keep.” Such remedies in English
law are called quasi-contracts.
Thus, a quasi contract rests upon the equitable principle that a person
shall not be allowed to enrich himself unjustly at the expense of another. It is
not a contract. It is an obligation which the law creates, in the absence of an
agreement.
PROVISIONS REGARDING QUASI CONTRACTS

Indian Contract Act, 1872 deals with quasi-contractual obligations under the
heading “Of certain relations resembling those created by contract”. Sections
68 to 72 provide for five kinds of quasi-contractual obligations, which are
discussed below:
1. Claim for necessaries supplied to a person incapable of

contracting (S. 68)
According to Section 68 of the Act, “If a person incapable of entering into a
contract, or any one whom he is legally bound to support, is supplied by
another person with necessaries suited to his conditions in life, the person who
has furnished such supplies is entitled to be reimbursed from the property of
such incapable person.”
Thus, (a) if a person supplies to a minor or to a lunatic or any one whom a
minor or lunatic is legally bound to support, (b) with necessaries suited to his
condition in life, (c) the person so supplying is entitled by law to be
reimbursed, from the property of such person to whom necessaries are
supplied.
Examples : (i ) A supplies B, a lunatic, with necessaries suitable to his condition in
life. A is entitled to be reimbursed from B’s property. [Illustration (a) to Sec. 68].
(ii) A supplies the wife and children of B, a lunatic, with necessaries suitable to their
condition in life. A is entitled to be reimbursed from B’s property. [Illustration (b) to Sec.
70].
The following points must be noted in this connection:

(i) Necessaries. It is necessary for the person supplying, to prove that
the things supplied are necessaries suited to the status and position
in life of the incapable person, and such a person has not had
sufficient supplies of such things. See the case of Nash vs. Inman
[(1908) 2 KB 1], in the chapter on ‘Capacity of Parties’.
(ii) Incapable person. Necessaries should be supplied only to a person
who is incapable of entering into a contract or to anyone whom he is
legally bound to support.
(iii) Reimbursement from property. The relief available under this
section is only against the property of such an incapable person and
130 Business Laws
not his person. If such a person does not have any property, the relief
is lost.
(iv) Reasonable value. The supplier can claim only reasonable value of
the things supplied as the word ‘reimbursement’ does not mean the
actual price of things supplied.
(v) Not based on agreement. The claim for necessaries is not based on
agreement as the agreement with a minor a with a person of
unsound mind is absolutely void. The claim by the person supplying
necessaries to such a person is based upon quasi-contractual
obligation.
2. Reimbursement of person paying money due to another, in

payment of which he is interested (S. 69)
Section 69 of the Act lays down that, “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”
According to this section, if A, for instance, is bound by law to make a
certain payment and B, being interested in such a payment, does make the
payment, a quasi contractual obligation is imposed on A. Therefore, B is
entitled to be reimbursed by A.
Example. B holds land in Bengal, on a lease granted by A, the ex-zamindar. The
revenue payable by A to the Government being in arrear, his land is advertised for sale by
the Government. Under the revenue law, the consequence of such sale will be the
annulment of B’s lease. B, to prevent the sale and the consequent annulment of his own
lease, pays to the Government the sum due for A. A is bound to make good the amount so
paid. [Illustration (b) to Sec. 69].
CASE : In Tulsa Kunwar v. Jogeshwar [(1906) 28 All 563], A was owner of certain
property. B was liable to arrears of government revenue. A’s goods were wrongfully
attached to realise the arrears due from B. In order to save his property, A paid the
Government the sums due from B. It was held that A was entitled to recover the
amount from B.
The applicability of this section is subject to the following conditions:

(i) Interest in making payment. The person who makes the payment
should be interested in making the payment. The payment, should
be made to protect his own interest, and the interest which is sought
to be protected should be bonafide and legally recognisable. The
payment should not be voluntary.
CASE : In Govindram Goverdhandas Seksaria vs. State of Gondal [AIR 1950 PC

99], a Maharaja sold certain mills without paying municipal taxes. The buyer paid the
taxes to save the property from being sold, and then sued the Maharaja. It was held
that by agreeing to purchase the property he had acquired sufficient interest in it to
safeguard.
(ii) No legal obligation of the person who makes the payment. The
person who makes the payment should not be legally bound to pay.
He should only be interested in making the payment in order to
protect his own interest.
(iii) Legal obligation of other person. The other person should be
legally bound by law to pay and not simply morally bound to pay.
The liability may be statutory or contractual.
CASE : In Brookswharf v. Goodman Bros [(1937) 7 KB 534], A (the plaintiff) was

the owner of a bonded warehouse. B (the defendant) imported certain goods (furs). A
took into his warehouse the goods imported by B. These goods were liable to duty. A
was responsible to the Commissioner of Customs and Excise if the goods go out of the
bonded warehouse without payment of duties. The goods were stolen without any
neglience on the part of A and the Commissioner recovered the duty from A. A was
held entitled to recover from B the amount paid for the duties.
3. Obligation of a person enjoying, benefit of a non-gratuitous

act (S. 70)
According to Section 70 of the Act, “Where a person lawfully does anything
for another person, or delivers anything to him, not intending to do so
gratuitously, and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former in respect of or to restore, the thing
so done or delivered.”
Example : (i ) A, a tradesman, leaves goods at B’s house by mistake. B treats the

goods as his own. He is bound to pay for them. [Illustration (a) to Sec. 70].
(ii ) A saves B’s property from fire. A is not entitled to compensation from B if the
circumstances show that he intended to act gratuitously. [Illustration ( b) to Sec. 70 given
above].
CASE : In State of West Bengal v. B.K. Mondal & Sons [AIR 1962 SC 779],
Mondal & Sons (the plaintiff-respondent) constructed certain structures including a
kutcha road, guardroom, office, kitchen and storage sheds at Rambagh at the oral
request of an high ranking officer of the State of West Bengal for use by its Civil
Supplies Department. Mondal & Sons had, before construction, submitted an estimate
for the construction. The State of West Bangal accepted the works but tried to escape
the liability under the pretence that no contract had been concluded in accordance with
the requirements of Section 175(3) of the Government of India Act, 1935 (now Article
299 of the Constitution of India). It was held by the Supreme Court that the
appellant having accepted the benefit of the structures constructed for it, was
liable under Sec. 70 of the Indian Contract Act, 1872 to pay for the same. (It may
be noted that under Article 299 of the Constitution of India, a contract to bind the
Government must be expressed to be made by the President or by the Governor of the
State, as the case may be and it must be executed on behalf of the President or the
Governor, as the case may be).
132 Business Laws
Thus, this section can be invoked only when the following three
conditions are satisfied:
(i) The person should lawfully do something or delivers
something to him. The first condition is that a person should
lawfully do something for another person or delivers something to
him.
CASE : In Bengal Coal Co. Ltd. vs. The Union of India [AIR 1971 Cal 219], it was
held by the Calcutta High Court that the Union of India was liable to compensate for the
price of coal amounting to 10,901 delivered to it under a void contract under Article
R
299(i) of the Constitution. The term ‘lawfully’, the Court observed, qualified only ‘does’
and not ‘delivers’, and this is clear from the illustration (a) to Sec. 70.
(ii) The person doing must not have intended to do it gratuitously.

Another condition contemplated in this section is that the person
doing the act should not have intended to do it gratuitously.
(iii) The other person must enjoy the benefit of the act. The third
condition is that the other person for whom something is done or to
whom something is delivered, must voluntarily accept the thing or
enjoy the work done.
CASE : In Piloo Dhunji Shaw Sidhwa vs. Municipal Corporation of the City of
Poona [AIR 1970 SC 1201], the Corporation tried to escape liability for spare parts
supplied to it on the pretext that contract was not made in accordance with the Bombay
Municipal Corporation Act, 1949. But the Corporation was held liable under sec. 70, as
it has enjoyed the benefit of the act done by the plaintiff.
4. Responsibility of finder of goods (S. 71)

Section 71 of the Act lays down that, A person who finds goods belonging
to another and takes them into his custody, is subject to the same
responsibilities as a bailee.
Although there is no agreement between the owner and the finder of the
goods, the law implies an agreement between the two, and this section places
the finder in the same position as that of a bailee. According to Section 151 of
the Act, it is the duty of the bailee to take reasonable care of the goods, and
try to find out the owner.
Rights of finder of goods

(i) To keep possession of goods as against other persons. A finder
of goods is entitled to possess the goods as against every one except
the true owner.
CASE : In Hollins vs. Fowler [((1874-80) All ER 118 (HL)], H picked up a diamond
ring from the floor of F’s shop and handed it over to him to keep it until the true owner is
found. In spite of best efforts the owner could not be found. After some weeks, H
tendered to F the lawful charges for finding the true owner and asked him to return the
ring to H, but F refused to do so. It was held that F must return the ring to H.
(ii) Right to receive compensation for expenses. The finder of goods

is entitled to receive compensation for trouble and expenses
voluntarily incurred by him for preserving the goods or finding the
true owner. He is entitled to retain the possession of the goods until
he receives such compensation. But he cannot sue the owner for
these expenses [S. 168].
(iii) Right to sue for the award. A finder of goods can sue the owner if the
owner has offered any reward for return of the goods lost [S. 168].
(iv) Right to sell the goods in certain cases. According to Sec. 169, a
finder of goods may sell the goods which is commonly the subject of
sale, if the following two conditions are satisfied:
(a) When the owner cannot, with reasonable diligence be found or
the owner refuses, upon demand, to pay the lawful charges of
the finder; and
(b) 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, amounts to two-thirds of its value.
The true owner is entitled to get the balance of the sale proceeds, if the
goods are sold at more than the lawful charges of the finder of goods. In
England a finder of goods is guilty of conversion if he sells the goods.
Duties of finder of goods
(i) To take reasonable care of the goods. According to Sec. 71, a
finder of goods is subject to same responsibilities as a bailee. And
according to S. 151 a bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would, under
similar circumstances take of his own goods of the same bulk, quality
and value as the goods bailed.
CASE : In Newman vs. Bourne & Hollingsworth [(1951) 31 TLR 209], A (the
plaintiff) went to B’s (the defendant’s) shop to buy a coat. She had a diamond brooch
on her coat. When she removed the coat, she kept the coat and the brooch on the
glass case, and later forgot to pick up the brooch. One of B’s assistants found it; and
placed the same in a drawer over the week-end. On Monday morning it was missing. B
was held liable to A on the ground that, “he had not exercised that degree of care which
was due from one who had found an article and had assumed possession of it. The
degree of negligence must be measured by the apparent value of the article.”
(ii) To find the true owner. He must try to find out the real owner. If
he is able to find out the true owner, he must return the goods to
him, after receipt of the lawful charges, if any.
(iii) Not to use the goods. The finder should not make personal use of
the goods. According to Sec. 403 of the Indian Penal Code a finder of
goods would be guilty of criminal misappropriation of the goods if he
appropriates the same for his own use when he knows or has the
means of discovering the owner.
134 Business Laws
5. Liability of a person to whom money is paid, or thing

delivered by mistake or under coersion (S. 72)
According to Section 72 of the Act, “A person to whom money has been
paid, or anything delivered by mistake or under coersion, must repay or return
it.”
Example : (i) A and B jointly owe 100 rupees to C. A alone pays the amount to C,
and B, not knowing this fact, pays 100 rupees to C. C is bound to repay the amount to B.
[Illustration (a) to Sec. 72].
(ii) A railway company refuses to deliver certain goods to the consignee except upon
the payment of an illegal charge for carriage. The consignee pays the sum charged in
order to obtain the goods. He is entitled to recover so much of the charge as was illegally
excessive. [Illustration ( b) to Sec. 72].
CASE : In Sales Tax Officer, Benares vs. Kanhaiya Lai Mukund Lai Saraf [AIR
1959 SC 135], K (the respondent) had paid sales tax on his forward transactions in
silver bullion under the U.P. Sales Tax Act. The levy of sales tax was held to be
ultravires by the High Court of Allahabad. K claimed the refund of the amount already
paid. It was held that Sec. 72 did not make any distinction between mistake of law and
mistake of fact and therefore, the refund of payment made under mistake of fact was
allowed.
Payment of time-barred debt cannot be recovered. It has been held that

money paid knowingly fully well that the contract had become void cannot be
recovered under this section [Ananth Bandu v. Dominion of India, AIR
1955 Cal 626]
The term coercion is used in this section in its general and ordinary
sense, and does not convey the special and narrow meaning assigned to it
under Sec. 15. See Example (ii) above.
REVIEW QUESTIONS
1. Explain the meaning and rationale of quasi-contracts.
2. What are quasi-contracts? State the circumstances in which quasi-
contractual obligation arise.
3. Discuss the rights and duties of a finder of goods.
4. “A quasi-contract is not a contract at all. It is an obligation which the law
creates.” Comment.
5. What do you understand by quasi-contractual obligations? Amplify and state
the quasi-contracts dealt with under the Contract Act. [B.Com. (H), D.U.]
6. “A quasi-contract has no affinity with contract but rests on the equitable
principle that a person shall not be allowed to enrich himself unjustly at the
expense of another.” Discuss and state the various situations in which a
quasi-contractual relationship may arise.
(a) Minor’s property may be attached for necessaries supplied to him.
(b) A person who has made a lawful payment on another’s behalf to save his
own interest has no right to be reimbursed for the same.
(c) A person cannot recover from another an amount paid by mistake or

under coercion.
(d) The finder of goods is the next best owner to the real owner.
[Hints : True : (a), (d); False : (b), (c).]
8. Which section deals with finder of goods :
(a) Section 71 (b) Section 62
(c) Section 39 (d) Section 37 [Hint : (a)]
PRACTICAL PROBLEMS
1. The Income tax authorities bring an order of the court for auctioning A’s
property for non-payment of taxes. B, a friend of A, to save his friend’s
honour, makes payment to the income tax authorities. Can B later on
demand payment from A?
[Hint : No. The payment by B is only voluntary, having no interest in the
payment (Section 69). However, if A agrees to pay, the contract would be good
under Section 25(2).]
2. B holds land in Bihar on a lease granted by A, the landlord. The revenue
payable by A to the Government being in arrear, the land is advertised for
sale by the Government. Under the revenue law, the consequences of such
sale will be annulment of B’s lease. B to prevent the sale, pays to the
Government the sum due from A. Is A bound to make good to B the amount
so paid?
[Hint : Yes. Section 69]
3. A goes to a restaurant for a dinner. he finds a mobile phone near his table
and gives it to the manager of the restaurant. The true owner could not be
traced. Afterwards, A requests the manager to return the mobile phone to
him, but B does not do so. A files a suit to recover it. Will he succeed ?
[Hint : Yes. Refer to S. 71 and case of Hollins v. Fowler]
11 Discharge of Contracts
LEARNING OBJECTIVES
After studying this chapter, you will understand the provisions relating to discharge
of contract :
➥ By Performance
➥ By Agreement or Mutual Consent
➥ By Lapse of Time
➥ By Operation of Law
➥ By Supervening Impossibility
➥ By Breach of Contract
A contract creates rights and obligations between the parties. When

the contractual relationship subsisting between them comes to an end the
Discharge of Contract
By By By By By By
Perforamnce Agreement Lapse of Operation Impossibility Breach
Time of Law of Performance
By By By By By Extension Accepting
Novation Alteration Rescission Remission Waiver of Time any other
Satisfaction
By By
Actual Attempted
Perforamnce Performance By By By By
Death Insolvency Merger Unauthorised
Material Alteration
By By By By By By By
Destruction of Unanticipated Failure of Change in Death or Actual Anticipatory
Subject Matter Change of Ultimate Law Incapacity Breach Breach
Circumstances Purpose
Fig. 11.1
Discharge of Contracts 137
contract is said to be discharged. Thus, by discharge we mean the

termination of the contractual relationship. A contract may be discharged in
any one of the following ways :
(1) By performance-actual or attempted
(2) By agreement or mutual consent
(3) By lapse of time
(4) By operation of law
(5) By impossibility of performance
(6) By breach of contract
DISCHARGE OF CONTRACT BY PERFORMANCE

Performance is the usual mode of discharge of a contract. If the parties to
a contract have done what they had undertaken to do as per the terms of the
contract, they become free from any further obligation. When both the parties
have performed their obligations, the contract is said to be discharged by
performance.
TYPES OF PERFORMANCE
According to Section 37 of the Act, “The parties to a contract must either
perform or offer to perform their respective promises, unless such performance
is dispensed with or excused under the provisions of this Act, or of any other
law. Promises bind the representatives of the promisors in case of the death of
such promisors before performance unless a contrary intention appears from
the contract.”
As per S. 37, performance of contract may be of two types : (1) actual
performance and (2) attempted performance. These are explained below :
1. Actual performance
Actual performance is the fulfilment of the obligations arising from a
contract, by the parties to it, in accordance with the terms of the contract.
Example : A and B enter into a contract whereby A promises to sell a car to B for 2
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lakhs. When A delivers the car to B and B pays 2 lakhs to A as per the terms of the
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contract, the contract is discharged by actual performance.
2. Attempted performance or Tender of performance (S. 38).

When a party to a contract offers to perform his obligation under the
contract, but is not able to do as the other party to the contract does not
accept the performance, it is called attempted performance or tender of
performance or offer of performance. If the offer of performance is not
accepted by the other party to the contract, the obligation of the party making
the tender is extinguished, and he is not liable for non-performance, although
his rights still continue. A valid tender of performance is equivalent to
performance. However, in case of tender of money a valid tender does not
extinguish the debt.
138 Business Laws
Essential of a valid tender (S. 38). Tender of performance, to be

equivalent to performance, must fulfil the following conditions:
(a) It must be unconditional. Tender of performance must be
unconditional. A tender becomes conditional if it is not in accordance
with the terms of the contract.
Example : A, a debtor offers to pay B, his creditor, the amount due to him on the
condition that B would sell him certain shares at par. This is not a valid tender.
(b) It must be made at a proper time and place. Tender of
performance must be made at proper time and place. In case the
contract mentions the time and place of performance, the offer of
performance must be made at the time and place stipulated. In the
absence of any such stipulation, the offer of performance must be
made at a proper time and place. Tender at the place of business and
during business hours is considered proper.
Example : A is a tenant of B. He offers to pay him rent at a marriage party. B is not
bound to accept as the tender is not made at a proper place.
3. It must be of the whole obligation. Tender of performance must

be of the whole obligation contracted for. Part payment or part
delivery of the goods contracted for is not a valid tender. Unless
otherwise agreed, a debtor who owes money must pay the entire
amount including interest at one and the same time.
4. The person making the tender must be willing to perform.
Tender of performance must be made by a person who is able and
willing there and then to do the whole what he is bound by his
promise to do.
5. In case of tender of goods, reasonable opportunity must be
given to the promisee for inspection of goods. If the offer is an
offer to deliver anything to the promisee, the promisee must have a
reasonable opportunity of seeing that the thing offered is the thing
which the promisor is bound by his promise to deliver.
Example : A contracts to deliver to B at his warehouse, on 1st March, 1873, 100
bales of cotton of a particular quality. In order to make an offer of performance with the
effect stated in the section. A must bring the cotton to B’s warehouse, on the appointed
day, under such circumstances that B may have a reasonable opportunity of satisfying
himself that the thing offered is cotton of the quality contracted for, and that there are 100
bales. (Illustration to S. 38)
6. It must be made to the proper person. Tender of performance

must be made to the promisee or his duly authorised agent.
7. Offer to one of the joint promisees. An offer to one of the several
joint promises has the same legal consequences as an offer to all of
them. A tender to karta of a joint family is a valid one, but an offer to
one of the heirs of the deceased creditor of the amount borrowed from
him is not a valid tender since the heirs are not joint promisees
under the contract.
8. In case of tender of money, exact amount should be tendered

in the legal tender money. The amount tendered should be in
current notes or coins. An offer to give a cheque in payment of the
amount due is not valid tender unless the creditor has agreed to
accept, expressly or impliedly, the payment by cheque, or where
there is a custom to make the payment by cheque. Further, if a
creditor accepts the cheque, he cannot afterwards raise an objection.
Tender of a smaller or larger amount is not a valid tender. In case of
tender of money, refusal by the creditor will not extinguish the debt.
Distinction between tender to perform a promise to supply goods
and tender to perform a promise to pay money
In case of valid tender of goods, refusal by the person to whom it is made
discharges the person by whom it is made from liability to supply the goods.
For example, in case of a contract of sale of goods, where the seller makes a
valid tender of goods and the buyer refuses to accept the goods, the seller is
discharged by such tender of goods and he is entitled to file a suit for breach
of contract against the buyer. But in case of valid tender of money, the refusal
by the creditor does not extinguish the debt. The debtor is not liable for
interest for the subsequent period.
WHO SHOULD PERFORM THE CONTRACT

A contract should be performed by the following persons depending upon
the nature of the contract and other circumstances :
1. By the promisor (S. 40). If it were the intention of the parties to a
contract that promise should be performed by promisor only, then a
promise should be performed by him alone and no one else. A
personal contract, such as the one to paint a picture, to sing, to act,
to dance, in which the personality of the promisor is a vital element,
should be performed by the promisor personally.
Example: A promises to paint a picture for B, A must perform the promise personally.
If A dies or becomes so disabled that he cannot himself perform the promise, the contract
is discharged. [ Illustration (b) to S. 40]
2. By the promisor or by his agent (S. 40). In other cases, where the
personal qualifications of the promisor are not material, the contract
may be performed either by the promisor himself, or by his agent, if
the promisor is alive. This is obviously because there is no personal
element involved in contracts to deliver goods, payment for them,
lending money, etc.
Example : A promises to pay B a sum of money. A may perform this promise either
by personally paying the money to B or by causing it be paid to B by another; and if A dies
before the time appointed for payment, his representatives must perform the promise, or
employ some proper person to do so. [Illustration ( a) to S. 40]
3. By the legal representatives (S. 37). In case of death of the
promisor before performance, the liability of performance of the
140 Business Laws
contract falls on the legal representatives of the promisor, unless a

contrary intention appears from the contract. The legal
representatives will be liable to perform the contract in case of
contracts not involving personal skill and their liability will be
limited to the estate inherited by them from the deceased in case of
breach of contract.
Example : A promises to deliver certain goods to B on a certain day for 5,000. A
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dies before that day. A’s legal representatives are bound to deliver the goods to B and B is
bound to pay 5,000 to A’s legal representatives.
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4. By a third person (S. 41). Section 41 of the Act states, “Where a

promisee accepts performance of the promise from a third person, he
cannot afterwards enforce it against the promisor.” Where a
promisee accepts lesser payment from a third party in full
satisfaction of his claim, he cannot enforce the promise against the
promisor.
Example : A owes B a sum of 50,000. C, a friend of A, offers a sum of 40,000 in
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full satisfaction and B accepts the amount. B cannot subsequently sue A for the balance.
WHO CAN DEMAND PERFORMANCE

It is only the promisee who can demand performance of the contract. A third
party cannot demand performance even if it is for his benefit. After the death
of the promisee his legal representatives are entitled to demand the
performance of a contractual obligation.
Example : A promises B to pay C a sum of 5,000. In this case B can demand the
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performance of contract, if A does not make the payment to C, C cannot take any action
against A. It is only B who can take action against A. After the death of B, B’s legal
representatives are entitled to enforce the promise against A.
DISCHARGE OF CONTRACT BY AGREEMENT

Since a contract arises on the basis of an agreement, it follows that a contract
can be discharged by mutual consent or agreement. Sections 62 and 63 deal
with discharge of contract by agreement.
Section 62 provides : “If the parties to a contract agree to substitute a new
contract for it, or to rescind or alter it, the original contract need not be
performed.” Thus this section contemplates three distinct modes of discharge
of contract by agreement. They are : (1) Novation, (2) Alteration, and (3)
Rescission.
Section 63 provides : “Every person who accepts a proposal may dispense
with or remit, wholly or in part, the performance of the promise made to him,
or may extend the time for such performance, or may accept instead of it any
satisfaction which he thinks fit.” Thus this section provides for two modes of
discharge of contract. They are : (1) Remission and (2) Waiver. It also
provides for extension of time.
Thus, Section 62 and 63 provide for the following methods of discharge of

contract by mutual agreement :
1. Novation (S. 62). Novation means substitution of a new contract for
the existing one with the consent of both the parties to the contract.
Such consent may be expressed as in written agreements or implied
through their actions or conduct. The new contract may be either
between the same parties or between different parties. The
consideration for the new contract is the discharge of the old
contract.
Novation by change of parties. Whether novation is between the same
parties or different parties, it can only take place by agreement; it cannot be
compulsory. If it involves a change of parties, consent of all the parties is
necessary.
Examples : (i ) A owes money to B under a contract. It is agreed between A, B and C
that B shall thenceforth accept C as his debtor instead of A. The old debt of A to B is
comes to an end, and a new debt from C to B has been contracted. [Illustration (a) to Sec.
62].
(ii ) A owes B 1,000 rupees under a contract. B owes C, 1,000 rupees. B order A to
credit C with 1,000 rupees in this books, but C does not assent to the arrangement. B still
owes C 1,000 rupees, and no new contract has been entered into. [Illustration ( c) to Sec.
62].
An instance of this kind is usual in the case of partnership agreements
when a partner either retires or is admitted and the reconstituted firm takes
upon itself the liabilities of the old firm and creditors also consent to it.
Novation without change of parties. Substitution of a new contract may
take place even without change of parties. This may happen when the parties
intend to effect a substantial change in the nature of the obligation or the
acts to be performed by them.
Example : A owes B 10,000 rupees. A enters into an arrangement with B and gives B
a mortgage of his (A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees. This
is a new contract and extinguishes the old. [Illustration (b) to Sec. 62].
Essentials of a valid novation. (i) It is possible only with the mutual

consent of the parties i.e., novation of the contract cannot be done
unilaterally. (ii) Substitution of a new contract is not possible after the breach
of the original contract. In other words, novation can take place only if the
original contract is subsisting. (iii) It is also necessary, that the agreement
subsequently entered into between the parties should be valid and
enforceable. (iv) The terms of the two contracts should not be inconsistent.
A mere variation in some of terms of the contract is not novation [Sasan
Power Ltd. v. North American Coal Corporation (India) (P) Ltd. [ITR
2016 SC 3474].
2. Alteration (S. 62). Alteration of contract means modification in the
original contract. A contract may be discharged by alteration by
mutual consent.
142 Business Laws
Novation is wider term than alteration.

Examples : (i) A gives a loan of 50,000 to B for two years at 15% p.a. rate of
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interest. Due to decline in the rate of interest in the market they mutually decide to bring
down the rate of interest to 12% p.a. after six months for the subsequent period. This is a
case of alteration in the contract.
(ii) A, on 1st July, agrees with B to make a painting of a particular garden on 2 by 2
feet canvas for 10,000 and deliver it to B on 8th July. Subsequently, A and B mutually
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agree that A will make the painting on 4 by 4 feet canvas instead of 2 by 2 feet canvas and
B will pay 12,000 for larger painting. This is an alteration of contract.
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Difference between Novation and Alteration

Basis Novation Alteration
1. Meaning Novation means substitution Alteration means modification
of a new contract for the in one more terms of the
existing contract with the original contract with the
mutual consent of the consent of the parties.
parties.
2. Change of Novation may be between Alteration in one or more
parties the same parties or between terms of the contract is only
different parties. between the same parties.
3. Variation in Novation may or may not Alteration always involve
the term of involve variation in the some change in the terms of
contract terms of the contract. There the contract.
may be only change of the
parties.
3. Rescission (S. 62). While novation results in a new contract in the

place of the old one, rescission results in the cancellation of the
original contract. The parties to a contract may, before its
performance, mutually agree that it shall no longer bind them. If
that be the case, the contract stands dissolved, freeing the parties
from their respective obligations. Such an agreement is known as
rescission by mutual consent.
Example : A promises to sell certain goods to B at a certain price by a certain date.
Before the date of performance, A and B agrees that the contract will not be performed.
Sometimes, the parties may also impliedly rescind the contract. This
happens when the parties do not perform their promises and remain silent
without complaining of non-performance for a long period.
4. Remission (S. 63). Remission means acceptance of a lesser sum than
what was contracted for or a lesser fulfillment of the promise made.
Section 63 lays down that the promisee may dispense with or remit,
wholly or in part, the performance of the promise made to him. No
consideration is necessary under S. 63 for remission or waiver.
Examples : ( i ) A owes B 5,000 rupees. A pays to B and B accepts, in satisfaction of
the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were
payable. The whole debt is discharged. [Illustration ( b) to Sec. 63].
(ii ) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them in
satisfaction of his claim on A. This payment is discharge of the whole claim. [Illustration (c )
to Sec. 63].
(iii ) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an
arrangement with his creditors, including B, to pay them a composition of eight annas in
the rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of
B’s demand. [Illustration ( e) to Sec. 63].
In Hari Chand Madan Gopal v. State of Punjab [AIR 1973 SC 381], A

owed certain sum of money to B. A’s friend C paid lesser sum and B accepted
it in full satisfaction of his claim against A. It was held that this discharged A
from his liability completely. He was not allowed to recover the balance
amount.
However, the procedure of obtaining of full and final discharge/settlement
voucher/no-dues certificate from private contractors by government
departments/PSUs/statutory corporations acknowledging receipts of sums
less than the claim “in full and final settlement” of all claims, as a condition
precedent for releasing even admitted claims is unfair, irregular and illegal.
5. Waiver (S. 63). Waiver means abandonment of a right which
normally everybody is at liberty to waive. In other words, it means
giving up of a right which a party is entitled to under the contract,
and thus the other party is released from his obligation. In such a
case, the promisor is released from his obligation to perform the
promise undertaken. Under Sec. 63 neither consideration nor an
agreement is required for wavier.
Example : A promises to paint a picture for B. B afterwards forbids him to do. A is no
longer bound to perform the promise. [Illustration ( a) to Sec. 63].
6. Extension of time (S. 63). Section 63 of the Act also permits the
promisee to extend the time of performance of the promise. Both the
parties must agree to extend time for the delivery of goods in a
contract of sale. It would not be open to the promisee by his
unilateral act to extend the time of his own accord and for his own
benefit. Consent of the other party is necessary [Keshavalal v.
Lalbhai Trikmal Mills, AIR 1958 SC 512]
Example : A owes B 10,000 payable on 31st March of a certain year. A is not in a
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position to meet his liability on 31st March and therefore requests B to extend the time for
payment by three months. B agrees. The promise to extend the time is binding and B
cannot file a suit before the expiry of the extended period.
7. Accepting any other satisfaction instead of performance (S.
63). Promisee may accept any satisfaction which he thinks fit
instead of performance.
Example : A owes B, under a contract, a sum of money, the amount of which has not
been ascertained. A without ascertaining the amount, gives to B, and B, in satisfaction
thereof accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever
may be the amount. [Illustration (d) to Sec. 63].
144 Business Laws
Distinction between Section 62 and 63. (i) An important point of

distinction between Section 62 and Section 63 is that, in the case of the
former, substitution of a new contract requires an agreement and
consideration. But, consideration is not required under Section 63. (ii)
Substitution of a new contract should be done before the breach of the
original contract, while under Section 63, the promisee may release the
promisor gratuitously before the breach or even after the breach without any
consideration from his liability arising from such a breach.
DISCHARGE OF CONTRACT BY LAPSE OF TIME

The Indian Limitation Act has prescribed the period within which the
existing rights can be enforced in courts of law. The object of the Act is to
assist the vigilant but not those who sleep over their rights.
In the case of simple contracts, the period of limitation is three years. If,
therefore, the aggrieved party to a contract does not enforce his rights within
the time prescribed by the Act, his remedy by way of a suit is barred, which
in effect means, that the other party is discharged from his obligation. Thus,
lapse of time terminates a contract.
Example : A agrees to supply certain goods to B at a certain price. Goods are to be
delivered after a week and payment is to be made on delivery. A supplies the goods as
per the agreement. But B does no make the payment. A must file that suit within three
years after debt has become due. If he does not file, the suit against B within three years
for the price of the goods, the debt becomes time-barred. A will be deprived of his remedy
at law and this in effect implies discharge of the contract.
DISCHARGE BY OPERATION OF LAW

Regardless of the wishes of the parties to a contract, the contract is
discharged by the operation of law in the following cases :
1. Death. If the contract envisages personal skill or ability of the
promisor, it is automatically terminated on the death of the
promisor. In other cases, the rights and liabilities devolve upon the
legal representatives of the deceased.
Example : A promises to paint a picture for B for 5,000. A dies before painting the
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picture. The contract is discharged as it involves personal skill of the promisor.

2. Insolvency. A contract is discharged by insolvency of one of parties
to a contract. When a court passes an “order of discharge”. After the
order of discharge, he is absolved of all liabilities incurred by him
prior to his adjudication as insolvent.
3. Merger. When a contract with an inferior right give place to another
contract with a superior right, the original contract gets discharged
by its merger in the latter.
Example : A is tenant of B’s house. A purchases the house from B. The rights of A as
the lessee of the house merge into his right as the owner of the house. The tenancy is
discharged by merger.
4. Unauthorised material alteration. If a party to a contract effects

any material alteration in a written document or contract without
the consent of the other party, the contract becomes void. The guilty
person may lose the rights on the instrument. The other party, may
enforce his rights on the basis of original consideration.. Material
alteration is one which affects the rights and liabilities of the parties
to the contract. For example, any alteration of the amount, rate of
interest is a material alteration. If any alteration is made which is
not material, or an alteration made to carry out the common
intention of the parties does not discharge the contract.
DISCHARGE OF CONTRACT BY SUBSEQUENT OR SUPERVENING

IMPOSSIBILITY OR ILLEGALITY (DOCTRINE OF FRUSTRATION)
Initial Impossibility
If an agreement contemplates doing something which is absolutely
impossible, the same becomes void ab initio.
Section 56 has laid down that, “An agreement to do an act impossible in
itself is void.” The phrase ‘impossible in itself’, obviously refers to something
which is inherently impossible of performance.
If an agreement becomes void ab initio on account of impossibility, the
question of discharge does not arise since there is no contract to be discharged
or terminated.
Example : A agrees with B to discover treasure by magic. The agreement is void.
[Illustration (a) to Sec. 56].
Supervening Impossibility
A contract, which is capable of performance at the time it was entered
into, may, owing to some event beyond the control of the promisor, become
incapable of performance or render it unlawful. In either case, the contract
becomes void. This eventuality is known as subsequent impossibility.
Section 56 has further laid down that, “A contract to do an act which,
after the contract is made, becomes impossible, or by reason of some event
which the promisor could not prevent unlawful, becomes void when the act
becomes impossible or unlawful.”
In Satyabrata Ghosh vs. Magneeram Bangur & Co. [AIR 1954 SC
44], it was held by the Supreme Court that, “If and when there is frustration,
the dissolution of contract occurs automatically, it does not depend, as does
rescission of a contract, on the ground of repudiation or breach, or in the
choice or election of either party.” The Court further held that the doctrine of
frustration, as applied in England, is really an aspect or part of law of
discharge of contract by reason of supervening impossibility or illegality.
In Satyabrate Ghosh vs. Magneeram Bangur & Co., Mukherjee, J., of
the Supreme Court further said :
“In deciding cases in India the only doctrine that we have to go by is that
146 Business Laws
of supervening impossibility or illegality as laid down in Section 56 of the

contract Act, taking the word ‘impossible’ in its practical and not literal
sense.”
Superevening Impossibility
Cases covered by Cases not covered by

Superevening Impossibility Superevening Impossibility
Destruction of subject-matter Self-induced frustration

Unanticipated change of circumstances Difficulty of performance
Failure of ultimate purpose Commercial hardship
Death or incapacity of the promiser Impossibility due to fault of a third person
Change of law Strikes, lockouts and civil disturbances
Outbreak of war Frustration of one of the objects
Fig. 11.2
Cases Covered by Supervening Impossibility

Although, “Impossibility of performance is, as a rule not an excuse from
performance”, the doctrine of frustration or supervening impossibility has
been invoked by courts of law in the following cases :
1. Destruction of the subject-matter. The continued existence of the
subject-matter of the contract is of absolute necessity for the
performance of the contract. As such, if the subject-matter is
destroyed without the contracting parties being at fault, after the
formation of the contract, performance of the contract becomes
impossible.
CASES : ( i ) In the leading case Taylor vs. Caldwell [(1863) 122 AP 299], A (the
defendant) agreed to let a music hall to B (the plaintiff) for a series of concerts. Before
the day of performance, the music hall was destroyed by fire. B sued A for damages for
breach of contract. It was held that the contract had become void due to the destruction
of the hall and thus A was not liable.
(ii ) In Howell vs. Coupland [(1876) 1 QBD 258], A (the defendant) agreed to sell a
specified quantity of potatoes to be grown on his farm to B (the plaintiff), but failed to
supply the same as the crop was destroyed by a disease. It was held that performance
had become impossible.
2. Unanticipated change of circumstances. If there is change of

circumstances which make the performance of the contract
impossible in the manner and at the time contemplated by the
contract, the courts will not enforce the contract.
CASE : A ship was chartered to load a cargo but on the day before she could have
proceeded to her berth, an explosion occurred in the auxiliary boiler, which made it
impossible for her to undertake the voyage at the scheduled time. It was held by the
House of Lords that frustration had occurred in the circumstances; [Joseph

Constantine Steamship Line Ltd. vs. Imperial Smelting Corporation Ltd, (1941) 2
All ER 165].
3. Failure of Ultimate Purpose. Where the ultimate purpose for

which the contract was entered into by the parties fails, the contract
is discharged by frustration. In other words, if the state of things on
which performance depends, is the sole basis of the contract, or the
non-occurrence of an event contemplated by both the parties as the
reason for the contract, the contract is discharged if the state of
things do not remain the same or the contemplated event does no
occur.
CASE : In the leading case Krell vs. Henry [(1903) 2 KB 740], A (the defendant)
hired a flat from B (the plaintiff) for two days, i.e. June 26 and 27, 1902, for witnessing
the coronation procession of King Edward VII. Although the contract contained no
reference to this, the purpose of hiring the flat was known to both the parties. The
procession was cancelled owing to the illness of the king. B sued to recover the rent
which had not been paid when the procession was cancelled. The Court of Appeal held
that the procession and the relative position of the flat being the foundation of the
contract, the contract was discharged and B could not recover the rent due.
4. Death or incapacity of the promisor. In the case of personal

contracts, the performance of which depends upon the skill or
qualification of the promisor, his death or incapacity discharges the
contract.
CASE : In Robinson vs. Davison [(1871) LR6 Exch 269], there was a contract
between A (the plaintiff) and B (the defendant) to the effect the B should play the piano
at a concert to be given by A on a specified day. On the day in question, B was unable
to perform owing to illness. The contract did no contain any term as to what was to be
done in case of illness. In an action against the defendant for breach of contract, it was
held that B’s illness and the consequent incapacity excused her from performance of
the contract.
Example 1 : A contracts to act at a theatre for six months in consideration of a sum

paid in advance by B. On several occasions A is too ill to act. The contract to act on those
occasions becomes void. [Illustration (e) to Sec. 56.]
Example 2 : A and B contract to marry each other. Before the time fixed for the
marriage, A goes mad. The contract becomes void. [Illustration ( b) to Sec. 56.]
5. Change in law. Whenever there is a change in the law or
administrative intervention so as to strike at the root of the contract,
the contract may be frustrated by supervening impossibility.
Example : A enters into a contract with B on January 1 for the supply of certain
imported goods to be supplied in the month of July of the same year. In March, the import
of such good is banned by the Government. The contract is discharged.
CASE : In Man Singh vs. Khazan Singh [NR 1961 Raj 205], a contract for sale of
trees of a forest was held to be discharged when the State of Rajasthan forbade the
cutting of trees in the area.
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But Government intervention of a temporary nature which does not

vitally affect the contract will not make the contract void.
CASE : In the leading case Satyabrata Ghosh vs. Magneeram Bangur and Co.
[AIR 1954 SC 44], the defendant company (Magneeram Bangur and Co.) who owned a
large area of land in Calcutta, started a scheme for the development of the land for
residential purposes during World War II. The plaintiff-appellant (Satyabrata Ghosh),
one of the purchasers of a plot, entered into a contract with the company, and paid
R 101 as earnest money. His contract was dated 5th August, 1940. The defendant
company undertook to construct roads and drains necessary for making the area
suitable for building and residential purposes, and as soon as they were completed, the
purchaser would be called upon to complete the sale by payment of the balance of the
consideration money. Before anything could be done, a considerable portion of the land
was requisitioned by the government in 1941 and 1942 for military purposes during
World War II. The company gave a notice to the purchaser to treat the contract as
cancelled because performance of the contract has become impossible due to
supervening impossibility.
The Supreme Court held that the requisition orders were by their very nature of a
temporary character. The contract was, therefore, held not discharged by
supervening impossibility.
6. Outbreak of war. All contracts entered into with an alien enemy is

illegal and thus void ab-initio. Contracts entered into before the
outbreak of war cannot be performed during the war since it is
illegal to perform contract with an alien enemy. These contracts are
either suspended or declared void. Suspended contracts may be
revived after the war is over.
CASE : In Basanti Bastralaya vs. River Steam Navigation Co. Ltd. [AIR 1987 Cal.
271], the defendants, a common carrier (as Indian company), agreed to deliver the
goods to the plaintiff in erstwhile East Pakistan by inland navigation, War broke out
between India and Pakistan. It was held by the Calcutta High Court that the contract of
carriage was frustrated due to impossibility of performance.
Cases Not Covered by Supervening Impossibility

In the following cases impossibility of performance is not an excuse for
non-performance of contract :
1. Self-induced frustration. The provisions of Section 56 of the
Contract Act cannot apply where the event which is alleged to have
frustrated the contract arises from the act or election of a party.
2. Difficulty of performance. A contract is not frustrated merely
because performance has become more difficult or more burdensome.
Mere hardship or inconvenience to one of the parties is not sufficient
to justify discharge.
CASE : In Blackburn Bobbin Co. vs. Allen & Sons [(1918 2 KB 467], A contracted
to sell a certain quantity of Finland timber to B to be supplied between July and
September. Before any timber could be supplied, war broke out in the month of August
and transport was disorganised so that A could not bring any timber from Finland. It
was held that the difficulty in getting the timber from Finland did not discharge the
contract.
3. Commercial hardship. The doctrine of frustration cannot be

invoked where the promisor finds that performance is not
commercially feasible, merely because of a possible decrease in
profits or increase in expenses.
CASES : (i ) In Karl Ettlinger & Co. vs. Chagandas & Co. [(1916) 40 Bom 301], A
(the defendant) agreed to supply goods to B (the plaintiff), to be sent from Bombay to
Antwerp. Owing to the outbreak of war before shipment, freight could not be procured
except at an exorbitant price. When A contended frustration, it was held that the
increase in freight rates did not excuse performance.
(ii ) In Sachindra Nath vs. Gopal Chandra [AIR 1949 Cal 240], A (the plaintiff) let
certain premises to B (the defendant) for a restaurant at somewhat higher rent. B
agreed to pay high rent because the British troops were stationed in the town. A clause
in the agreement provided that “this agreement will remain in force so long as British
troops will remain in this town.” After some months, the locality was declared out of the
bounds of the British troops. It was held that the contract has not become impossible
under Sec. 56.
4. Impossibility due to default of a third person. The doctrine of

frustration does not extend to the case of failure of a third party on
whose work the defendant relied.
CASES : (i ) In Hurnandrai Fulchand v. Pragdas Budhsen [AIR 1923 PC 542], an

agreement dated 26th November, 1917 was entered into between A (the respondent)
and B (the appellant) under which A agreed to supply to B 864 bales of dhotis as
specified, to be manufactured by the named Mills. The agreement provided that, “the
same are to taken delivery of us as and when the same may be received from the mills.
Delivery to be given in full by the 31st December in the year 1918.” The said mills
supplied the goods to the Government in preference to A. A supplied to B a part of the
goods only and contended that owing to the non-receipt of the goods from the mills by
A, the contract should be considered to be frustrated. The Court held that the
contract to supply goods “as and when they may be received from the mills”
does not mean “if and when received from the mills” and therefore, the contract
was not frustrated and B was entitled to claim compensation from A for breach of
contact. The Court observed that in such cases when the contract is an absolute one
and not contingent, the non-receipt of the goods does not frustrate the contract.
(ii ) In Ganga Saran vs. Ram Charan Ram Gopal [(1952) SCR 36], A (the respondent)
agreed to supply to B (the appellant) 61 bales of cloth manufactured by the New
Victoria Mills, Kanpur, by the 17th Nov., 1941, and that the delivery should be effected
as and when the goods were supplied to A by the said mill. Since no delivery was
made by the time fixed, B instituted civil proceedings against A claiming 9,808 being
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the loss sustained on account of the rise in the market price of the goods contracted. A
contended frustration, which was rejected by the Supreme Court.
5. Strikes, lockouts and civil disturbance. Unforeseen events such

as strikes, lockouts and civil disturbances do not discharge the
150 Business Laws
contract, in the absence of a specific provision in the contract to that

effect.
CASE : In Ram Partap Mahadeo Prasad vs. S. S. Works Ltd. [AIR 1964 Pat. 250],
a strike of the workmen employed to carry out repair and closure of the mills
manufacturing gunny bags due to strike, was not considered by the Patna High Court
sufficient enough to make performance impossible.
6. Frustration of one of the objects. Where a contract has more

objects than one, and only one, or some of them has, or have been
frustrated, the entire contract is not discharged.
CASE : In the leading case Henri Bay Steam Boat Co. vs. Hutton [(1903) 2 KB
683], the written contract that explained the purpose of the charter was “viewing the
naval review and for the day’s cruise round the fleet.” A (the defendant) paid £ 50
immediately and the balance of £ 200 to be paid just before the trip. The review was
canceled because of the King’s illness, but the fleet remained anchored at Spithead.
When A refused to pay the balance, B (the plaintiff company) sued him for the amount
and succeeded. It was held that the contract had not been frustrated, because the
watching of the view was not the sole purpose of the contract; there was no reason
why the boat could not be used for the second purpose — ‘a day’s cruise round the
fleet’.
Effect of Supervening Impossibility

1. Contarct becomes void. Section 56 provides, as pointed out earlier,
that due to supervening impossibility or illegality the contract becomes void
when the act becomes impossible or illegal.
Example : A and B contract to marry each other. Before the time fixed for the
marriage A goes mad. The contract becomes void. [Illustration (b) to Sec. 56].
2. Principle of restitution applies. Section 65 provides that, “When an

‘agreement is discovered to be void or a contract becomes void, any person who
has received any advantage under such agreement of contract is bound to
restore it, or make compensation for it, to the person from whom he received
it”.
Example : A contracts to sing for B at a concert for 1,000 rupees which are paid in
advance. A is too ill to sing. A is not bound to make compensation to B for the loss of
profits which B would have made if A had been able to sing, but must refund to B the
1,000 rupees paid in advance.
3. Compensation for loss through non-performance of act known

to be impossible or unlawful. Section 56 provides that, “Where one person
has promised to do something, which he knows, or with reasonable diligence,
might have known, and which the promisee did not know to be impossible or
unlawful such promisor must make compensation to such promissee for any
loss which such promisee sustains through the non-performance of the
promise”. Thus if the impossibility is not obvious and the promisor alone
knows or with reasonable diligence might have known, such promisor is
bound to compensate the promisee for any loss he may suffer due to the non-
performance of the promise.
Example : A contracts to marry B, being already married to C, being forbidden by the
law to which he is subject to practice polygamy. A must make compensation to B for the
loss caused to her by the non-performance of his promise. [Illustration ( c) to Sec. 56].
DISCHARGE BY BREACH OF CONTRACT

Breach of contract by a party thereto is also a method of discharge of
contract. When a party to a contract fails to perform the obligation imposed
upon him, he is said to have committed breach of contract. In case of breach of
contract, the aggrieved party, inter alia, has a right of action for damages
against the defaulter party.
Breach of contract may be (1) actual breach or (2) anticipatory breach.
Actual Breach
Actual breach of a contract may occur either (a) at the time when
performance is actually due, or (b) during performance of the contract.
(a) Breach at the time performance is actually due. If a party to a
contract fails to perform his obligation at the specified time, he is
liable for its breach.
Examples : A agrees to deliver 10 bags of rice to B on 1st September, but fails to do
so on that date, he is said to have committed a breach of the contract. Similarly, if A
delivers 10 bags of rice on 1st September, but B, for not valid reason, refuses to accept
them, B becomes guilty of breach.
(b) Breach during performance. If, during performance of a contract,

a party to it either fails or refuses to perform his obligation, it is said
to be actual breach during performance of the contract. Such a
contingency is likely to happen in the case of instalment contracts
such as, sale of goods and delivery by instalments, or construction of
a building and payment by instalments, etc. Breach during
performance may either be explicit of implicit.
Actual breach of contract entitles the aggrieved party to repudiate
the contract and sue the other party for damages for breach of
contract.
CASE : In Cort vs. Ambergate Railway Company [(1851) 17 QB 127], A (the

plaintiff) contracted to supply to B (the defendant company) 3,900 tons of railway chairs
at a certain price, to be delivered in certain quantities at specified dates. After 1,787
tons had been delivered, the company requested him to deliver no more, as they would
not be wanted. Thereupon, A brought an action contending that he was always ready
and willing to perform his part, but had been prevented from doing so by the action of
B. It was held that, since the contract had been renounced, he could maintain an action
without manufacturing and tendering the rest of the goods. The measure of damages in
such a case would ordinarily be the difference between the cost of production and
delivery and the contract price.
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Anticipatory Breach
If a party to a contract repudiates or renounces his obligation before the
time fixed for performance, breach by him is said to be anticipatory. In other
words, “a breach contract caused by the repudiation of obligations not yet ripe
for performance is called an anticipatory breach.”
The law relating to this type of breach is contained in Section 39 of the
Act which lays down that, “When a party to a contract has refused to perform,
or disabled himself from performing, his promise in its entirety, the promisee
may put an end to the contract, unless he had signified, by words or conduct,
his acquiescence in its continuance.”
Thus, anticipatory breach of contract may be (b) express or (b) implied.
(a) Express. When a party to the contract by words, spoken or written,
communicates, before the due date of performance, his intention
not to perform it, it is called express anticipatory breach of
contract.
Example : A contracts with B on 25th October to supply 10,000 bags of rice of 50 kg.
of rice at the rate of 1,500 per bag on 30th December. On 1st November A informs B
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that he will not be able to supply the rice. This is express anticipatory breach of contract.
(b) Implied. When a party to the contract proclaims by conduct his

inability to perform before the date of performance, it is called
implied anticipatory breach of contract.
Example : A agree to marry B. Before the date of the marriage, A marries C. This is
anticipatory breach of contract by the conduct of one of the parties.
Effects of anticipatory breach of contract. The innocent party has

the following two options in case of anticipatory breach of contract :
(a) Treat the anticipatory breach as actual breach and sue
immediately. He may put an end to the contract and sue the party
in default for damages without waiting till the date of performance.
In this case, he is excused from performing his part of the contract.
However, the innocent party, i.e., the aggrieved party should
communicate clearly its decision to terminate the contract to the
repudiating party.
Example : A, a singer, enters into a contract with B, the manager of theatre, to sign at
his theatre two nights every week during the next two months, and B engages to pay her
100 rupees for each night’s performance. On the 6th night A wilfully absents herself from
the theatre. B is at liberty to put an end to the contract. [Illustration (a) to Sec. 39]
CASES : (i ) The leading case on anticipatory breach is Hochester vs. De La Tour

[(1853) 2E&B 678], in which A (the defendant) agreed, on 12th April, 1852 to employ B
(the plaintiff) as his courier and to accompany him upon a tour. The employment was to
commence on 1st June 1852. On 11th May, 1852 he wrote to B that he had changed
his mind, and hence, would not require a courier. B sued for damages before 1st June
and succeeded. This is an instance of express repudiation.
(ii ) In Frost vs. Knight [(1872) LR 7 Exch 11], A (the defendant), a bachelor, promised
to marry to B (the plaintiff) upon his (A’s) father’s death. But during his father’s lifetime,
he renounced the contract. B brought an action against him at once without waiting for
the death of the father. It was held that B was entitled to sue.
Thus, a contract is a contract from the time it is made and not from the
time its performance is due.
(b) Treat the contract as subsisting and wait till the date of
performance. He may elect to treat the contract as subsisting and if
he does so he had to wait till the performance is due. If the other, i.e.,
repudiating party performs the contract, the innocent party has to
accept performance. If the other party does not perform the contract,
the innocent party can claim damages estimated as at that date.
Thus, in this case he keeps the contract alive for the mutual benefit
of both. Consequently, he is subject to all the liabilities under it, and
at the same time, enables the other party to complete the contract
inspite of the previous repudiation.
Example : A, a singer enters into a contract with B, the manager of a theatre, to sing
at his theatre two nights in every week during the next two months and B engages to pay
her at the rate 100 rupees for each night. On the 6th night A wilfully absents herself. With
the assent of B, A sings on the seventh right. B has signified his acquiescence in the
continuance of the contract, and cannot now put an end to it, but is entitled to
compensation for the damage sustained by him through A’s failure to sign on the sixth
night.
If the contract is kept alive, and the promisor cannot perform the contract
due to supervening impossibility, the injured party loses the right of suing
him for damages.
CASES : (i ) In R. B. Shah v. N. Gopal [(1906) 3 CWN 477], there were two

separate contracts between A and B. Under these contracts A agreed to purchase a
total of 300 tons of wheat. The wheat was to be delivered on different dates. A failed to
take delivery under the first contract. B claimed that he was entitled to put to an end
both the contracts on the ground of anticipatory breach of contract. It was held that B
was not entitled to put to an end both the contracts because A did not refuse to perform
the contract in its entirety.
(ii ) In Avery vs. Bowden [(1856) 6 E & B 953], A (the defendant) chartered B’s (The
plaintiff’s) ship, agreeing to load her with a cargo at Odessa within 45 days of the
contract. A, being unable to get a cargo, told B that he could not carry out his side of
the bargain and suggested B to sail his ship away. B, nevertheless waited, hoping that
a cargo would be loaded. Before the expiry of 45 days, the Crimean War broke out
between England and Russia. As Odessa became an enemy port, the performance of
the contract became illegal, and hence, it was frustrated. B then brought an action for
breach. It was held that A’s failure to provide a cargo was an anticipatory breach
of the contract which gave B the option of suing immediately or of waiting until
the time-limit had expired before bringing an action. Because B had waited, the
contract was subsisting and was then frustrated by the outbreak of war. Hence, B
lost his right to sue for breach of the contract. Had he accepted renunciation, he
would have had the right to recover damages equal to the loss he had sustained from
breach of the contract.
154 Business Laws
Measures of damage in an anticipatory breach of contract. If the

contract is treated as discharged by the aggrieved party, the amount of
damages will be measured by the difference between the price prevailing on
the date of breach and the contract price.
If the aggrieved party decides to wait till the date fixed for performance,
the damages will be measured by the difference between the contract price
and the price prevailing on the date fixed for performance of the contract.
REVIEW QUESTIONS
1. What do you understand by performance of contract ? Who can demand
performance and by whom contracts must be performed ?
2. What are the essentials of a valid tender of performance ? Explain.
3. What do you understand by frustration of contract? Discuss fully its legal
effects.
4. ‘Impossibilities of performance, is as a rule, not an excuse for non-
performance of a contract’. Discuss.
5. Explain the cases covered by supervening impossibility.
6. Explain the discharge of contract by agreement.
7. What do you understand by anticipatory breach of contract? State the rights
of the parties in case of such a breach. [B.Com. and B.Com. (H), D.U.]
8. Differentiate between actual breach and anticipating breach of contract.
[B.Com and B.Com. (H) D.U.]
9. State with reasons whether each of the following statements is true or false :
(a) An agreement to do an impossible act is voidable at the option of the
promisee.
(b) Commercial impossibility makes the contract void.
(c) Insolvency of the promisor discharger the contract.
(d) If the promisor is not able to perform his promise due to the default of
the third person upon whom he relied, the contract becomes void.
[Hints : True : (c) False : (a), (b), (d).]
(i) If before the date of performance of contract, a party to the contract
refuses to perform the contract, it is known as :
(a) restitution (b) rescission
(c) actual breach of contract (d) anticipatory breach of contract.
[Hint : (d) ]
(ii) In which of the following cases, a contract is not discharged on the ground
of supervening impossibility :
(a) destruction of the subject-matter (b) death of the promisor
(c) change of law (d) commercial impossibility.
11. What is meant by supervening impossibility of performance ? Under what
circumstances the contract is discharged on the ground of supervening
impossibility ? [B.Com. and B.Com. (H), D.U.]
12. Discuss the ‘Novation’ and ‘Remission’ as a mode of discharge of contract by
giving suitable examples. [B.Com. (H), D.U.]
PRACTICAL PROBLEMS
1. Anil agrees with Gopal to let out the house under construction and obtains an
advance for the purpose. The house is, however, requisitioned by Government
and, therefore, Anil is unable to honour his promise. What are the rights of
Gopal against Anil? Can Gopal recover damages for breach of contract?
[Hint : No. Gopal cannot recover damages as the contract is discharged by
supervening impossibility under Sec. 56. Gopal can claim refund of the
advance made by him under Sec. 65.]
2. A entered into a contract with B for supplying 600 tons of coal to B within 6
months. A failed to make the delivery in accordance with the terms of the
contract owing to Government restriction on the transport of coal from
collieries but A admitted that coal was available and could be purchased in
the local market. Can A successfully take the plea that the contract stood
discharged because of impossibility of performance?
[Hint : A cannot successfully take the plea that the contract stood discharged
as he has himself admitted that the coal was available in the local market.
The contract is not discharged under Sec. 56.]
3. Michael Jackson entered into a contract with Jazz India Ltd. to perform in
India on 1st January and 5th January 1994. On 29th December, 1993, the
agent of Michael Jackson informed Jazz India Ltd. that Michael Jackson
could not perform on those days as he was not physically fit to perform and
that the doctor had advised him complete rest for two months. Jazz India Ltd.
sued Michael Jackson for damages. Decide.
[Hint : Contract is discharged by supervening impossibility.]
4. There was a contract between A and B that A would exhibit a film in B’s
cinema hall on 14th Nov., 20X2. On that day, the rear wall of the cinema got
collapsed by an earthquake and its licence was cancelled until the cinema
hall was reconstructed. A failed to exhibit the film. The public who purchased
the tickets in advance claimed compensation from A and in return A filed a
suit against B for breach of contract. Decide.
[Hint : Contract is discharged by supervening impossibility. A must return
the money to the public who purchased the tickets in advance.]
5. A agreed to sell his plot of land to B. Subsequently the land is acquired by the
State Government for public purpose. Can A refuse to perform the contract on
the ground that the performance of the contract has become impossible.
[Hint : Yes. The contract has become void under Sec. 56 of the Indian
Contract Act, 1872.]
6. Anil was due to perform a contract on 20th February, 20X2, but on 16th
February repudiated his obligation. On 19th February, the contract became
illegal through a change in the law. Varun, the other party to the contract
after waiting upto 20th February, filed a suit for breach of contract of 25th
February. Decide the case with reasons.
[Hint : Varun cannot claim damages as he opted to wait and in the meantime
the contract was discharged by supervening impossibility. See Anticipatory
breach of contract.]
Remedies for Breach of
12 Contract
LEARNING OBJECTIVES
After studying this chapter, you will be able to understand the provision regarding :
➥ Suit for Damages
➥ Suit upon Quantum Meruit
➥ Rescission of Contract
➥ Suit for Specific Performance
➥ Suit for Injunction
The following remedies are available to the aggrieved party in case of

breach of contract as per the Indian Contract Act, 1872 and the Specific Relief
Act, 1963 :
(1) Suit for damages
(2) Suit upon quantum meruit
(3) Rescission of contract
(4) Suit for specific performance
(5) Suit for injunction
SUIT FOR DAMAGES

‘Damages’ means compensation in terms of money to the aggrieved
party for the loss or injury suffered by him. The primary aim or
principle of the law of damages for a breach of contract is to place the
aggrieved party in the same position in which he would have been, if the
contract had been fulfilled. As the object of awarding damages is to put the
aggrieved party in the same position which he would have been had there
been no breach of contract, but performance, the damages are not
punitive, but compensatory. Burden lies on the aggrieved party to prove
his loss.
Section 73 of the Act deals with the loss or damage caused by breach of
contract.
It provides that when a contract has been broken the party who suffers by
such breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby —
1. which naturally arose in the usual course of things from such breach
or
Remedies for Breach of Contract 157
2. which the parties know when they made the contract to be likely to
result from the breach of it.
The rules regarding damages laid down in this section are based on the
decision in the leading case, Hadley vs. Baxendale.
CASE : In Hadley v. baxendale [(1854) 9 Exch 341], Hadley was engaged in a

milling business at Gloucester. The flourmill was driven by a steam engine. A crank
shaft of the engine broke and the mill had to be stropped. The engineers who made the
steam engine were running their business at Greenwich. Hadley ordered a replacement
of the shaft from the engineers based at Greenwich. The engineers asked for the
broken shaft to be sent to them as a pattern for making a new one. Thus it became
necessary to send the shaft to them. Hadley sent the shaft to Pickford & Co. (a firm of
common carries). Pickford & Co. was represented by Baxendale. The carriers promised
to deliver the shaft at Greenwich the next day and collected two pounds for doing this
task. The shaft was sent by the carriers by canal rather than by rail and due to this
negligence of the cammon carriers there was delay of five days. As a result the new
shaft was delivered late to Hadley. Baxendale was never told that Hadley would lose
profits if delivery to engineers at Greenwich was delayed. During the interval, the mill
remained idle and Hadley lost the profits which he would otherwise have made.
Estimating the loss of profits of £ 300, Hadley sought to recover the same from the firm
of common carriers.
Holding that ‘the loss of profits here cannot reasonably be considered such a
consequence of the breach of contract as could have been fairly and reasonably
contemplated by both the parties when they made the contract’, Alderson, B. laid down
the following rule :
“Where two parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of
contract should be such as may fairly and reasonably be considered either as
arising naturally, i.e., according to the usual course of things, from such breach
of contract itself, or such as may reasonable to supposed to have been in the
contemplation of both the parties, at the time they made the contract, as the
probable result of the breach of it.”
Thus, the consequences of breach may be endless, but the law has
prescribed a limit to liability and beyond that limit the damage is said to be
remote and therefore not recoverable.
Kinds of Damages
Damages are mainly of the following kinds :
1. General or ordinary damages
2. Special damages
3. Exemplary or vindictive damages
4. Nominal damages.
These are discussed below :
1. Ordinary or General Damages

According to S.73, when there is a breach of contract, the aggrieved party
can always recover from the guilty party general or ordinary damages. These
are the damages as may fairly and reasonably be considered as
arising naturally, i.e., according to the usual course of things from
158 Business Laws
breach of contract. In other words, the damages which are awarded

for compensating the loss that arises in the usual course of
things from breach of contract are known as general or ordinary
damages.
Thus, these damages can always be claimed as a matter of right.
CASE : In Hadley v. Baxendale, A’s mill was stopped due to breakdown of a shaft.
He delivered the shaft to B, a common carriers, to be taken to the manufacture make a
new shaft. A had not told to B that delay would result in loss of profits. Due to
negligence of B, the delivery of the shaft was delayed beyond a reasonable time. It was
held that A was not entitled to claim loss of profits during the period of delay as it was
not in the contemplation of both the parties at the time of entering into the contract.
Examples : ( i) [Market price criterion]. A contracts to sell and deliver 50 maunds of

saltpetre to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled
to receive from A, by way of compensation, the sum, if any, by which the contract price
falls short of the price for which B might have obtained 50 maunds of saltpetre of like
quality at the time when the saltpetre ought to have been delivered. [Illustration ( a) to Sec.
73].
(ii) [ Seller’s loss on resale]. A contracts to buy of B, at a stated price, 50 maunds of
rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice
tendered to him. B is entitled to receive from A, by way of compensation the amount if any,
by which the contract price exceeds that B can obtain for the rice at the time when A
informs B that he will not accept it. [Illustration (c ) to Sec. 73].
General damages are calculated as the difference between the

contract price and market price at the place of performance of
contract on the date of breach, taking into consideration, the
prevailing circumstances, and not as a result of subsequent change
in circumstances. If there is no market price for the subject-matter of
the contract, the market price of the nearest substitute should be
taken into consideration.
CASE : In Jamal vs. Moola Dawood and Co. [(1916) 43 IA 6 P(C)], A (the plaintiff-
appellant) sold to B (the defendant-respondent) 23,500 shares in the British Burma
Petroleum Co. Ltd. for 1,84,125 to be delivered and paid for on December 30, 1911.
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B failed to pay and take delivery of the shares. The market price of the shares on the
date of delivery was less by 1,09,218 than the contract price. But A sold the shares
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only after February when the market price was again rising and realised 79,862 less
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than the contract price. A sued B to recover 1,09,218 as damages for breach,
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measured by the difference between the contract price and the market price. B
contended that as the price of the shares rose subsequently A did not, in fact, suffer the
loss. Rejecting this contention the Privy Council allowed the appeal by observing that,
“If the seller retains the shares after the breach, the speculation as to the way the
market will subsequently go is the speculation of the seller, not of the buyer; the
seller cannot recover from the buyer the loss below the market price at the date
of breach if the market falls, nor is he liable to the purchaser for the profits if the
market rises. The seller’s loss at the date of the breach was and remained the
difference between contract price and market price at that date.”
Remote and Indirect Loss or Damage

Section 73 further provides that, “Such compensation is not to be
given for any remote and indirect loss or damage sustained by
reason of the breach.”
Example : [Default in payment of money]. A contracts to pay a sum of money to B on
a day specified. A does not pay the money on that day; B in consequence of not receiving
the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to
make good to B anything except the principal sum be contracted to pay, together with
interest up to the day of payment. [Illustration (n) Sec. 73].
CASE : In Madras Railway Co. vs. Govinda Rau [(1898) 21 Mad 172], G, a tailor,
(the plaintiff) delivered a sewing machine and a cloth bundle to the defendant railway
company to be carried to a place where he expected to carry on his business and make
large profits on the occasion of a festival to be held at that place. Owing to the fault of
the defendant’s servants, there was delay in transit and the goods were not delivered
till after the conclusion of the festival, in a suit by G for damages for the loss of profits
and the expenses incidental to the journey to that place and back, the Court held that
he was not entitled to any damages since the same were too remote and could
not have been in the contemplation of the parties when they made the contract,
nor can they be said to have naturally arisen in the usual course of things from
the breach. All of them were due to the frustration of the special purpose and that was
not known to the defendants.
2. Special Damages
Special damages are those which arise an account of the special
circumstances affecting the plaintiff. These cannot be recovered
unless the special circumstances were brought to the knowledge of
the defendant so that these may reasonable be supposed to have
been in the contemplation of both parties at the time they made the
contract. In other words, these are the damages which the aggrieved party
may claim for any loss he has suffered due to special circumstances known to
both the parties at the time of contracting. Thus, special damages cannot
always be claimed as a matter of right by the aggrieved party.
CASE : In Fazal Ilahi vs. East India Railway Co. [(1921) ILR 43 All 623], F (the
plaintiff) delivered to the defendant railway company’s parcel office at Kanpur four
boxes of crackers for consignment to Allahabad. F needed the crackers at Allahabad
for a festival on 5th June: but he did not bring this to the notice of the company. The
company’s servants considering it unsafe to send crackers by parcel train, actually sent
them by goods train and they reached at Allahabad only after the conclusion of the
festival. The Court held that F was not entitled to claim the loss of profits which would
have been made as the special purpose was not known to the company.
Similar was the decision of the Gauhati High Court in Union of India v
Hari Mohan Ghosh on 12th September, 1988.
Examples : ( i ) [ Delay caused by carrier]. A delivers to B, a common carrier, a
machine to be conveyed, without delay, to A’s mill, informing B that his mill is stopped for
want of the machine. B, unreasonably delays the delivery of the machine, and in
consequence loses a profitable contract with the Government. A is entitled to receive from
160 Business Laws
B, by way of compensation, the average amount of profit which would have been made by
the working of the mill during the time that delivery of it was delayed, but not the loss
sustained through the loss of the Government contract. [Illustration (i) to Sec. 73].
(ii ) [ Where the seller has knowledge of the resale agreement, loss of profits is
recoverable]. A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees
a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of
iron at 80 rupees a ton, telling C that he does so for the purpose of performing his contact
with B. C fails to perform his contract with A, who cannot procure other iron, and B, in
consequence rescinds the contract. A must pay to A 20,000 rupees, being the profits
which A would have made by the performance of his contract with B. [Illustration (j) to Sec.
73].
3. Exemplary or vindictive Damages

These are the damages which are awarded to punish the guilty
party for the breach and not by way of compensation for the loss
suffered by the injured party. The main principle of the law of damages
for a breach of contract is to compensate the injured party for the loss
suffered and not to punish him. However, there are following two exceptions
to the rule:
(a) Breach of contract to marry:
(b) Unjustified dishonour of a customer’s cheque by a banker.
In case of unjustified dishonour of a cheque by a banker the rule of
measuring damages is, “the smaller the cheque, the greater the damage”.
While ascertaining the damages, the status of the customer and whether the
customer is a trader will also be taken into consideration.
The object of awarding exemplary damages is to deter a person from
committing a breach of such contracts.
4. Nominal Damages
Nominal damages are neither compensatory nor punitive. These are
awarded only for the name sake. These are awarded to establish the
right to decree when the aggrieved party has not suffered any loss as
a result of breach of contract. It consists of a very small sum of money,
say, a rupee. These are usually awarded if the contract price and the market
price are same at the time of breach of contract, and the aggrieved party has
thus suffered no loss. the award of nominal damages to the plaintiff is in the
discretion of the court.
CASE : In Charter vs. Sullivan [(1957) 1 All ER 809], A (the defendant) contracted
to buy a motor car from B (the plaintiff), but committed breach of the contract. In a suit
by B for damages, it was held that he was entitled only to nominal damages since the
demand for cars far exceeded the supply and B could sell the cars without any loss of
profit. The court held that B was entitled only to nominal damages and 40 shillings were
allowed.
Duty to Mitigate Damage

The Explanation to Section 73 provides that, “In estimating the loss or
damage arising from a breach of contract, the means which existed of

remedying the inconvenience caused by non-performance of the contract must
be taken into account.
Accordingly, the party complaining of the breach must act reasonably to
mitigate the loss not only in his own interest but also in the interest of the
party who has broken the contract and keep down the damages. However, he
is under no obligation to destroy his property or to injure himself or his
commercial reputation to keep down the damages. The principle of mitigation
of loss does not give any right to a party in breach of contract but it is a factor
to be taken into account in assessing damages.”
The party complaining of breach should do all that is in his power, to
mitigate or minimise his loss.
In case of a contract for sale or purchase of goods if the buyer refuses to
take delivery, the seller should resell the goods at the prevailing market price
and he may then recover from the defaulting buyer as damages the difference
between the price at which he sold the goods and the contract price. If the
seller does not resell the goods and his loss increases due to falling market,
he cannot recover the higher amount of loss; [Jamal vs. Moola Dawood
Sons and Co. [(1916) 43 IA 6 PC]. Similarly where the seller refuses to
deliver the goods, the buyer should buy the goods on the date of breach from
alternate source and cannot recover any further loss, if any, due to his own
neglect.
Similarly, if a guest who has booked rooms in a hotel cancels it later, the
hotelier should re-let the rooms, if possible, to another guest. Again, if an
employee is dismissed from his job, he should try to secure an alternative job,
and not merely sit down and do nothing.
CASE : In S. S. Shetty vs. Bharat Nidhi Ltd. [AIR 1958 SC 12], the general
manager of a factory was dismissed. The Court observed that where an employee is
dismissed, even through wrongfully, it is his duty to mitigate the loss by seeking other
employment. He can recover only nominal damages if he refuses a reasonable
offer of fresh employment. It was further observed that the defendant cannot ask the
plaintiff to take up just and every employment that may be available to him, e.g., the
employee is not expected to accept an employment in a lower status, nor will he be
expected to go to a different part of the country or different type of work. In this case
there was evidence to show that a job similar to that of a general manager of a
factory with somewhat similar status and pay scale as well as nature of work was
available at or about the time when the breach occurred. It was further held that if
the contract of employment is for a specific period, the servant would be entitled to
damages the amount of which would be measured subject to the rule of mitigation, by
the salary for the whole of the unexpired period of service. If the contract of
employment was not for a fixed period, then the principle of awarding damages for a
reasonable period comes into play.
Rules Regarding Damages Summarised

Damages means compensation in terms of money to the aggrieved party
for the loss or injury suffered by him.
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The rules regarding damages may now be summarised as follows :

(1) Damages are compensatory. The party who has suffered the loss
should be placed in the same position, as far as compensation in
money can do it, as if the party in breach had performed his contract
or fulfilled his duty. The primary aim or principle of law of damages
for a breach of contract is to place the plaintiff in the same position
he would have been if the contract had been fulfilled. When this is
accomplished, the primary aim of the law of damages has
been fulfilled [Murlidhar Chiranjilal v. Dwarkedas, AIR 1962 SC
366].
(2) General damages. The aggrieved party is entitled to receive such
damages as may be fairly and reasonable considered as arising
naturally, that is, according to the usual course of things, from the
breach [Hadley vs. Baxandale].
(3) Remote or Indirect Loss or Damage. The party in breach must
make compensation in respect of the direct consequences flowing
from the breach and none in respect to loss or damage indirectly or
remotely caused. In other words, compensation is not to be given for
any remote or indirect loss or damage sustained by reason of the
breach. [Illustration (n) Section 73, given earlier].
(4) Special damages. Special damages are not recoverable unless the
special circumstances are brought to the notice of the other party
before or at the time the contract is made. [Fazal Ilahi v. East
India Railway Co.].
(5) Measure of damages in a contract of sale of goods. The
measure of damages, normally, in the case of breach of contract for
sale of goods, is the difference between the contract price and market
price on the date of the breach [Jamal v. Moola Dawood Sons &
Co.].
(6) Duty to mitigate the damage. A party to contract who suffers loss
by reason of breach committed by the other party, must take
reasonable steps to mitigate the loss. But the plaintiff’s duty to
minimise damage is limited to doing what is reasonable having
regard to all the facts of the case, and the burden of showing that he
has failed in his duty, is on the defendant.
If, in trying to mitigate the loss, he properly incurs any expense, he
may claim the same as part of damages; but he cannot charge the
defendant with any unreasonable expenses which he may choose to
incur [Jamal vs. Moola Dawood Sons & Co.].
(7) Difficulty in assessing damages. The fact that damages are
difficult to assess, does not prevent the injured party from recovering
them.
CASE : In Chaplin vs. Hicks [(1910) 2 KB 486], the readers of a certain newspaper
had to select 50 ladies for a beauty competition organised by A (the defendant). Out of
the 50 selected, A had to choose 12 for a theatrical job. B (the plaintiff) was the one
amongst 50 selected by the readers. She was not given reasonable opportunity to
appear at the final section through A’s negligence. Although the value of a change of
getting selected in a competition where there are a number of competitors is difficult to
assess, the breach of contract by A resulted in a loss of the chance to B. Accordingly,
in a suit by her against A, she was awarded £ 100 damages.
(8) Exemplary damages. Vindictive or exemplary damages, i.e.,

damages by way of punishment cannot be awarded for breach of
contract, except in cases of breach of promise of marriage and
unjustified dishonour of a cheque by the banker.
(9) Damage should be actually suffered. Section 73 “does not give
any cause of action unless and until the damage is actually suffered”.
This was the observation made by the Delhi High Court in Union of
India vs. Tribhuvan Das Lalji Patel [AIR 1971 Del 20]. In the
instant case A, a contractor, agreed to supply sleepers to the
Railways. One of the condition of the contract was that if he failed to
supply sleepers, he will pay damages to the Railways. A could not
supply the sleepers. But the Railways did not suffer any loss due to
A’s failure to supply the sleepers. The Railway filed a suit for
claiming damages. But their suit was dismissed.
(10) Damages in case of Quasi-contracts. The third paragraph to
Section 73 provides that the same principles will apply in case of
breach of a quasi contractual obligation as in case of breach of
contract.
(11) Damages for anguish and vexation. In Ghaziabad
Development Authority v. Union of India [AIR 2000 SC 2003],
the Supreme Court held that damages for anguish and vexation
caused by breach of contract cannot be awarded in ordinary
commercial contract. Earlier, in Lucknow Development
Authority v. M.K. Gupta [AIR 1994 SC 787], a case decided under
Administrative Law, the Supreme Court awarded damages for
mental suffering suffered by the complainant because of harassment,
mental agony and oppression and ordered that compensation be
recovered from the concerned officials.
In Hobbs v. London and South Western Railway [(1875) LR 10
QB 111], damages were awarded for mental suffering arising from
physical discomfort or inconvenience, subject to the rules of
remoteness. In this case the members of a family were transported to
a wrong place at night where they could get neither conveyance nor
hotel. They have to walk several miles to reach home in a wet night.
(12) Liquidated damages and penalty. This has been explained below
under separate heading.
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Liquidated Damages and Penalty

The parties to a contract, may, at the time of contracting, fix the amount
of damages payable to the aggrieved party, in the event of breach by anyone
of them. The sum so stipulated or agreed upon, may either be ‘liquidated
damages’ or ‘penalty’.
‘Liquidated damages’ means a sum fixed at the time of contracting, which
is a fair and genuine pre-estimate of the probable loss that is likely to result
from the breach of the contract. A sum less than the amount of probable
damage is also regarded as liquidated damages.
CASE : In Dunlop Pneurnatic Tyre Co. Ltd. vs. New Garage and Motor Co Ltd.
[(1915) AC 79] the appellants, through an agent, entered into a contract with N, the
respondents, under which D supplied to N with motor tyres, covers and tubes. The
contract prohibited inter alia the sale to any private customer or co-operative society at
prices less than the current price list issued by the D, and clause 5 of the contract laid
down that, “We agree to pay to the Dunlop Pneumatic Tyre Co. Ltd., the sum of £ 5 for
each and every tyre, cover or tube sold or offered in breach of this agreement, as and
by way of liquidated damages and not as a penalty.” N, the dealer, committed breach.
The House of Lords held that the amount stipulated was only liquidated damages.
‘Penalty’ means a sum fixed at the time of entering into a contract which is
extravagam and unconscionable in amount in comparison to the greatest loss
that may result from the breach of contract. Thus, the essence of penalty is a
payment of money stipulated as in terrorem of the offending party; the
essence of liquidated damages is genuine pre-estimate of damage.
If a single lump sum is payable on the occurrence of one or all of several
events, some of which may occasion serious and other trifling damage, the
sum fixed is penalty.
CASE : In Ford Motor Co. Ltd. vs. Armstrong [(1915) 31 TLR 267 (CA)], A (The
defendant-respondent), a car dealer, agreed to sell F’s (the plaintiff-appellant’s) cars
and to pay £ 250 if he sold any car or car parts below the list prices, such sum being
the agreed damages which the manufacture will sustain. A, the dealer, sold below the
list price, and F sued for £ 250. The Court of Appeal held that the amount was a
penalty and as such irrecoverable.
Legal Position in England. The distinction between liquidated damages

and penalty is of fundamental importance under the English law, In English
law, courts allow the full amount of liquidated damages without any regard to
the actual loss suffered. If the stipulation is a penalty, only a reasonable
compensation is allowed.
Legal Position in India – Section 74 of Indian Contract Act, 1872

The law relating to the award of damages in India when the parties
themselves have stipulated the amount of damages in the contract, is
contained in Section 74 of the Act. This section lays down that, “When a
contract has been broken, if a sum is named in the contract as the amount to
be paid in case of such breach, or if the contract contains any other stipulation
by way of penalty, the party complaining of the breach is entitled, whether or
not actual damage or loss is proved to have been caused thereby, to receive
from the party who has broken the contract reasonable compensation not
exceeding the amount so named or, as the case may be the penalty
stipulated for.”
The Indian Law has done away with the distinction between the
liquidated damages and penalty. In case of breach of contract, the
aggrieved party can only get reasonable compensation for the actual
loss sustained, not exceeding the amount named in the contract.
Thus, the named sum, regardless whether it is a penalty or
liquidated damages, sets only the maximum limit of liability in case
of breach of contract. It has been held by the Supreme Court that
even if there is a stipulation by way of liquidated damages, a party
complaining of breach of contract can recover only reasonable
compensation for the injury sustained by him, the stipulated amount
being nearly outside limit [Union of India v s. Raman Iron
Foundry, AIR 1974 SC 1265].
Section 74 of the Act also makes it clear that although the amount of
damages cannot exceed the amount specified in the contract, the court has
the discretion in the matter of reducing the amount of damages and award
reasonable compensation.
Example : A contracts with B to pay 1,000 if he fails to pay 500 on a given day. A
R R
fails to pay 500 on that day. B is entitled to recover from A such compensation not
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exceeding 1,000 as the court considers reasonable. [Illustration (a) to Sec. 74].
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Exception. Section 74 provides for one exception to the above rule.

According to S. 74, the whole sum shall become due in the following
situations :
(a) When a person enters into any bail bond, recognizance or other
instrument of such nature.
(b) When a person gives any bond for the performance of any public duty
under the provisions of any law or under the orders of the central
government or any State Government.
Example : A gives recognizance binding him in a penalty of 500 to appear in Court
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on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.
[Illustration (c) to Sec. 74].
Stipulations regarding payment of interest. The largest number of

cases decided under Section 74 related to stipulation providing for interest.
The first Explanation to Section 74 provides that : “A stipulation for increased
interest from the date of default may be stipulation by way of penalty”.
Example : A gives B a bond for repayment of 1,000 with interest at 12% per annum
R
at the end of six months, with a stipulation that in case of default interest will be payable at
166 Business Laws
the rate of 75% per annum from the date of default. This is a stipulation by way of penalty
and B is only entitled to recover from A such compensation as the court considers
reasonable. [Illustration (d) to Sec. 73].
The stipulations providing for interest may be divided into the following
categories:
(1) Stipulation for enhanced rate of interest. In the case of a stipulation

providing for payment of interest at an increased rate from the
date of the contract of loan on the failure of the debtor to pay on
the due date the interest or the principal or an instalment of the
principal it has been held that stipulation always amounts to
penalty. In such a case the court an per Section 74 will award only
reasonable compensation to the creditor.
Where a stipulation provides for payment of interest at a higher rate
from the date of default, the provision has not generally been
regarded as penalty. But depending on the facts and circumstances
of the case such stipulation may be a penalty. The enhanced rate will
be held to be penal if it is unconscionable.
(2) Stipulation for compound interest. A stipulation that compound
interest would be payable in case of default at the same rate at
which simple interest was payable, is not in the nature of penalty.
But a stipulation that compound rate at a rate higher than the
simple interest would be in the nature of penalty. [Rani Sunder
Koer v. Rai Sham Krishan, (1907) 34 Cal 150 : 34 IA 9 (PC)]
Distinction between Liquidated Damages and Penalty

The following are the points of distinction between liquidated damages
and penalty :
Basis Liquidated Damages Penalty

1. Meaning Liquidated damages means a Penalty means a sum fixed at
sum fixed at the time of the time of contracting which
contracting, which is a fair and is much higher than the
genuine pre-estimate of the probable loss that may result
probable loss that is likely to from the breach of contract.
result from the breach of the The essence of penalty is
contract. payment of money “in
terrorem.”
2. Purpose The purpose of liquidated The purpose of penalty is to
damages is to compensate the penalise the party who makes
aggrieved party for the loss a branch of contract. Thus, it
arising from the breach of discourages the parties from
contract. breaching it.
3. Basis of Amount of liquidated damages is Amount of penalty is not based
assessment based on probable loss. on probable loss.
Earnest Money and Security Deposit

Earnest Money. The Supreme Court in Maula Bux vs. Union of India
[AIR 1970 SC 1955], cited the meaning of earnest money as given in Earl
Jowit, The Dictionary of English Law. As per this dictionary : “Giving an
earnest or earnest money is a mode of signifying assent to a contract of sale or
the like by giving to the vendor a nominal sum (e.g., a shilling) as a token that
the parties are in earnest, have made up their minds.” Thus, earnest money is
money paid as an instalment or advance payment to confirm a contract.
Usually around 10% of the contract price is fixed as earnest money and is a
part of the purchase price when the transaction goes forward. It is usually
forfeited when the transaction falls through due the fault or failure of the
buyer. It is given at the time when the contract is concluded.
Security deposit. Security deposit is given for due performance of a
contract to deliver goods etc. It is not part of the purchase price. It is not
adjusted towards the payment of price. Security deposit cannot be forfeited.
In the Maula Bux case the Supreme Court held that forfeiture of
reasonable amount is not penalty. But if forfeiture is of the nature of penalty,
Section 74 applies. The Court further held that if no loss is proved to have
been suffered, the provisions of the Act in Sections 73 and 74 are not
attracted.
CASE : In Maula Bux v s . Union of India [AIR 1970 SC 1955], the plaintiff
contracted to supply to the Military Headquarters, U.P. Area certain goods for one year
and deposited 18,500 for due performance of the contract. The Supreme Court held
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that the deposit was not in the nature of earnest money. The amount in question was a
security deposit as it was not to be appropriated towards the payment of the price.
SUIT UPON QUANTUM MERUIT

Quantum meruit means ‘as much as is merited’ or ‘as much as is earned’
or “in proportion to the work done”. An action based on the doctrine of
quantum meruit usually arises where a person claims reasonable
remuneration of the part of the work done in pursuance of a contract which
has been discharged by the default of the other party. It also arises where a
person has rendered services in pursuance of an agreement which is
discovered to be void or where the other person enjoys the benefit of a non-
gratuitous act.
Cases where doctrine of quantum meruit is applicable.
The doctrine of quantum meruit is applicable in following cases :
1. Work done in pursuance of a contract, which has been
discharged by the default of the defendant. If a person has done
work for another in pursuance of a contract which has since been
discharged by the latter’s wrongful breach, he may obtain reasonable
compensation for the work done, by suing on quantum meruit. Where
168 Business Laws
there is wrongful breach of contract the aggrieved party can claim

reasonable remuneration based upon quantum meruit, whether the
contract is divisible or not.
Example : A enters into a contract with B, a contractor, under which B is to build a
house for A. When B had completed 75% of the work, A prevents B from working any
more. B is entitled to get reasonable compensation for the work done under the doctrine of
quantum meruit. B is also entitled to damages for he breach of contract.
CASE : In Plinche vs. Colburm [(1831) 5 C & P 58], A (the plaintiff) was engaged
by B, the defendants, who were the publishers of a work called ‘The Juvenile Library’,
to write for the work an article to illustrate the history of armour and costume from the
earliest times. He collected material and had prepared a considerable portion of
manuscript. After three volumes had been published, ‘The Juvenile Library’ was
discontinued. A claimed a sum of £ 50 for the part which he had prepared, and the
trouble he had taken. It was held that he was entitled to it based on quantum meruit.
2. Where services are rendered in pursuance of an agreement

which is discovered to be void or under a contract which
becomes void. According to section 65 of the Act, if a person has
done work for another on the assumption that a contract exists
between them, but in fact, the contract is a nullity, he may obtain
reasonable remuneration for the work by suing on a quantum
m e r u i t . Similarly, a person is entitled to get reasonable
remuneration for the work done if the contract becomes void.
Example : A, the owner of a house, enters into a contract with B for white-washing
A’s house. B works for a day and promises to come next morning. However, the same
night house collapses due to an earthquake. B is entitled to get reasonable payment for
the work done.
CASE : In Craven-Ellis vs. Canons Ltd. [(1936) 2 KB 403], A (the plaintiff) was
nominated by the signatories to the Memorandum as one of the directors of the
company. Subsequently, he became the Managing Director, by virtue of an agreement
between himself and the other directors on behalf of the company. None of the
directors, including A, had taken up the qualification shares. Thus, A was appointed as
a Managing Director by other directors when they were not qualified to appoint him for
the post. Yet, he continued to act as the Managing Director of the company for the
agreed remuneration and, as an alternative, sought to recover for his services on a
quantum meruit. The Court of Appeal rejected his claim for the agreed remuneration as
the contract of appointment was void, but allowed him to recover reasonable
remuneration on the basis of quantum meruit.
3. Where a person enjoys the benefit of a non-gratuitous act.

Section 70 provides that “Where a person lawfully does anything for
another person, or delivers anything to him, not intending to do so
gratuitously, and such other person enjoys the benefit thereof, the
latter is bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.”
Examples : ( i) A, a tradesman, leaves goods at B’s house by mistake. B treats the
goods as his own. He is bound to pay for them. [Illustration (a) to Sec. 70].
(ii ) A saves B’s property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously. [Illustration (b) to Sec. 70].
4. Where a person is guilty of breach of a divisible contract and
the other party enjoys the benefit of part performance. A
person who is guilty of breach may also sue on the basis of quantum
meruit if both the following conditions are satisfied :
(a) the contract is divisible, and
(b) the other party has enjoyed the benefit of the part performance
of the contract although he had the option of declining it.
In other words, if the contract is divisible, the defaulting party is entitled
to sue on a quantum meruit provided the other party has enjoyed the benefit
of what has already been done. In other words, it should be possible for the
plaintiff to raise the inference of a new contract and the circumstances should
be such as to give an option to the defendant to take or not to take the benefit
of the work done.
Example. A agrees to supply 500 bales of cotton at a certain rate per bale. He
supplies 200 bales which are accepted by B. B must pay for the 200 bales and he is
entitled to sue A for breach of contract.
Cases not covered by quantum meruit

1. Where a contract requires complete performance. Where there
is a contract to do work for a lump sum payable only after the
completion of the work, and the contract is not divisible, no action
can be brought either on the contract or on quantum meruit.
CASES : (i ) In Cutter vs. Powell [(1795) 6 GTR 320], A, a sailor was employed by
B on a lump sum on a voyage from Jamaica to Liverpool. B (the defendant-respondent)
agreed to pay 30 guineas, ‘provided he proceeds, continues and does his duty as
second mate.’ The mate died when the vessel was 19 days short of reaching Liverpool.
However, by that time, more than two-thirds of the voyage was complete. In an action
by A’s widow to recover a proportion of the agreed amount, it was held that by the
terms of the contract the deceased was obliged to perform a given duty before he could
demand payment. Thus, she could not recover on quantum meruit.
(ii ) In Appleby vs. Myers [(1867) 2 CP 651], A (the plaintiff) agreed to erect
machinery on B’s (the defendant’s) premises for a fixed sum of money. When the work
was nearly complete, the premises got destroyed by an accidental fire without the fault
of either party. In a suit by A, it was held that nothing could be recovered for the work
done.
2. A person who is himself guilty of breach cannot sue if the

contract is not divisible.
CASE : In Sumpter vs. Hedges [(1898) 1 QB 673], A (the plaintiff) had agreed to
erect upon B’s (the defendant’s) land, two houses and stables for £ 565. He did part of
the work to the value of about £ 333 and then abandoned the contract. B himself
completed the buildings. In a suit by A for recovering the value of materials and labour
expended, it was held that A could not recover anything on the original contract
However, he was held entitled to recover the value of materials left on the site and
used by B for completing the unfinished work.
170 Business Laws
Substantial performance. Even if the contract is not divisible, where

the work is substantially completed, but certain small defects are manifest or
differences exist from what was contractually agreed, the full amount due
may be claimed, after making allowances for the defects and differences. The
rule in this case is “so long as there is substantial performance, the contractor
is entitled to the stipulated price, subject only to a cross-action or counter-
claim for the omissions or defects in execution.”
If this were not the case and if exact performance in the literal sense were
always required, a tradesman who had contracted to decorate a house
according to certain specifications for a lump sum might find himself in an
intolerable position. If, for instance, he had put two coats of paint in one room
instead of three as agreed, the owner would be entitled to take the benefit of
all that had been done throughout the house without paying one penny for
the work.
Example : A contracts to repair B’s house in a certain manner, and receives payment
in advance. A repairs the house, but not according to the contract. B is entitled to recover
from A the cost of making the repairs conform to the contract [Illustration (f) to Sec. 73].
RESCISSION OF CONTRACT
Rescission means repudiation of contract. When a party makes a
breach of contract the other party may file a suit to treat the contract as
repudiated and refuse further performance. As discussed in Chapter 2, if the
contract is voidable, the aggrieved party has the option to rescind the
contract.
Cases where court may grant rescission

Section 27 (1) of the Specific Relief Act 1963 provides that any person
interested in a contract may sue to have it rescinded and such rescission may
be adjudged by the court in any of the following cases :
1. Where the contract is voidable or terminable by the plaintiff.
Terminable contract is one in which there is a condition that if a
party fails to fulfil the obligation within a fixed period, the other
party may avoid the contract. This covers the cases referred to in
Sections 19, 19A, 39, 53 and 55 of the Indian Contract Act, 1872.
This also includes cases where a power to rescind is reserved by the
contract to one or both of the contracting parties.
Example : A sells a field to B. There is a right of way over the field of which A has
direct personal knowledge, but which he conceals from B. B is entitled to have the contract
rescinded.
2. Where the contract is unlawful for causes not apparent on its face
and the defendant is more to blame than the plaintiff.
Example : A, an attorney, induces his client, B, a Hindu widow, to transfer property to
him for the purpose of defrauding B’s creditors. Here the parties are not equally at fault,
and therefore, B is entitled to have the instrument of transfer rescinded.
Cases where the court may refuse to grant rescission

Section 27(2) of the Specific Relief Act, 1963 provides that the court may
refuse to rescind the contract in any of the following cases :
(a) Rectification. Where the plaintiff has expressly or impliedly ratified
the contract;
(b) Parties cannot be substantially restored to original position.
Where owing to change of circumstances which has taken place since the
making of the contract (not being due to any act of the defendant himself), the
parties cannot be substantially restored to the position in which they stood
when the contract was made;
(c) Third party acquiring rights in good faith. Where third parties
have, during the subsistence of the contract, acquired rights in good faith
without notice and for value; or
(d) Contract not severable. Where only a part of the contract is sought
to be rescinded and such part is not severable from the rest of the contract.
Consequences of rescission of contract

1. Aggrieved party is discharged. When rescission is granted, the
aggrieved party is discharged from his obligation to perform the contract.
2. Party rightfully rescinding contract entitled to compensation.
Section 75 of the Contract Act provides that a person who rightly rescinds a
contract is entitle to compensation for any damage which he has sustained
through the non-fulfilment of the contract.
Example : A, a singer, contracts with B, the manager of a theatre, to sing at his
theatre for two nights in every week during the next two months, and B engages to pay her
100 rupees for each night’s performance. On the sixth night A willfully absents herself from
the theatre, and B, in consequence, rescinds the contract, B is entitled to claim
compensation for the damage which he has sustained through the non-fulfilment of the
contract. [Illustration to Sec. 75],
3. Court may require parties rescinding to do equity. Section 30 of

the Specific Relief Act, 1963 provides that on adjudging the rescission of a
contract, the court may require the party to whom such relief is granted to
restore, so far as may be, any benefit which he may have received from the
other party and to make any compensation to him which justice may require.
Similarly, S. 64 of the Indian Contract Act requires the aggrieved party to
restore the benefits to the other party from whom he has received.
Mode of communication or revocating rescission of voidable
contract. Section 66 of the Contract Act provides that the rescission of a
voidable contract may communicated or revoked in the same manner, and
subject to the rules, as apply to the communication or revocation of a
proposal.
172 Business Laws
SUIT FOR SPECIFIC PERFORMANCE

Specific performance means the actual carrying out the terms of
the contract as agreed between the parties, by a party who has
broken the contract. It is an order of the court directing the
defendant to actually perform the promise which he has made. A suit
for specific performance may be filed either in place of or in addition to a suit
for damages. This is a discretionary remedy under the Specific Relief Act,
1963. It means that the court may decree or may not decree for specific
performance of a contract. But the court cannot use this power in an arbitrary
manner. The court orders for specific performance when it is just and
equitable to do so.
Cases where specific performance may be enforced. Section 10 of
the Specific Relief Act, 1963, as amended by the Specific Relief (Amendment)
Act, 2018, provides that the specific performance of any contract shall be
enforced by the court, subject to the provisions contained in sub-section (2) of
section 11, section 14 and section 16 of the Specific Relief Act, 1963.
Contracts which cannot be specifically enforced

I. Sub-section (2) of section 11 of the Specific Relief Act, 1963 provides
that a contract made by a trustee in excess of his powers or in breach of trust
cannot be specifically enforced.
II. Section 14 of the Specific Relief Act, 1963, as amended by the Specific
Relief (Amendment) Act, 2018, lays down that the following contracts cannot
be specifically enforced :
(a) Where a party to the contract has obtained substituted performance
of the contract.
(b) A contract the performance of which involves the performance of a
continuous duty which the court cannot supervise. For example, the
difficulty of supervision is a reason for not enforcing building
contracts or keep buildings in repairs. Similarly, the author of an
article for a newspaper cannot get specific performance of his contract
as that will require supervision by the court of editing the article.
(c) A contract which is so dependent on the personal qualifications of the
parties that the court cannot enforce specific performance of its
material terms.
Example : A, an author, contracts with B, a publisher, to complete a literary work. B
cannot enforce specific performance of these contracts.
(d) A contract which is in its nature determinable.

Example : A and B contract to become partners in a certain business, the contract
not specifying the duration of the proposed partnership. This contract cannot be
specifically enforced, for, if it were so performed, either A or B might at once dissolve the
partnership.
Personal bars to relief. Section 16 of the Specific Relief Act, 1963

provides that specific performance of a contract cannot be enforced in favour
of a person :
(a) Who has obtained substituted performance of contract; or
(b) Who has become incapable of performing, or violates any essential
term of, the contract that on his part remains to be performed, or acts
in fraud of the contract;
(c) Who fails to prove that he has performed or has always been ready
and willing to perform the essential terms of the contract which are to
be performed by him, other than the terms of performance of which
he has been prevented or waived by the defendant.
SUIT FOR INJUNCTION

Injunction is an order of the court directing a party to refrain
from doing something. In other words, injunction is an order of the
court directing a defaulter party to actually carry out the negative
terms of the contract. Thus, if the party does something which he has
promised not to do, the court may, by issuing an injunction restrain him from
doing that.
Preventive relief how granted. According to Section 36 of the Specific
Relief Act, 1963 preventive relief is granted at the discretions of the court by
injunction, temporary or perpetual. Thus the Act places the grant of an
injunction in the discretions of the court. But the discretion of the court is not
arbitrary but sound and reasonable, guided by judicial principles and capable
of correction by a higher court.
Temporary and perpetual injunctions. Injunction may be temporary
or perpetual. According to Section 37 of the Specific Relief Act, 1963,
temporary injunctions are such as are to continue until a specified time, or
until a further order of the court, and they may be granted at any stage of a
suit, and are regulated by the Code of Civil Procedure, 1908. On the other
hand, a perpetual injunction can only be granted by the decree made at
the hearing and upon the merits of the suit.
In order to get the remedy of injunction, the plaintiff must make out a
strong prima facie case as to his right.
CASE : In Lumley v. Wagner [(1852) 1 DMG 604] A, an actor, agreed to act at B’s
theatre for a certain period and she further agreed that she will not act at any other
theatre during the prescribed period. Before the expiry of the specified period. A
contracted with C to act at his theatre and refused to act at B’s theatre. It was held that
A could not be compelled to act at B’s theatre, but she could be restrained from acting
at C’s theatre.
174 Business Laws
REVIEW QUESTIONS
1. Discuss in brief the various types of remedies available to aggrieved party for
breach of contract as per Indian Contract Act, 1872.
2. Explain the principles for assessment of damages in case of breach of
contract.
3. When are ‘special damages’ awardable for a breach of contract? Explain with
the help of decides cases. [B.Com. and B.Com. (H), D.U.]
4. Comment on the following statements:
(a) “The plaintiff cannot claim damages which are caused due to his failure
to perform the ‘duty to mitigate’ the damage.”
(b) “Damages are compensatory, not penal.”
(c) “If a contract is broken, the law will endeavour, so far as money can do it,
to place the aggrieved party in the same position as if the contract had
been performed.”
(d) “Where a party to the contract refuses altogether to perform, or disabled
himself from performing his part of it, the other party has the right to
rescind it.”
(e) “Quantum meruit is restitutory but damages are compensatory.”
(f) “Compensation is not to be given for any remote and indirect loss or
damage sustained by reason of the breach.”
5. State the rules governing the assessment of damages for breach of contract in
the light of the decision in Hadley vs. Baxendale.
6. Explain the four main kinds of damages. [B.Com. and B.Com. (H), D.U.]
7. Distinguish between the following:
(a) Ordinary damages and Special damages
(b) Liquidated damages and Penalty
(c) Earnest money and Security deposit
(d) Specific performance and Injunction
8. Write a short note on quantum meruit. [B.Com. (H), D.U.]
9. Special damages can be claimed as a matter right by the aggrieved part.
Discuss. [B.Com. (Hons.), D.U.]
10. Ordinary damages can be claimed as a right by the aggrieved party.
11. Explain with reasons whether each of the following statement is true or false:
(a) The aggrieved party is entitled to monetary compensation no matter
whether he has suffered some loss or not.
(b) The claim for quantum meruit can be made only when the original
contract has been discharged.
(c) The aggrieved party is not responsible to mitigate the loss caused by the
breach.
(d) Specific performance means carrying out the actual obligations of the
conduct.
(e) Injunction is an order of the court restraining a person from doing
something which he promised not to do.
[Hints: True: (b), (d), (e); False: (a), (c).]
12. The law as to damages for breach of contract as laid down in S. 73 of the
Indian Contract is based on the leading English case of:
(a) Hadley v. Baxendale (b) Powel v. Lee
(c) Boulton v. Jones (d) Taylor v. Caldwell
[Hint: (a)]
2. An amount of compensation stipulated in the contract as genuine pre-
estimate of the probable loss in case of breach, is known as:
(a) ordinary damages (b) special damages
(c) nominal damages (d) liquidated damages
[Hint: (d)]
PRACTICAL PROBLEMS
1. The plaintiff was the owner of mill at Mumbai. Its crackshaft broke down and
mill stopped working as the mill had only one shaft. The shaft had to be sent
to Jamnagar for repairs. The plaintiff booked the shaft for transportation
through a common carrier. The carrier negligently delayed the transportation
of the shaft. The plaintiff files a suit for damages for breach of contract,
claiming loss of profits owing to the mill remaining closed for a longer period
due to delay in transportation. Decide.
[Hint : The common carrier is not liable for loss of profits suffered by the
plaintiff as the loss of profits is a special damage suffered by the party.
Special damages can be claimed only when they were in the contemplation of
the parties at the time of entering into the contract which is not the case here
(Hadley vs. Baxendale).]
2. A, in Delhi, entrusts 100 packages of crackers with the Railway to be carried
to his branch at Allahabad and instructs the Railway authorities to deliver
the same by the first week of November, 2001. Due to negligence of the
Railways, the packages are delivered by the third week of November after
Diwali season is over. A sues the Railways for the loss of profit which he
might have earned by the sale of crackers during Diwali season. Decide
giving reasons.
[Hint : A will not succeed since the special circumstances have not been made
known to the defendant (Madras Railway Co. vs. Govinda Rau).]
3. R contracts to sell 300 shares to S for 30,000 on 1.9.2001, the shares to be
R
delivered on 18.9.2001 and the price to be paid on the delivery of the shares.
R tenders the performance of the contract on 18.9.2001. S refuses to take the
delivery of the shares as the market price of the shares fell by 10,000 by
R
that day due to terrorist attact on World Trade Centre in New York on
11.9.2001 Subsequently R sells the shares on 5.12.2001 for 45,000. R sues S
R
for damages for breach of contract. Discuss whether R is entitled to any

amount of damages.
[Hint : R is entitled to 10,000 as damages. Damages are calculated as at the
R
date of breach of contract (Jamal vs. Mulla Dawood and Co.).]

4. A contracts to sell and deliver to B, on 1st October, 20X1, one hundred bales
of cotton which P intended to use for manufacturing school uniforms for
which there is no demand except in the months of November and December.
The cloth is not delivered till 15th December, when it is too late to be used
that year for making uniforms. B sues A for damages for the expenses
incurred by him making preparation for the manufacture and for profits
176 Business Laws
which he expected to obtain by making uniforms. A is willing to pay by way of

compensation only the difference between the contract price of the cloth and
its market value on 15th December. Is B entitled for the expected profits also.
[Hint : B would be entitled to expected profits only if use of bales of cotton for
manufacture of school uniforms was in the knowledge of both the parties at
the time of formation of the contract. But the facts of the case give no
indication about A’s knowledge regarding the use of bales of cotton for
manufacture of uniforms. Therefore, he is not liable for loss of profits.]
5. A contract to pay a sum of money to B on a day specified. A does not pay the
money on that day, B, in consequence of not receiving the money on the day is
unable to pay his debts and is totally ruined. B claims heavy damages. Advise
A.
[Hint : B cannot file a suit to recover the amount of debt alongwith interest;
Illustration (n) to Sec. 73.]
6. A, a mate was engaged by B on the term that he would be paid a certain
amount as lump sum for a complete voyage. A died before the completion of
the voyage. Can his legal representatives claim remuneration for the work
done by the mate.
[Hint : No. The doctrine of quantum meruit is not applicable in this case
(Cutter vs. Powell).]
7. A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur,
for sale at that place, starting on specified day. The boat, owing to some
avoidable cause, does not start at the time appointed, whereby the arrival of
the cargo at Mirzapur is delayed beyond the time when it would have arrived
if the boat had sailed according to the contract. After that date and before the
arrival of the cargo, the price of jute falls. What is the measure of
compensation payable by A?
[Hint : The measure of the compensation payable to B by A is the difference
between the price which he could have obtained for the cargo at Mirzapur at
the time when it would have arrived if the boat had sailed according to the
contract, and its market price at the time when it actually arrived;
Illustration (e) to Sec. 73.]
8. A contracts to repair B’s house in a certain manner, and receives payment in
advance. A repairs the house, but not according to the contract. What is the
measure of compensation payable by A to B.
[Hint : B is entitled to recover from A the cost of making the repairs conform
to the contract; Illustration (f) to Sec. 73.]
9. A contracts to let his ship to B for a year, from the first of January, for a
certain price. Freights rise, and on the first of January, the hire obtainable
for the ship is higher than the contract price. A breaks his promise. What is
the measure of compensation payable by A to B.
[Hint : He must pay to B, by way of compensation, a sum equal to the
difference between the contract price and the price for which B could hire a
similar ship for a year on and from the first January; Illustration (g) to
Sec. 73.]
Contracts of Indemnity
13 and Guarantee
LEARNING OBJECTIVES
➥ Contract of Indemnity and Contract Guarantee
➥ Nature of Surety‘s Liability
➥ Rights of Surety
➥ Discharge of Surety
Contracts of indemnity and guarantee are special kinds of contracts. They

are species of contract and, therefore, the same general principles relating to
formation and discharge of contracts in general are applicable to these also.
However, there are some special features with regard to them, besides the
general principles.
CONTRACT OF INDEMNITY
Definition (S. 124)

Section 124 of the Act defines a contract of indemnity thus : “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”.
A contract of indemnity is an example of contingent contract. It is entered
into to protect the promisee from loss caused to him by the conduct of the
promisor or by the conduct of any other person. A contract of indemnity has
two parties, viz., (i) the promisor or the indemnifier and (ii) the promisee or
the indemnified or indemnity-holder. Indemnifier is the person who
promises to make good the loss, and indemnity-holder is the person whose
loss is to be made good.
Examples : (i) A contract to indemnify B against the consequences of any
proceedings which C may take against B in respect of a certain sum of 200 rupees. This is
a contract of indemnity. [Illustration to S. 124].
(ii ) A after having lost the share certificate of a certain company, applies to the
company for issue of a duplicate share certificate. The company asks A to furnish an
indemnity bond in its favour to save if from loss that may be caused to it if any claim is
made by any person on the original certificate. Accordingly, A executes the indemnity-
bond. Indemnity-bond is a contract between A and the company where A is the
indemnifier and the company is the indemnity-holder.
178 Business Laws
Scope of Contract of Indemnity

The scope of contracts of indemnity is much wider than the definition of
indemnity given in S. 124. It is explained below :
Firstly, the definition indicates that a contract of indemnity is restricted
to cases where loss is caused by the conduct of the promisor himself or by the
conduct of any other person. This obviously means that the loss should be
caused by human agency, whether he is the promisor or a third party.
Accordingly, if the loss were to occur not because of human conduct, but
because of accidental fire or sea perils, the same is not supposed to be covered
by this section. But these contracts of general insurance are contracts of
indemnity. Therefore, courts of law in India have followed the English
law relating to indemnity which is wider in scope. Thus, the
contracts of indemnity are not based on S. 124 alone.
Secondly, it is argued that this section covers only an express contract of
indemnity, In other words S. 124 does not cover an implied promise of
indemnity. There are, in fact, cases of implied indemnity apart from the
express indemnity.
CASE : In the leading case Adamson vs. Jarvis [(1827) 4 Bing 66], A, an
auctioneer (the plaintiff), sold cattle under instructions from P (the defendant). The
cattle did not belong to P. The true owner held the auctioneer liable, and the auctioneer
in turn, sued P for the loss he suffered by acting as the agent to P. The Court held that
A was entitled to assume that he would be indemnified by P.
Again, when shares are sold, there is an implied promise by the

transferor that he would indemnify the transferee against future calls. Even
this type of liability to indemnify implied by law is outside the scope of this
section.
English law. It is necessary, in this context, to make a passing reference
to the English law relating to indemnity. A contract of indemnity is defined in
the English law as “a promise to save another harmless from loss caused as a
result of a transaction entered into at the instance of the promisor.”
Comparison of the two definitions. A comparison of this definition
with that given in Section 124 reveals that the English definition is wider in
scope, and it makes room for the inclusion of a promise to indemnify the
promisee against any loss which may be caused by natural factors besides
that caused by the conduct of the promisor or of third persons. Further, the
promise to save may either be express or implied, unlike Section 124 which
refers only to an express promise.
Courts in India follow the English law relating to indemnity.
Although, the definition of indemnity, according to the Indian law is
restrictive in scope when compared to the English definition, courts of law in
India have followed the English law relating to indemnity [Gajanan
Moreshwar vs. Moreshawar Madan, AIR 1942 Bom 302].
Contracts of Indemnity and Guarantee 179
Essentials of a Contract of Indemnity

The following are the essentials of a contract of indemnity:
1. Two parties. There must be two parties — the indemnifier and the
indemnified.
2. Promise to save the other from loss. There must be promise to
save the other from loss. The promise may be express or implied. See
the case of Adamson v. Jarvis given above.
3. Cause of loss. The loss may be caused due to the conduct of the
promisor himself or any other person. When a person undertakes to
save the other from loss caused due to the conduct of a third person,
he must do so without any request from such third person. If he
promises at the request of the third person, it would be a case of
contract of guarantee. Further the loss may be caused due to non-
human agency such as fire or sea perils.
4. Presence of all essentials of a valid contract. All the essentials of
a contract must be present in a contract of indemnity.
Rights of the Indemnity-holder When Sued (S. 125)
According to S. 125 of the Act, the indemnity-holder, when sued, has the
following rights :
1. Right to recover all damages. Indemnity-holder is entitled to
recover all damages which he might have to pay to a third party in a
suit by him in respect of any matter to which indemnity applies.
2. Right to recover cost of suit. Indemnity-holder is entitled to
recover cost of suit which he might have to pay to such a third party.
However, in bringing or defending the suit, he should not have
contravened the orders of the promisor, and acted in such a way as a
prudent man would act in his own case, or he has acted under the
authority of the promisor, in bringing or defending the suit.
3. Right to recover sums paid on a compromise. He is also entitled
to recover all sums which he might have paid on a compromise of such
suit provided the compromise was not contrary to the orders of the
promisor and the compromise was such as a prudent man would make
under similar circumstances, or compromise was authorised by the
promisor.
Commencement of Indemnifier’s Liability
Section 125 of the Act is silent regarding the time of commencement of
the indemnifier liability. Whether the indemnifier becomes liable to make
good the loss only after the indemnity-holder has suffered the loss, or when
the latter’s liability becomes absolute although he has not discharged the
same, is an important point to be considered in this context.
Although there are different views of the High Courts in India, the
prevalent view has been expressed by Chagla, J., of the Bombay (now
180 Business Laws
Mumbai) High Court in Gajanan Moreshwar vs. Moreshwar Madan [AIR

1942 Bom 302], that “if the indemnified had incurred a liability and that
liability is absolute, he is entitled to call upon the indemnifier to save him
from that liability and pay it off.” In other words, the indemnifier becomes
liable to pay as soon as the liability of the indemnity-holder becomes absolute,
or certain.
CASE : In Osman Jamal & Sons Ltd. vs. Gopal Purshottam [(1928) ILR 56 Cal
262], a company was acting as the commission agent of firm X. The company
purchased certain goods for the firm and the firm failed to take those goods. Thus, the
supplier of goods became entitled to recover from the company certain sum of money
as damages for breach. Before paying the company went into liquidation. The Calcutta
High Court held that the official liquidator of the company could recover the amount of
damages payable to the supplier from the firm even though the official liquidator of the
company had not yet paid the amount to the supplier of goods.
CONTRACT OF GUARANTEE
Definition (S. 126)
According to Section 126 of the Act, “A contract of guarantee is 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
the ‘surety’; the person in respect of whose default the guarantee is given is
called the ‘principal-debtor’, and the person to whom the guarantee is
given is called the ‘creditor’. A guarantee may be either oral or written.
A contract of guarantee has three parties, viz., the surety, the principal-
debtor and the creditor. Such a contract brings into existence a triangular
relationship involving three contracts: one, between the creditor and the
principal-debtor creating the debt, etc.; second, between the surety and the
creditor guaranteeing the performance; and the third between the principal-
debtor and the surety by which the principal-debtor requests the surety to act
as such and impliedly promises to indemnify the surety in case surety is
called upon by the creditor to pay off the debt due by the principal- debtor. In
a contract of guarantee there must be a conditional promise to be liable on
the default of the principal-debtor.
The object of contract of guarantee is to enable a person to get a loan or
goods on credit or to get an employment. Accordingly, “the essence of the
contract is that the guarantor agrees, not to discharge the liability in any
event, but to do so only if the principal- debtor fails in his duty.” Guarantee
is widely used in business. Banks are the institutions for moving
money. They also provide credit. Therefore now-a-days bank
guarantee is required in many business transactions. Banks charge
fee for giving the guarantee.
Example : P requests C to sell and deliver to him goods on credit. C agrees to do so,
provided S will guarantee the payment of the price of the goods. S, at the request of P,
promises to guarantee the payment in consideration of C’s promise to deliver the goods.
This is a contract of guarantee. Here P is the principal-debtor. C is the creditor and S is
the surety or guarantor.
It should be noted that in the above example S must stand as surety at

the request of P as only in that case there will be privity of contract between
S and P and it will be a contract of guarantee between C and S. If without P’s
request S promises to pay on default of P, it will be a contract of indemnity
between C and S.
Essential Features of a Contract of Guarantee

It must fulfill all the essentials of a valid contract. In particular, the
following requisites of a valid guarantee must be noted:
1. These must be someone liable as principal-debtor : A contract
of guarantee is a tripartite agreement which contemplates the
principal-debtor, the creditor and the surety. Therefore, there must
be someone liable as principal-debtor and the surety promises to
make the payment on his default. Thus, unless and until there is a
principal debt, present or future, and there is a principal-debtor,
there can be no contract of guarantee. There must be primary
liability on someone other than the surety.
Further, the debt or the liability must be legally enforceable.
Therefore, a guarantee for an unlawful obligation will not be
binding.
CASES : (i ) In Manju Mahadeo v. Shivappa [(1918) 42 Bom 444], M made an oral

promise to C to pay his time-barred debt and S guaranted that payment. Here M had
no enforceable obligation to pay the time-barred debt and therefore he could make no
default. Therefore, S was held not liable as a surety or in any other capacity.
(ii ) In the leading case Swan v. Bank of Scotland [(1836) 10 Bligh NS 627], A
was enjoying overdraft facility from a bank. The overdrafts were contrary to a statute,
which not only imposed penalty upon the parties to such overdrafts but also made them
void. The overdrafts were guaranteed by B. A defaulted. The bank sued B for the
recovery of the overdrafts. B was held not liable.
Guarantee of minor’s debt. Parties to a contract of guarantee should be

competent to contract. If the surety is a minor, then the contract of guarantee
is void. In Kashiba vs. Shripat [(1984) 19 Bom 697], it has been held that
where a minor’s debt has been knowingly guaranteed, the surety is liable as a
principal-debtor. The Court said : “If the debt is void, the contract of the so-
called surety is not collateral, but a principal contract.”
2. There must be consideration. A contract of guarantee must be
supported by consideration. With regard to consideration for
guarantee, Section 127 of the Act lays down that, “Anything done or
182 Business Laws
any promise made for the benefit of the principal-debtor may be a

sufficient consideration to the surety for giving the guarantee.” The
consideration may benefit the surety; but it is not necessary that the
surety should receive any benefit under the contract.
Example 1 : B (Principal-debtor) requests A (Creditor) to sell and deliver to him
goods on credit. A agrees to do so, provided C (Surety) will guarantee the payment of the
price of the goods. C promises to guarantee the payment in consideration of A’s promise
to deliver the goods. This is sufficient consideration for C’s promise. [Illustration (a) to S.
127].
Example 2 : A (Creditor) sells and delivers goods to B (Principal-debtor). C (Surety)
afterwards requests A to forbear to sue B for the debt for a year, and promises that if he
does so C will pay for them in default of payment by B. A agrees to forbear as requested.
This is a sufficient consideration for C’s promise. [Illustration ( b) to S. 127].
(Note : The words in the bracket added)
Guarantee for a past debt. According to illustration (c) to S. 127,
guarantee for past debt is not valid.
Example : A sells and delivers goods to B. C afterwards, without consideration,
agrees to pay for them in default of B. The agreement is void. [Illustration ( c) to S. 127].
Guarantee for a past as well as future debt. A guarantee for a past debt
would be valid provided fresh consideration is given by the creditor by
making a further advance at the time of guarantee and there is a clear
undertaking by the surety that he could be liable on the total amount.
3. There should not be misrepresentation or concealment of
material facts. According to Section 142, “Any guarantee which has
been obtained by means of misrepresentation made by the creditor, or
with his knowledge and assent, concerning a material part of the
transaction, is invalid.”
Similarly. Section 143 provides that, “Any guarantee which the creditor
has obtained by means of keeping silence as to material circumstances is
invalid.” In Co-operative Commission Shop Ltd. v. Udham Singh [AIR
1944 Lah 424], a cashier had been found guilty of embezzlement, but this fact
was not disclosed when a surety was made to guarantee the future conduct of
the cashier, the surety was held not liable.
4. All the parties must consent. The formation of a contract of
guarantee requires the concurrence of all the three parties to it, viz.,
the creditor, the principal-debtor and the surety The surety comes
into the picture at the request of the principal-debtor. He undertakes
his obligation at the request, express or implied, of the principal-
debtor.
5. Writing is not necessary. A contract of guarantee may be oral or
in writing.
Distinction between a Contract of Indemnity and Contract of

Guarantee
The points of distinction between the two are given below:
Basis Contract of Indemnity Contract of Guarantee
1. Meaning A contract of indemnity is a contract A contract of guarantee is a
by which one party promises to save contract to perform the
another harmless from loss caused promise, or discharge the
as a result of transaction entered at liability, of a third person in
the instance of the promisor. case of his default.
2. Number There are only two parties : There are three parties :
of indemnifier and indemnity-holder. creditor, principal debtor and
parties surety.
3. Number There is only one contract, and that There are three contracts. one
of is between indemnifier and between the creditor and the
contract indemnity-holder principal-debtor, another
s between the creditor and
surety and the third, an
implied contract between the
principal-debtor and surety.
4. Request It is not necessary for the Surety should give the
indemnifier to act at the request of guarantee at the request,
the indemnity-holder. express or implied, of the
principal-debtor. It requires
consent of all the three parties.
5. Nature The liability of the indemnifier is The liability of the surety is
of primary. secondary. The liability of the
liability principal debtor is primary.
6. Purpose The purpose of a contract of The purpose of a contract of
of indemnity is to make good the loss guarantee is to provide security
contract suffered by a party to it. to the creditor in case of default
by the principal debtor.
7. Rights of In a contract of indemnity, the The surety, after discharging
indemni- indemnifier cannot sue the third the debt of the principal-debtor
fier/ party in his own name as there is no acquires all rights which the
surety privity of contract between the third creditor had against the
party and himself. He can sue a principal-debtor. Thus, in a
third party if there is an assignment contract of guarantee, the
in his favour, or if he joins his name surety steps into the shoes of
with that of the principal debtor. the creditor in his own right.
Further, an indemnifier is not Further, a surety is entitled to
entitled to rights given by sections all the rights provided in
140 and 141 of the Act. sections 133 to 145 of the Act.
8. Existing In a contract of indemnity, the In the case of contract of
debt or possibility or risk of any loss is the guarantee, there is an existing
duty only contingency, and the debt or duty the performance of
indemnifier become liable only on which is guaranteed by the
the happening of such contingency. surety.
The liability may arise or may not
arise.
184 Business Laws
Nature and Extent of Surety’s Liability

The nature and extent of surety’s liability has been discussed under the
following heads:
1. The liability of the surety is only secondary. He becomes liable
to the creditor only on default by the principal-debtor. If the surety
becomes insolvent before default by the principal-debtor, the creditor
cannot prove against the surety’s official receiver in insolvency.
2. In case of default by the principal debtor it is open to the
creditor not to sue the principal-debtor first; he may
straightway proceed against the surety, unless the contract
provides that the creditor has to sue the principal-debtor
first, and then only the surety. A surety is not entitled to any
notice of the default, unless the terms of the guarantee so require.
Creditor may make surety a co-defendant along with the principal-
debtor.
CASE : In Bank of Bihar vs. Damodar Prasad [AIR 1969 SC 297], S (the
defendant; Surety) guaranteed a bank’s loan. A default having taken place, S was sued
by the bank before suing the principal-debtor. The Supreme Court held that surety’s
liability was immediate. The Court said: “Before payment the surety has no right to
dictate terms to the creditor and ask him to pursue his remedies against the principal in
the first instance. The surety is a guarantor; and it is his business to see that the
principal pays, and not that of the creditor.” Therefore, the bank was held entitled to sue
the surety even before the bank exhausted its remedies against the principal-debtor.
3. Where a creditor hold securities from the principal-debtor, he

(the creditor) need not resort to these securities before suing
the surety, unless there is a contract to the contrary.
4. Once the liability of the surety arises, it is co-extensive with
that of the principal-debtor. In fact, Section 128 of the Act
declares that, “The liability of the surety is co-extensive with that of
the principal-debtor unless it is otherwise provided by the contract.”
Section 128 merely refers to the quantum of the surety’s liability. The
liability of the surety is the same as that of the principal-debtor,
unless there is a provision in the contract to the contrary. Surety may
limit his liability. A statutory reduction of the principal-debtor’s
liability automatically reduces the liability of the surety. Thus, in
general, the liability of the surety is neither more nor less than that
of the principal-debtor.
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. [Illustration to S. 128].
The maximum extent of the surety’s liability is limited to that of the
principal-debtor’s liability. The surety may limit his liability at the time of
entering into the contract. If the surety limits his liability to a fixed
amount, he cannot be held liable for more than that amount,

regardless of the amount due by the principal-debtor. It is only in the
absence of any such specification regarding the amount guaranteed at the
time of the contract, that the liability of the surety would be same as that of
the principal-debtor. A surety may attach any other condition to his liability.
Example : P takes a loan of 80,000 from C. S guarantees the debt upto 50,000. P
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pays only 20,000. The liability of S would be 50,000 although P has already paid
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R20,000. The quantum of surety’s liability is determined taking into account the default
amount.
5. Any guarantee which has been obtained by the creditor

misrepresenting a material part of the transaction or by
keeping silence as to material circumstances is not valid and
therefore the surety will not be liable in such cases (Sections
142 and 143).
6. It is not necessary that surety is liable only if the principal-
debtor is liable. The liability of the surety and that of the principal-
debtor is not co-terminus although both are for the same debt. In
other words, one may be liable while the other may not be liable.
These cases are as follows:
(a) When a variation in the terms of a contract is made by the
principal-debtor and the creditor without the consent of the
surety, the surety is discharged from liability but the principal-
debtor remains liable.
(b) A judgement against the principal-debtor is not a judgement
against the surety. In an action against the surety he is not
bound by any admissions made by the principal debtor.
(c) The obligations of the principal-debtor and that of the surety
may begin on different dates and thus a surety may be liable for
a debt which has become time-barred. However, if the debt has
become time-barred against both the principal-debtor and the
surety, then none of them is liable to the creditor. If the surety
pays a debt which has become time-barred against both the
principal-debtor and the surety, he will not be able to recover
the amount from the principal-debtor as per S. 145.
(d) Where the principal-debtor is discharged by virtue of his
insolvency the surety still remains liable for the full amount if
he has not limited his liability [Jagannath v. Shivnarayan,
AIR 1940 Bom 247]. However, if the liability of the principal-
debtor is reduced under Debt Relief Act, the surety’s liability is
accordingly reduced, otherwise the object of the Debt Relief Act
is defeated.
(e) If the original agreement between the principal debtor and the
creditor is void, the surety may still be liable, not as surety, but
186 Business Laws
only as a principal-debtor (Chitty on Contracts). In Kashba v.

Shripat [(1894) 19 Bom 697], it was held that where a minor’s
debt has been knowingly guaranteed, the surety is liable as a
principal-debtor.
Example : P, a minor, takes a loan of 50,000 from a bank which is guarantee by S.
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The contract between P and the bank is void. In this case S has knowingly guaranteed the
loan and, therefore, he will be liable as a principal-debtor.
7. Where a person gives a guarantee upon a contract that a

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. (S. 144).
8. The contract of guarantee may provide for conditions
precedent to the surety’s liability. Any express or implied
conditions precedent to the surety’s liability must be fulfilled before
recourse can be had to him.
9. A continuous guarantee is not exhausted by the first advance
or credit upto the specified limit. (For detail see Kinds of
Guarantee)
Surety a favoured debtor. According to Lord Selborne, “A surety is
undoubtedly and not unjustly, an object of some favour both at law
and at equity.” It only means that, the surety, being a favoured debtor, can
insist on a rigid adherence to the terms of the contract and his obligation to
the creditor. He is a favoured debtor due to the following reasons:
(a) The surety can be made liable only to the extent specified in the
contract and he cannot be asked to perform any promise which he
has not expressly undertaken. No liability can be thrust on the
surety which is not covered by the contract. He can also limit his
liability.
(b) If the terms of the contract are altered without the consent of the
surety, the surety is discharged from his liability. Similarly, surety’s
liability is discharged in certain other cases as explained earlier and
further explained later on.
(c) The liability of the surety is secondary. His liability arises only on
the default of the principal debtor.
(d) Surety is liable to the extent of the default made by the principal
debtor and not for the full amount.
(e) The contract of guarantee may provide for conditions precedent to
the surety’s liability.
Kinds of Guarantee
A guarantee may be (1) Specific Guarantee or (2) Continuing Guarantee.
Specific guarantee. A guarantee given for a single or specific
transaction is called specific guarantee. Thus a specific guarantee provides for
securing of a specific advance and it ceases to be effective on the repayment

thereof. For examole, P taken a loan of R 50,000 from C which is guaranteed
by S. P repays the loan in time. The guarantee comes to an end. If P takes the
loan again from C it would require a fresh guarantee. A guarantee for good
behavior of an employee is a specific guarantee.
A guarantee may be for a single transaction or a number of transactions.
In the former case, it is called a simple or ‘specific guarantee, and in the
latter, it is known as ‘continuing guarantee’.
Continuing guarantee. Recording to Section 129 of the Act, “A
guarantee which extends to a series of transactions is called a continuing
guarantee.” A ‘continuing guarantee,’ is intended to cover a number of
transactions over a period of time. Surety becomes liable for the unpaid
balance at the end of the guarantee. For examples, a continuing guarantee
covers a fluctuating account such as an ordinary current account at bank, and
secures the balance owing at any time withing the limit of the guarantee.
Example : A, in consideration that B will employ C in collecting the rent of B’s

Zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due
collection and payment by C of those rents. This is a continuing guarantee. [Illustration ( a)
to S. 129].
The following points should be noted in connection with continuing

guarantee:
(1) A continuing guarantee is not exhausted by the first advance
or credit upto the specified limit. When a guarantee is
continuing, it is not exhausted by the first advance or credit up to
the specified limit.
Examples : (i) A guarantees payment to B, a tea dealer, to the amount of £ 100, for
any tea he may from time to time supply to C. B supplies C with tea to the above value of
£ 100, and C pays for it. Afterwards, B supplies C with tea to the value of £ 200. C fails to
pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to
B to the extent of £ 100. [Illustration (b) to S. 129].
(ii) S agrees to be answerable to C for the amount of five sacks of flour, to be
delivered to P payable in one month. It is a specific guarantee.
(2) Where the consideration for the guarantee is ‘entire’ supplied

at one time, it is not a continuing guarantee.
CASES : ( i) A guarantee for rent due under a lease for a fixed term is not continuing
guarantee. Therefore it cannot be revoked by the death of the surety [Gopal Singh vs.
Bhawani Prasad, ILR (1888) 10 All 531].
(ii ) A guarantee for the good behaviour of an employee is not a continuing
guarantee as the employment of a person is one transaction. Therefore it is not
revocable as long as he continues in the job [Lloyds vs. Harper, (1880) 16 Ch D 290].
Such a guarantee cannot be determined by the surety’s death unless there is an
agreement to the contrary [Balfour vs. Grace, (1902) 1 Ch. 733].
188 Business Laws
Revocation of Continuing Guarantee

A continuing guarantee may be revoked in the following cases :
(a) By Notice (S. 130). According to Section 130, “A continuing
guarantee may at any time be revoked by the surety, as to future
transactions, by notice to the creditor.” This section has laid down in
clear-cut terms that the surety can avoid his liability in respect of
future transactions by notice of revocation. However, he still remains
liable for the transactions entered into by him before giving the
notice.
Example : A in consideration of B’s discounting, at A’s request, bills of exchange for
C, guarantees to B, for twelve months, the due payment of all such bills to the extent of
5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards at the end
of three months A revokes the guarantee. The revocation discharges A from all liability to
B for any subsequent discount. But A is liable to B for the 2,000 rupees on default of C.
[Illustration (a) to S. 130 is based on decision in Offord v. Davies, (1862) CB (NS) 748].
(b) By death of surety (S. 131). According to Section 131, “the death of
the surety operates, in the absence of any contract to the contrary, as a
revocation of a continuing guarantee, so far as regards future
transactions”. The death of the surety also operates as termination of
a continuing guarantee with regard to future transactions. This rule
is applicable only in the absence of a contract to the contrary. No
notice of death to the creditor is necessary. The estate of the surety is
liable for the transaction already entered into.
(c) When a surety is discharged. A continuing guarantee is revoked
under the same circumstances under which a surety is discharged
from his liability. This has been explained under the heading
“Discharge of Surety”.
Rights of Surety
A surety has certain rights against the creditor, principal-debtor and co-
sureties. They are discussed under the following heads:
I. Rights against the Creditor

1. Right to benefit of creditor’s securities (S. 141). The surety is
entitled to the benefit of every security held by the creditor at the
time of making the contract, whether the existence of the security is, or
is not known to him. If any such security is lost or parted with or
without the consent of the surety, the surety is discharged to the
extent of the value of the security. The value of the security means
its value at the time it was given to the creditor.
However, if the security is lost for reasons beyond the control of the
creditor such as an act of God, accident etc., the surety is not
discharged [Krishan Talwar vs. Hindustan Commercial Bank,
AIR 1957 Punj 30].
As the surety cannot claim any security given by the principal-debtor

to the creditor subsequent to the contract of guarantee, if the creditor
parts with the same, the liability of the surety is not reduced
[Bhushayya vs. Suryanarayan, (1944) Mad 340].
The expression ‘security’ is not used in any technical sense; it
includes all rights which the creditor had against the property at the
date of the contract [State of Madhya Pradesh vs. Kaluram, AIR
1967 SC 1105].
Example : C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has
also a further security for 2,000 rupees by a mortgage of B’s furniture. C, cancels the
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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 [Illustration ( a) to S. 141].
According to Section 141 of the Act, the surety enjoys the right to
securities. However, he can have the benefit of the securities, only on paying
the guaranteed debt.
2. Right of set-off. In the case of default by the principal-debtor, if the
surety is called upon to make the payment to the creditor, he is
entitled to exercise the right of set-off or counter-claim, which the
principal-debtor had against the creditor. For instance, if the creditor
himself owed some money to the principal-debtor, the latter would
certainly put forth his right of set-off or counter-claim against the
creditor. The same rights or defences of the principal-debtor would
be available to the surety.
Example : P takes a loan of 50,000 from C. The repayment of loan is guaranteed
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by S. S also has certain claim of 10,000 upon C. In case of default by P, S will be liable
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to pay C 40,000 only.

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3. Right to request the creditor to proceed against the principal-

debtor, on default. The surety may request the creditor to sue the
principal-debtor in case of default. But, the creditor is not bound to do
so.
4. Right to get the services of dishonest employee terminated in
case of guarantee for his fidelity. If a person whose honesty has
been guaranteed to the employer, and his dishonesty has been proved,
can ask the employer to terminate his services.
II. Rights against the Principal-debtor

1. Right to indemnity (S. 145). In the case of a contract of guarantee,
there is an implied promise by the principal-debtor to indemnify the
surety. Accordingly, the surety has a right to recover from the
principal-debtor whatever he has rightfully paid under the contract
to the creditor. But he cannot recover the sums which he had paid
wrongfully.
The expression rightfully paid includes the principal sum, interest

190 Business Laws
thereon and cost of the suit if there are reasonable grounds to defend the suit
or the principal-debtor authorised him to defend the suit.
Example : B is indebted to C, and A is surety for the debt. C demands payment from
A, and on his refusal sues him for the amount. A defends the suit, having reasonable
grounds for doing so, but he is compelled to pay the amount of debt with costs. He can
recover from B the amount paid by him for costs, as well as the principal debt. [Illustration
(a) to S. 145].
The payment of a time-barred debt is not a ‘rightful’ payment, if it has
been made when the debt against the surety or against both surety and
principal-debtor had become time-barred.
2. Right of subrogation (S. 140). Subrogation is a substitution of one

person or thing for another. According to the doctrine of subrogation,
after, the surety pays the guaranteed debt, or performs the
guaranteed duty, he is invested with every remedy which the
creditor had against the principal-debtor., In other words, the surety
steps into the shoes of the creditor to exercise all his rights although
he is not the creditor. Such a right of the surety which the law vests
in him, is known as the right of subrogation.
III. Rights against Co-sureties

1. Co-sureties liable to contribute equally (S. 146). Section 146 of
the Act lays down that where co-sureties have guaranteed the same
debt or duty either jointly or severally, and the principal-debtor
makes default, each surety is liable to contribute equally towards the
debt, or that part of the debt which remains unpaid. The co-sureties
might have given the guarantee under the same, or different
contracts. It may be with or without the knowledge of each other.
Example : A, B and C are sureties to D for the sum of 3,000 rupees to E. E makes
default in payment. A, B and C are liable, as between themselves, to pay 1,000 rupees
each. [Illustration ( a) to S. 146].
In the case of a contract to the contrary, each surety need not

contribute in equal proportions, but only the amount he has
guaranteed.
Example : A, B and C are sureties to D for the sum of 1,000 rupees lent to E and
there is a contract between A, B and C that A is to be responsible to the extent of one
quarter, B to the extent of one-quarter and C to the extent of half. E makes default in
payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees and C 500
rupees. [Illustration ( b) to S. 146].
2. Liability of co-sureties bound in different sums (S. 147).

Equality of burden recognised in Section 146 is subject to the
maximum limit fixed by each co-surety to his liability. Section 147
of the Act, they are required to contribute equally, but not
more than the amounts to which they have agreed to become
liable.
This section lays down that, “Co-sureties who are bound in different sums
are liable to pay equally as far as the limits of their respective obligations
permit.”
Examples : A, B and C as sureties for D, enter into three several bonds, each in a
different penalty, namely A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C
in that of 40.000 rupees, conditioned for D’s duly accounting to E. D makes default to the
extent of 30,000 rupees. A, B and C are each liable to pay 10,000 rupees. If D makes
default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and C
15,000 rupees each. Again, if the default by D is to the extent of 70,000 rupees, each co-
surety has to pay the maximum amount of liability he has undertaken, viz., 10,000, R
R 20,000 and 40.000 respectively. [Illustration (a), (b) and (c ) to S. 147].

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3. Right to share benefits of security. Where one of the co-sureties

has received a security from the principal debtors all the co-sureties
are entitled to share the benefits of that security.
Thus, as between the co-sureties there is equality of burden and benefit.
DISCHARGE OF SURETY
The surety is discharged and his liability comes to an end under the
following circumstances :
1. Notice of revocation (S. 130). While a specific guarantee cannot be
revoked if the liability is incurred, a continuing guarantee may be
revoked as to future transactions, by notice to the creditor. However,
the surety remains liable for the transactions entered into prior to the
notice (Section 130).
2. Death of surety (S. 131). In the absence of any contract to the
contrary the death of the surety operates as termination of a
continuing guarantee as to future transactions. The estate of the
surety, however, will be liable for the transactions entered into before
death (Section 131).
3. Variance in terms of contract. According to Section 133 of the Act,
“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.”
The illustrations appended to the section are as follows:
Examples : ( i ) A becomes surety to C for B’s conduct as manager in C’s bank.
Afterwards, B and C contract, without As consent, that B’s salary shall be raised, and that
he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to
overdraw, and the bank lose a sum of money. A is discharged from his suretyship by the
variance made without his consent and is not liable to make good this loss. [Illustration ( a)
to S. 133].
(ii) A guarantees C against the misconduct of B in an office to which B is appointed by
C, and of which the duties are defined by an Act of the legislature. By a subsequent Act,
the nature of the office is materially altered. Afterwards, B misconducts himself. A is
discharged by the change from future liability under his guarantee, though the misconduct
of B is in respect of a duty not affected by the later Act. [Illustration ( b) to S. 133].
192 Business Laws
Since the surety guarantees the liability of the principal-debtor, any

variance in the contract between the creditor and the principal-debtor alters
the liability of the latter. As such, the position of the surety also becomes
different from what it was at the time of the contract. It is, therefore,
necessary that any such change should be made with the concurrence of the
surety. Otherwise, the changes would not bind him.
CASE : In Knatu Bibi v. Abdullah [(1880) 3 All 91], C, a landlord let out his house to
P at a certain monthly rent. S gave guarantee for payment of rent by P. Afterwards,
without knowledge or consent of S, the landlord increased the rent of the tenant. It was
held the surety was discharged from his liability although rent was increased with the
consent of the tenant.
The question whether a variation which is not substantial or material, or

is beneficial to the surety, would discharge the surety was examined by the
Supreme Court in M.S. Anirudhan vs. Thomco’s Bank Ltd. [AIR 1963 SC
746]. It was held that insubstantial alterations in an instrument which are
for the benefit of the surety, do not discharge the surety from liability.
CASE : In the above mentioned M.S. Anirudhan case, S (the defendant; the surety)
guaranteed an overdraft allowed by C (the plaintiff bank; the creditor). P (the principal-
debtor) filled in the blank guarantee form given to him stating that the maximum amount
overdraft guaranteed to be R 25,000. Since C was not prepared to extend
accommodation for more than 20,000, P made an alteration reducing the amount to
R
R 20,000, and without intimating the alteration to S, gave the document to the bank. On
default by P, C sued S. The surety pleaded discharge of the liability on the ground that
the document was altered without his consent. The Supreme Court held by majority
that the surety was not discharged. Accordingly, if the variation is unsubstantial or not
material, or is beneficial to the surety, he is not discharged.
Similarly, where the guarantee is for the performance of several and

distinct contracts or duties, and variation is effected without the consent of
the surety in one of those contracts, the surety is discharged only in respect of
such contract where there is variation, but not in respect of the others.
4. Release or discharge of the principal-debtor (Sec. 134). Section

134 of the Act lays down that,. “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.”
Thus, Section 134 provides for the following two different ways of
discharge of the surety from his liability:
(a) If the creditor and the principal-debtor enter into a contract by

which the latter is released, the surety is also discharged.
Example : A gives a guarantee to C for goods be supplied by C to B. C supplies
goods to B, and afterwards B becomes embarrassed and contracts with his creditors
(including C) to assign to them his property in consideration of their releasing him from
their demands. Here B is released from his debt by the contract with C, and A is
discharged from his suretyship. [Illustration ( a) to S. 134]. This is an example of contract
between the creditor and the principal debtor by which the principal debtor is released.
(b) If the creditor does some act, or omits to do an act, and the legal
consequence of the same is the discharge of the principal-debtor,
the surety is also discharged.
CASE : In Hewison vs. Ricketts [(1894) 63 LJ QB 711], C (the plaintiff) sold some
goods To P on a hire-purchase agreement, and S (the defendant) guaranteed the
instalments payable. On the debtor’s failure to pay the instalments, C terminated the
contract and seized the goods. Subsequently, he sued S on his guarantee. It was held
that since C had put an end to the contract, he could not recover from the surety. This
is a case of implied release.
Examples : (i ) According to illustration (b) “A contracts with B to grow a crop of indigo

on A’s land and to deliver it to B at a fixed rate, and C guarantees A’s performance of this
contract, B diverts a stream of water which is necessary for irrigation of A’s land, and
thereby prevents him from raising the indigo. C is no longer liable on his guarantee.” This
is an example of an act of the creditor, the legal consequence of which is the discharge of
the principal-debtor, which discharges the surety also.
(ii) According to illustration (c) “A contracts with B for a fixed price to build a house for
B within a stipulated time. B supplying the necessary timber. C guarantees A’s
performance of the contract. B omits to supply the timber.” C is discharged from his
suretyship.” This is an example of the omission of the creditor.
According to this section, it is only an act or omission on the part of the

creditor that eventually discharges the surety. Therefore, if the principal-
debtor becomes bankrupt, his discharge does not operate as a discharge of the
surety [Jagannath vs. Shivnarayan, AIR 1940 Bom 247].
Similarly, omission on the part of the creditor to sue the principal-debtor
within the period of limitation, cannot be regarded as omission within the
meaning of this section so as to discharge the surety.
It has been held by the Supreme Court that the creditor is entitled to
recover the debt from the surety, even though the suit against principal-
debtor is barred [Bombay Dyeing and Manufacturing Co. Ltd. vs. State
of Bombay. AIR 1958 SC 328].
5. Compounding with or giving time to the principal-debtor
(Sections 135, 136, 137 and 138). According to Section 135, “a
contract between the creditor and the principal-debtor, by which the
creditor makes a composition with, or promises to give time to, or not
to sue the principal-debtor, discharges the surety unless the surety
assents to such contract.” The idea behind this section is that where
the creditor does something behind the back of the surety, and does
it to his prejudice, by advancing facilities to the principal-debtor,
which are likely to harm the surety, the surety is discharged.
In terms of this section, the surety is discharged if the creditor (a)
makes a composition with the principal-debtor, (b) promises to give
194 Business Laws
time to him, or (c) promises not to sue the principal-debtor, unless

the surety assents to such contract.
(a) Composition with debtor. Making a composition with
principal-debtor is to enter into a compromise agreement with
him without the surety’s consent. Any such agreement involves
a variation of the original contract between the two. As such,
the surety is discharged.
Example : C contracts to lend P 50,000 at 10% interest for a year. S guarantees
R
repayment. After one year C agrees to receive from P a second hand car instead of
R 55,0000. S is discharged from his liability.
(b) Promise to give time to the debtor. Similarly, the creditor has
no right to give time to the principal-debtor without the consent
of the surety.
CASE : In Croydon Gas Co. vs. Dickinson [(1876) 2 CPD 46], the contract
between the principal-debtor and the gas company provided for the payment for each
month’s supply of gas within fourteen days. In the month of July, the gas company was
not paid within fourteen days, and the company took a promissory note from the
principal-debtor. Surety had no knowledge of this. It was held that this amounted to
extension of time which discharged sureties.
A creditor can be said to have given time where the creditor has agreed to
accept amounts in instalments instead of one lumpsum.
(c) Promise not to sue. According to this section, if the creditor
has entered into an unconditional contract with the principal-
debtor not to sue him, the surety is discharged.
Example : P owes a sum of 50,000 to C, which is guaranteed by S. The debt
R
becomes payable. But C enters into a unconditional contract with P not to sue him. This
will discharge the surety.
Circumstances when surety is not discharged

In the following cases however, the surety is not discharged :
(i) Agreement by the creditor with a third person to give time.

“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, the
surety is not discharged.” [S. 136]
Example : 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. [Illustration to
S. 136].
(ii) Forbearance to sue. “Mere forbearance on the part of the creditor to
sue the principal-debtor or to enforce any other remedy against him
does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety” [Second proviso to S. 137].
Thus there is a distinction between a promise not to sue and mere
forbearance to sue. In the former case, the surety is discharged, while in the
latter, he is not. Even if the forbearance continues till the expiry of the period
of limitation, and the action against the principal-debtor becomes time-
barred, the surety is not discharged since the debt has not become time-
barred against the surety.
Example : B owes to C a debt guaranteed by A. The debt becomes payable. C does
not sue B for a year after the debt has become payable. A is not discharged from his
suretyship. [Illustration to S. 137].
(iii) Release of co-surety. According to section 138, where there are

more sureties than one, and the creditor releases any one of them, it
does not operate as a discharge of the others. Even in the case of the
surety so released, his liability to contribute towards the debt
continues.
6. Impairing surety’s remedy (S.139). According to section 139, the
creditor should not do anything which is not consistent with the rights of the
surety, or omit to do anything which his duty to the surety requires him to do.
If, therefore, any act or omission by the creditor deprives the surety of his
eventual remedy against the principal-debtor, the surety is discharged.
Examples : ( i ) B contracts to build a ship for C for a given sum, to be paid by
instalments 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 to B the last two
instalments. A is discharged by this prepayment [Illustration (a) to S. 139].
(ii ) 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, and apply the proceeds in discharge of the note.
Subsequently, C sells the furniture, but owing to his misconduct and willful negligence,
only a small price is realised. A is discharged from liability on the note [Illustration (b) to S.
139].
Example 3 : A puts M as apprentice to B, and gives guarantee to B for M’s fidelity. B
promises on his part that he will, at least once a month, see M make up the cash. B omits
to see this done as promised, and M embezzles. A is not liable on this guarantee.
[Illustration (c) to S. 139].
7. Loss of security (141). According to section 141, the surety has a

right to whatever security held by the creditor at the time when the contract of
suretyship is entered into, whether he knows of the existence of the same or
not. If, therefore, the creditor loses the security or parts with the same
without the consent of the surety, the surety is discharged to the extent of the
value of the security.
CASE : In State Bank of Saurashtra v. Chitranjan Rangnath Raja [AIR 1980 SC

1528], the General Manager of the Bank accepted the proposal for cash credit facility
on the specific condition that the principal debtor shall offer two securities, one, the
pledge of goods to be kept under the lock and key of the Bank to be supervised by the
Bank’s employee, and second the personal guarantee of the surety. The surety himself
agreed to give personal guarantee on the specific understanding and with the full
knowledge of the Bank that the principal debtor was offering another security, hamely
pledge of goods. The surety contracted on the good faith of the principal contract when
196 Business Laws
entering into the contract of guarantee in which case, he is deemed so to contract that
both the securities would be available to the creditor. It was found that the Bank was
negligent with regard to the safe keeping and handling of the goods pledged and
security of pledged goods was lost on account of negligence of the Bank. The
Supreme Court held that due to wrongfully parting with the pledged goods
without the consent of the surety, the surety was discharged. It may be noted that
in English law the surety is entitled to the securities held by the creditor both before and
after the contract of guarantee.
Examples : (i ) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C

has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C 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. [Illustration (a) to S. 141].
(ii) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B.
Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives
up the further security. A is not discharged. [Illustration ( c) to S. 141].
8. Invalid guarantee (S. 142 and S. 143). (i) Any guarantee which
has been obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material
part of the transaction, is invalid (S. 142).
(ii) Any guarantee which the creditor has obtained by means of
keeping silence as to a material circumstances, is invalid (S. 143).
Thus, if a guarantee is obtained by concealment or
misrepresentation as to a material fact, the guarantee becomes
invalid. In such a case, the surety is discharged.
Example 1 : A engages B as clerk to collect money for him. B fails to account for
some of his receipts, and A, in consequence, calls upon him to furnish security for his duly
accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s
previous conduct. B afterwards makes default. The guarantee is invalid. [Illustration (a) to
S. 143].
Example 2 : A guarantees to C payment for iron to be supplied by him to B to the
amount of 2000 tons. B and C have privately agreed that B should pay five rupees per ton
beyond the market price, such excess to be applied in liquidation of an old debt. This
agreement is concealed from A. A is not liable as surety. [Illustration (b) to S. 143].
(iii) Similarly, if a person gives the guarantee on the express

undertaking that the creditor shall not act upon it until another
person has joined in it as co-surety, and if the other person does not
join as a co-surety, the guarantee is invalid as per Section 144 of the
Act.
(iv) Again, if there is absence of one or more essential elements of a
valid contract, e.g., surety is incompetent to contract or the object is
illegal, the guarantee is not valid.
9. Guarantee for fidelity. If an employer of a servant, whose honesty
has been guaranteed, continues to employs him even after a proved
act of dishonesty, without notice to the surety, the surety is
discharged.
LIABILITY OF TWO PERSONS PRIMARILY LIABLE, NOT AFFECTED

BY ARRANGEMENT BETWEEN THEM THAT ONE SHALL BE SURETY
ON OTHER’S DEFAULT.
Where two persons contract with a third person to undertake a certain
liability, and also contract with each other that one of them shall be liable
only on the default of the other, the third person not being a party to such
contract, the liability of each of such two persons to the third person under the
first contract is not affected by the existence of the second contract, although
such third person may have been aware of its existence (S. 132).
Example : A and B make a joint and several promissory note to C. A makes it in fact,
as surety for B, and C knows this at the time when the note is made. The fact that A, to the
knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon
the note. [Illustration to S. 132].
REVIEW QUESTIONS
1. Define contracts of indemnity and guarantee and distinguish between the
two.
2. Distinguish between a contract of indemnity and a contract of guarantee.
3. What is contract of indemnity ? Explain the rights of the ‘indemnified’ and
‘indemnifier’ under the Indian Contact Act.
4. “The liability of the surety is co-extensive with that of the principal debtor.”
Comment. [B.Com. (H), D.U.]
5. What is the nature of surety’s liability ? Explain. [B.Com. D.U.]
6. “A surety is a favoured debtor.” Comment.
7. “A surety is undoubtedly and not unjustly the object of some favour both at
law and at equity.” Comment.
8. What is continuing guarantee ? How is this guarantee revoked ?
9. “The liability of the surety is secondary; it is co-extensive with that of the
principal-debtor.” Elucidate.
10. Explain the right of a surety against (a) the creditor, (b) the principal debtor
and (c) the co-sureties. [B.Com. and B.Com. (H), D.U.]
11. “Between co-sureties there is equality of burden and benefit.” Comment.
[B.Com. (H), D.U.]
12. State and explain the circumstances under which a surety is discharged from
liability.
13. Write short notes on the following :
(a) Nature of surety’s liability.
(b) Continuing guarantee
(c) Rights of surety against co-sureties.
(d) Discharge of surety by variance in terms of contract.
(e) Commencement of identifier’s liability.
(a) An oral guarantee is not a guarantee at all.
(b) Anything done or any promise made for the benefit of the principal-
debtor may be sufficient consideration to the surety for giving the
guarantee.
(d) A fidelity guarantee is not a continuing guarantee
(e) A contract of indemnity is a contingent contract.
[Hints : True : (c), (d), (e); False : (a), (b)]
198 Business Laws
PRACTICAL PROBLEMS
1. A request B, a journalist, to publish defamatory statement against C, and P
promises to indemnity B for any loss which he may suffer by way of damages
payable to C. Is it a contract of indemnity?
[Hint : No. The object is opposed to public policy.]
2. Can the guarantee be revoked in the following cases :
(a) C lends P 10,000 on the guarantee of S?
R
(b) C, a dealer in foodgrains, regularly supplies rice to P in various lots? S

guarantees payments by P for the rice supplied to P for the rice supplied
to P from time to time upto 10,000.
R
[Hint : (a) No, as it is a specific guarantee; (b) Yes, as it is a continuing

guarantee.]
3. C appoints P as a clerk on salary basis on the guarantee of S that P will duly
account for moneys received by him as such clerk. After a year, C and P agree
that P will be paid on commission basis on the amount of sales in place of
salary without the knowledge of S. Is S discharged from his liability?
[Hint : S is discharged from liability (S. 133). However, he will be liable for
loss, if any, suffered by C for the first year.]
4. P owes C a debt guaranteed by S. The debt becomes payable. C does not sue P
for a year after the debt has become payable. P then becomes insolvent
Thereafter C sues S for the debt. S contends that he is not liable. Decide.
[Hint : S is liable as mere forbearance to sue P by C does not discharge S, the
surety, unless otherwise agreed (S. 137)].
5. S puts P as apprentice to C and gives a guarantee to C for P’s fidelity. C
promises on his part that he will at least once a month, see P make up the
cash. C omits to see this done as promised, and P embezzles. Is S liable on his
guarantee?
[Hint : S is not liable as C’s omission impair’s the eventual remedy of S.]
6. C agrees to advance 10,000 to P on 1.3.2002 for which S stands as surety. C
R
actually advances 10,000 to P on 28.1.2002. Discuss the liability of S to C.

R
[Hint : S is discharged because of variance in the terms of contract (S. 133).]

7. S1, S2 and S3 as sureties for P, enter three separate bonds, each in a
different penalty, namely, S1 in the penalty of 10,000, S2 in that of 20,000
R R
and S3 in that of 40,000 conditioned for P’s duly accounting to C.P makes
R
default to the extent of 40,000. Discuss the respective liabilities of S1, S2

R
and S3.
[Hint : S1 10,000 and S2 and S3 15,000 each (S. 147).]
R R
8. S guarantees to C to the extent of 15,000 that P shall pay all bills that C
R
shall draw upon him. C draws certain bills upon P, who accepts these bills.
Subsequently S gives notice of revocation of his guarantee. P dishonours the
bill at maturity. Is S liable upon his guarantee?
[Hint : No. The object is opposed to public policy.]
9. S gives C a continuing guarantee for the due fulfillment by a partnership
firm, P & Co., of its business transactions with C. A partner in the firm
retires and another partner is taken in. What effect, if any, has the change in
the partnership on guarantee given by S?
[Hint : S will not be liable for the firm’s act after the new partner is admitted
(S. 133).]
14 Bailment and Pledge
LEARNING OBJECTIVES
➥ Definition and Essentials of Bailment
➥ Kinds of Bailment
➥ Duties of Bailee
➥ Duties of Bailor
➥ Bailee’s Lien
➥ Definition and Essentials of Pawner or Pledger
➥ Rights and Duties of the Pawnee or Pledgee
➥ Pledge by Non-owners
BAILMENT
Definition (S. 148)
In everyday life there are many instances of entrustment of goods or
movable property by one person to another. For instance, a person may
deliver cloth to a tailor for the purpose of stitching, a watch may be entrusted
to a watch repairer for repairs, a book may be lent to a person for reading,
goods may be delivered to a carrier for trans-shipment, an ornament may be
entrusted to a jeweller for mending etc.
In all these cases, the delivery or entrustment of goods by one person to
another is known as bailment.
‘Bailment’ is thus the legal relation that arises whenever movable
property is delivered by one person to another, under an agreement by which
the latter is under a duty to return the property to the former, or to dispose it,
as the former directs. The essence of bailment is transfer of possession,
ownership remaining with the bailor. There cannot be bailment of immovable
property.
Section 148 of the Act defines bailment thus : “A ‘bailment’ is 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 of according to the directions of the
person delivering them. The person delivering the goods is called the
‘bailor’. The person to whom they are delivered is called the ‘bailee’.”
200 Business Laws
Examples : ( i) A deposited his luggage in a cloak room at the railway station. This is
a contract of bailment. In this example A is bailor and the railway administration is the
bailee.
(ii) A gave his car to B, a car workshop owner, for repairs. This is a contract of
bailment in which A is the bailor and B is the bailee.
The Explanation to the section states that, “If a person is already in

possession of goods of another, contracts to hold them as a bailee, he thereby
becomes the bailee, and the owner becomes the bailor, of such goods although
they may not have been delivered by way of bailment.” For example, if A sells
a particular scooter to B but B leaves it in A’s possession till he completes his
other purchases, A becomes a bailee although earlier he was a owner.
Bailor-bailee relation may exist even though there is no contract between
them as there can be bailment in case of goods seized. [State of Gujarat vs.
Menon Mohammad Haji Hasan].
Essential of Bailment
The following are the essential features of bailment :
1. Specific movable property. A bailer-bailee relation can arise only
in case of a specific movable property. There cannot be bailment of immovable
property.
2. Delivery of goods for change of possession. The essence of
bailment is transfer of possession, ownership remaining with the bailor,
change of possession requires delivery of goods. According to S. 149, “The
delivery to the bailee may be made by doing which has the effect of putting the
goods in the possession of the intended bailee or any other person authorised to
hold them on his behalf.” Delivery should involve change of possession in the
legal sense of the term i.e. the bailee should have de fact control of the
property. Mere custody does not involve change of possession. One who has
custody without possession, like a servant, or a guest using his host’s
goods is not a bailee.
CASES : (i ) In Indra Kumar vs. State of M.P. [AIR 1963 All 70], it was held that a
mere fact that a person, who travels by a roadways bus is allowed to keep the luggage
on the roof of the bus does not make it an implied contract to return the luggage at
the destination; there being no entrustment nor bailment.
(ii ) In Sri Hanuman Steel Rolling Mills vs. CESC Ltd. [AIR 1996 Cal 449], it was
held that supply of electricity meter to a consumer of electricity is one of the obligation
in a contract for supply of energy to him, and therefore the contract is not of bailment of
meter.
(iii ) In Ultzen vs. Nicols [(1894) 1 QB 92], A (the plaintiff) entered B’s (the
defendant’s) restaurant to dine. His coat was taken by a waiter and hung on a hook
behind A. While A was dining, his coat was stolen. In a suit by A, it was held that the
proprietor of the restaurant was liable for the loss. The waiter, in this case, had taken
possession of the coat and selected the place himself for its safe-keeping. He did act
as servant under instruction from the owner to collect the coat and keep in a particular
place. Hence, B, the owner of the restaurant had become the bailee.
Bailment and Pledge 201
Types of delivery. Delivery means transfer of possession of a thing from

one person to another. Delivery may be actual, symbolic or constructive. They
are explained below :
(i) Actual delivery. Actual delivery involves physically handing over the
possession of the goods. For example, A hands over to B, a tailor, certain
clothes for tailoring.
(ii) Symbolic delivery. When the means of getting the possession of
goods are delivered, it is called symbolic delivery. For example, handing over
the key of the godown is a symbolic delivery. Similarly, goods in transit, when
they are on a railway, can be delivered by handing over the railway receipt
representing the goods.
(iii) Constructive delivery. When a person who is already in possession
of the goods agrees to hold them as a bailee, it is called constructive delivery.
Deposit of valuables in a bank locker is not bailment. Similarly,
mere leaving of box in room in another person’s house, when key of
the box is not handed over to him does not amount to delivery within
the meaning of Section 149.
CASE : In the leading case Kaliaperumal Pillai v. Visalakshmi [AIR 1948 Mad 32],
a lady employed a goldsmith for the purpose of melting old jewellery and making new
ones. Every evening, she used to receive the half-made jewels from the goldsmith, put
them into a box, and lock it up. While the box was left in the room of the goldsmith, she
used to retain the key herself. One night, the jewels were stolen, and the lady sued the
goldsmith holding him liable as the bailee. It was held that, “Any bailment that could be
gathered from the facts must be taken to have come to an end as soon as the plaintiff
was put in possession of the melted gold. Delivery is necessary to constitute bailment.
The mere leaving of box in room in the defendant’s house, when the plaintiff herself
took away the key, cannot certainly amount to delivery within the meaning of the
provision in Section 149.” This is an important case from examination point of view.
3. Delivery for some purpose and usually upon a contract.

Delivery of goods should be for some purpose. The goods may be lent or hired
or deposited for safe custody or as security for a debt. Section 148 of the Act
contemplates delivery based upon a contract. However, the question arises
whether there is need for a contract at all. English law recognises bailment
without contract. Usually the delivery of goods is the result of a
contact. But this feature, though usual, is not essential.
CASE : In State of Gujarat vs. Menon Mohammad Haji Hasan [AIR 1967 SC
1885], the vehicles and goods belonging to M (the respondent) were seized by the
Government pursuant to the power under the Sea Customs Act. M was not found guilty
and the Government was directed to return the seized vehicles and the goods. But in
the meanwhile the vehicles remained totally uncared for and parts of the vehicles were
pilfered-away, leaving only the skeletons of the vehicles. The vehicles had become
useless for all practical purposes. In an action by the owner, it was contended on behalf
of the Government that the State was not the bailee. The Supreme Court rejected this
contention. The Supreme Court said : “Bailment is dealt with by the Contract Act
only in cases where it arises from a contract but it is not correct to say that there
202 Business Laws
cannot be a bailment without an enforceable contract.” The owner was held

entitled to demand the property seized or its value.
4. Obligation to return the goods or dispose them according to

directions of the bailor. The essence of bailment is the obligation of the
bailee to return the goods or to dispose them according to the directions of the
bailor. The directions for return or disposal of the goods may be given
even after the accomplishment of the purpose of bailment. Even
where the contract is silent about the return of the goods, there is an
implied term in a bailment to return the goods within a reasonable
time after the accomplishment of the purpose. It is not bailment if there
is no obligation to return the same subject-matter either in its original or in
altered form.
Examples : (i ) A deposits money with his banker. There is no bailment in this case as
the banker is not bound to return the same currency notes and coins. The relationship
between the banker and customer is that of debtor and creditor.
(ii) A farmer delivers grain to a miller to be used by him in his trade, and is entitled to
claim an equal quantity of corn of like quality or its market price. It is not bailment.
Kinds of Bailment
Bailment may be classified from the point of view of (1) benefit, and (2)
reward.
Classification of Bailment from ‘Benefit’ point of view:
(a) Bailment for the exclusive benefit of the bailor. In such a
bailment there is benefit only to the bailor. For example, the
gratuitous deposit of a thing with a bailee, who is to keep for the
bailor.
(b) Bailment for the exclusive benefit of the bailee. In this case
there is benefit only to the bailee. For example, the gratuitous loan of
a thing by the bailor to the bailee for his use.
(c) Bailment for the mutual benefit of the bailor and the bailee.
In this case bailment is for the benefit of both the bailor and the
bailee. For example, the hire of a thing by the bailor to the bailee for
reward or pledge of goods by the bailor to the bailee as security for
loan.
Classification of Bailment from ‘Reward’ point of view

(a) Gratuitous bailment. In case of gratuitous bailment, no
compensation passes between the bailor and the bailee, that is,
neither the bailor nor the bailee gets any remuneration. The
examples of gratuitous bailment are : (i) the deposit of a chattel with
a bailee for safe custody without any charge, (ii) delivery of a chattel
to the bailee who is to do something without reward for the bailee
and (iii) the gratuitous loan of a chattel or class notes by the bailor to
the bailee for the use of the bailee.
(b) Non-gratuitous bailment or Bailment for reward. Non-

gratuitous bailment is for reward for valuable consideration. In this
case either the bailor or the bailee is entitled to remuneration. For
example, bailment for hire. Bailment for hire may be hiring for use of
the goods; hiring for safe custody, i.e., of services in keeping the
goods; hiring for work on or with regard to the goods.
The following are the points of difference between gratuitous and

non-gratuitous bailment :
Criteria Gratuitous Bailment Non-gratuitous Bailment
1. Remuneration No remuneration passes Either the bailor or the
between bailor and bailee. bailee is entitled to
remuneration.
2. Duty to It is the duty of the bailor to Bailor is responsible for
disclose defects disclose to the bailee known damages arising to the bailee
in the goods faults in the goods bailed (S. due to faults in the goods
bailed 150). even if he himself was not
aware of existence of such
faults in the goods bailed.
3. Repayment of It is the duty of the bailor to Bailor has no duty to pay the
necessary meet the necessary expenses necessary expenses.
expenses incurred by the bailee for the
purpose of bailment (S. 158).
4. Premature If a gratuitous bailment is Bailor has no right to
termination of made for a specified time or terminate the bailment
bailment purpose, and the bailor before the expiry of the
compels the return of the specified period or
goods bailed even before the completion of the specified
expiry of that time or purpose.
accomplishment of the
purpose, having a right to do
so, he has to make good the
loss in excess of the benefit
suffered by the bailee due to
such earlier demand of the
good bailed (S. 159).
5. Termination of Gratuitous bailment is Non-gratuitous bailment is
bailment terminated in case of death of not terminated in case of
the bailor or the bailee (S. death of the bailor or the
162). bailee.
Sub-bailment
A sub-bailee is a person to whom the actual possession of goods is
transferred by someone who is not himself the owner of the goods, but has a
present right to possession of them as a bailee of the owner (Halsbury’s Laws
of England, fourth edition, reissue, vol-2, para 1841). For example, a carrier
might sub-bail by engaging another carrier as sub-contractor.
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Consideration in Relation to Gratuitous Bailment

Since the Act deals with bailment based upon a contract, it becomes
necessary to discover consideration supporting the contract if bailment is
gratuitous, i.e., either for the sole benefit of the bailor or of the bailee. For
instance, if A deposited his silver plate with B for safe custody, and B accepts
the same gratuitously, B becomes liable to A if the plate is not returned, or in
the case of goods, if any damage is caused to them. The detriment suffered by
the bailor in parting with the possession of the goods is sufficient
consideration to support the promise on the part of the bailee to return the
goods. Thus, even a gratuitous bailment is a valid contract.
Difference between Bailment and Sale

Basis Bailment Sale
1. Transfer of Ownership is not transferred Ownership is transferred to
Ownership to the buyer; only possession is the buyer.
transferred.
2. Return of The bailee is required to Goods are not required to be
Goods return the goods to the bailor returned to to the seller.
or otherwise dispose them
according to the directions of
the bailor.
3. Price Bailment may be gratuitous or The buyer is required to pay
non-gratuitous. the price of goods purchased.
4. Contract Bailment is usually upon on a All the essentials of contract
contract. But there may be must be present in case of
bailment without contract, e.g. sale.
in case of seizure of goods.
5. Timing of Goods are usually delivered at Goods may or may not be
delivery the time of bailment. delivered at the time of sale.
6. Statute The Indian Contract Act, 1872 The Sale of Goods Act, 1930
contains provisions for contains provisions relating
bailment. to sale.
Difference between Bailment and Licence

Bailment : Bailment is 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 of according to the directions
of the persons delivering them. It is the duty of the bailee to take reasonable
care of the goods.
Contract of License : A contract of license is a contract whereby a
person is allowed to enter or use or to place his goods in the premises
belonging to another person. The goods are not delivered to the other party.
there are two parties in such a contract : (i) Licensor and (ii) licensee. The
licensor is the person who authorises the use of the premises and licensee
is the person who is authorised to enter or use or place the goods in the
premises belonging to the licensor.
The questions whether a transaction amounts to bailment or some other
species of contract, sometimes arises specially in the case of vehicles left on
the land either gratuitously or on payment of a small charge.
The relationship between the owner of the parking lot and the owner of
the car, where parking was at the owner’s risk, was held to be of licensor and
licencee, and not that of bailor and bailee [Ashby vs. Tolhurst, (1937) 2 KB
242].
CASE : In Ashby vs. Tolhurst [(1937) 2 KB 242], A (the plaintiff), the owner of a
motor car, who went to see a horse race, parked his car in a private parking ground
belonging to B (the defendant). On payment of a shilling, he got from the attendant a
ticket on which was printed “Seaway Car Park, Car Park Ticket”. This ticket purported
to absolve B from any liability for loss of or damage to cars. The attendant allowed a
thief to drive away the car honestly believing that the thief represented A. The car was
never recovered. In a suit by A for negligence based upon the duty of a bailee, it was
held that in the absence of delivery, the relationship between the two was only that of a
licensor and licensee, and not that of bailor and bailee.
In a landmark judgement that Supreme Court has held on 17th

November, 2019 that hotels cannot deny compensation under the garb of
“owner’s risk” clause to its guests or visitors for theft of vehicle parked through
its staff or valet. The Apex Court said that valet parking at the hotel is unlike
parking facility where it is the owner’s responsibility to find suitable parking
spot, park the vehicle correctly, return, take out the vehicle upon display of the
parking token/slip.
It held, “the hotel-owner cannot contract out of liability for its negligence
on that of its servants in respect of a vehicle of its guest in any circumstance.”
DUTIES OF BAILEE
The duties of a bailee are as follows:
1. Duty to take reasonable care of the goods delivered to him
(Section 151 and 152). Section 151 has laid down a uniform
standard care for all kinds of bailment. According to this section, “In
all cases of bailment the bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would, under
similar circumstances, take of his own goods of the same bulk, quality
and value as the good bailed.” The banker-bailee, gratuitous or for
reward, is bound to take the same care of the property entrusted to
him as a reasonably prudent man and careful man may fairly be
expected to take of his own property of the like description.
CASE : In the leading case Houghland v. R.R. Low (Luxury Couches) Ltd. [(1962)
1 QB 694], A (the plaintiff) was a passenger in one of B’s (the defendant’s) coaches.
She had put her suitcase in the boot of the coach. The suitcase was stolen from the
206 Business Laws
boot. B was held liable for damages as he failed to take reasonable care of the
suitcase.
The bailee is not an insurer of the goods bailed to him. Section 152 states
that, “The bailee, in the absence of any special contract, is not responsible for
the loss, destruction or deterioration of thing bailed, if he has taken the
amount of care of it described in Section 151.” Thus, if the bailee takes the
care as is stipulated in S. 151, he is not responsible for any loss or damage to
the goods bailed. The bailee is not liable for loss caused by State enemies,
communal riots or by an act of God, that is, fire, lightening, flood etc.
CASES : (i ) In Rampal vs. Gaurishankar [AIR 1952 Nag 8], a bailee kept the
bailor’s ornaments locked in a safe. But he kept the key in the cash-box in the same
room which was situated on the ground floor. The room was locked from outside and
was easily accessible to burglars by removing the latch. The ornaments were stolen
from the safe by using the key from the cash box. The bailee was held liable for not
taking reasonable care of the goods.
(iii) In Shantilal v. Tara Chand [AIR 1933 All 158], bailee was held not liable for
damage to the foodgrains caused by very heavy floods which was first of its kind in the
history of the place.
2. Duty not to deviate from the terms of the contract (Section

153). According to Section 153 of the Act, “A contract of bailment is
voidable at the option of the bailor, if the bailee does any act with
regard to the goods bailed, inconsistent with the conditions of the
bailment.”
Thus, any wrongful act committed by the bailee with regard to the goods
bailed, will entitle the bailor to avoid the contract, and insist on the return of
the goods bailed.
Example : (Illustration to S. 153). A lets B, for hire a horse for his own riding. B drives
the horse in his carriage. This is, at the option of A, a termination of bailment.
If, according to the contract, the goods should be deposited at one place,
and in fact, the goods are deposited at another place, the bailee will be liable
for loss or damage to the goods, since his act is inconsistent with the
conditions of bailment.
CASE : In Lilley vs. Doubleday [(1881) 7 QBD 510], (1881) 7QBD 510, A (the
defendant) contracted to warehouse goods for B (the plaintiff) at Kingsland Road, but
warehouse a portion elsewhere. The goods were destroyed owing to fire in that place,
although B was not negligent. B was, held liable for the loss.
3. Duty not to make unauthorised use of the goods (S. 154). If the
bailee has a right to use the thing bailed, the right of the bailee is strictly
limited to the use contemplated by the bailor. If the bailee makes any
unauthorised use of the thing bailed, he will be liable to make
compensation to the bailor for any damage to the goods bailed
during such use of them. This liability of the bailee is absolute and
he will be liable even if he did not act negligently.
In this context, Section 154 of the Act has laid down that, “If the bailee
makes any use of the 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 for the goods from or during such use of them.”
Examples : (i) A lends a horse to B for this own riding only. B allows C, a member of
the family, to ride the horse. C rides with care, but the horse accidentally falls and is
injured. B is liable to make compensation to A for the injury done to the horse. [Illustration
(a) to S. 154].
(ii) A hires a horse in Calcutta from B expressly to march to Banaras. A rides with due
care, but marches to Cuttack instead. The horse accidentally falls and is injured. A is liable
to make compensation to B for the injury to the horse [Illustration ( b) to S. 154].
4. Not to mix the goods bailed with his own goods (Sections 155,
156 and 157). As a general rule, the bailee should not mix his own
goods with those of the bailor bailed to him. He is required to
maintain separate entity of the goods bailed.
Effect of mixture, with bailor’s consent, of his goods with bailee’s.
According to Section 155 of the Act, “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”. Thus, if the mixture is produced with the consent of
the bailor, both the bailor and the bailee will have a proportionate interest in
the mixture.
Effect of mixture, without bailor’s consent, when goods can be
separated. According to Section 156 of the Act, “If the bailee, without the
consent of the bailor, mixes the goods of the bailor with his own goods, and
goods can be separated or divided, the property in the goods remains in the
parties respectively; but the bailee is bound to bear the expenses of separation
or division, and damage arising from the mixture.”
Example : A bails 100 bales of cotton marked with a particular mark to B. B without
As consent, mixes the 100 bales with other bales of his bearing a different mark. A is
entitled to have his 100 bales returned, and B is bound to bear all the expenses incurred in
the separation of the bales and any other incidental damage. [Illustration to S. 156].
Effect of mixture, without bailor’s consent when goods cannot be

separated. According to Section 157, “If the bailee, without 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 the other goods and
deliver them back, the bailor is entitled to be compensated by the bailee for the
loss of the goods.”
Example : A bails a barrel of Cape flour, worth 45 to B.B, without A’s consent,
R
mixes the flour with country flour of his own, with only 25 a barrel. B must compensate A
R
for the loss of his flour. [Illustration to S. 157].
5. Duty to return the goods (Sections 160 and 161). According to

section 160, bailee is under a duty to return the identical goods
208 Business Laws
which form the subject-matter of the contract, without demand, after

the expiry of the time for which they were bailed, or the
accomplishment of the purpose of bailment.
If the bailee fails to return the goods bailed at the proper time, he
becomes liable for any loss or damage to the goods, inspite of the fact that he
exercises reasonable care (Section 161).
In a case like this, act of God or accident will not be a defence to absolve
the bailee of his responsibility.
However, a bailee is excused from returning the goods bailed in case they
are taken away from him by authority of law exercised through regular and
valid proceedings [Jaggilal Kamlapat Oil Mills vs. Union of India].
CASE : In the leading case Jaggilal Kamlapat Oil Mills vs. Union of India [(1976)
1 SCC 893], A entered into a contract to sell edible oil to B. He sent the oil to Indian
Railways for purpose of carrying it from Kanpur to Calcutta (Kolkata). But the oil was
seized by the Food Inspector of Calcutta as it was adulterated subsequently. The oil
was destroyed on the orders of the High Court. The Railways were held not liable to A
for not delivering the goods to B.
Where there are joint bailors, the bailee may, according to Section 165 of
the Act, “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.
6. Duty to return increase or profit from goods bailed (S. 163). It
is also the duty of the bailee to return to the bailor, any increase or
profit from the goods bailed in accordance with the provisions of
Section 163 of the Act.
According to this section, “In the absence of a contract to the contrary, the
bailee is bound to deliver to the bailor, or according to this directions, any
increase or profit which may have accrued from the goods bailed.”
Example : A leaves a cow in the custody of B to be taken care of. The cow has a calf.
B is bound to deliver the calf as well as the cow to A. [Illustration to S. 163].
7. Not to set up an adverse title (Ss. 166 and 167). According to

Section 117 of the Indian Evidence Act, the bailee is estopped from
denying the bailor’s authority to make the bailment and receive the
goods back. As such the bailee cannot say that the bailor had no
right to make the bailment, and set up an adverse title against the
bailor and in favour of a third party.
Section 166 provides that if the bailor has no title to the goods, and the
bailee returns the goods to the bailor in good faith, he will not be responsible
to the owner in respect of such delivery. Section 167 provides that if a person
other than the bailor claims the goods, he may apply to the court to stop the
delivery of the goods, and to decide the title to the goods.
However, if the bailee has already delivered the goods to the person
having a better title to the goods and the bailor sues him, the bailee may
prove that the person to whom the goods were delivered had a better right to
receive the goods. [Explanation (2) to S. 117 of the Evidence Act, 1872].
DUTIES OF BAILOR
The following are the duties of a bailor:
1. Duty to disclose faults in the goods bailed (Section 150).
Section 150 lays down the duty to disclose faults in the goods bailed.
The bailor’s duty to disclose the faults in the goods bailed is different
for gratuitous and non-gratuitous bailor. A gratuitous bailor is a
bailor who lends his goods to the bailee without any charge. A non-
gratuitous bailor delivers goods to the bailee for remuneration and
therefore his duty is greater.
(a) Duty of gratuitous bailor. A gratuitous bailor is bound to
disclose to the bailee faults in the goods bailed, of which the
bailor is aware and which materially interfere with the use of
them, or expose the bailee to extraordinary risks. Failure to make
such disclosure will make the bailor liable for damages arising
to the bailee directly from such faults.
Example 1. A lends a horse, which he knows to be vicious, to B. He does not
disclose the fact that the horse is vicious. The horse runs away. B is thrown and injured, A
is responsible to B for damage sustained. [Illustration ( a) to S 150].
Example 2. A gives his car to B for two days without any charge. A knows that brakes
of the car are not working properly. He does not disclose this fact to B. A will be
responsible for any loss caused to B by the faulty brakes.
(b) Duty of a non-gratuitous bailor (bailor for reward). In

case of a bailor for reward greater degree of care is required on
the part of the bailor. If the goods are bailed for hire, the bailor
is responsible for all defects in the goods bailed whether he is
aware of the defects or not.
Example : A hires a carriage of B. The carriage is unsafe, though B is not aware of it,
and A is injured. B is responsible to A for the injury. [Illustration (b) to S. 150].
CASE : In Reed vs. Dean [(1949) 1 K.B. 188], A (the plaintiff) hired B’s (the
defendant’s) motor launch for a holiday on the Thames. Two hours after he had set out,
the launch caught fire. The fire-fighting equipment was out of order, and A suffered
personal injuries and lost all his belongings on board. B was held liable for his failure to
make the launch fit for the purpose of the hiring as reasonable care could make it.
2. Duty to repay necessary expenses if the bailee is to receive

no remuneration (S. 158). In the case of gratuitous bailment, it is
the duty of the bailor to meet the bailee’s necessary expenses
incurred for the purpose of bailment (Section 158).
210 Business Laws
Example : A delivers a horse to B without reward for safe custody. It is the duty of A,
the bailor, to reimburse to B, the bailee, for feeding expenses (i.e. necessary expenses) of
keeping the horse. Further the bailor will be liable to pay the extraordinary expenses, if
any, on medical care.
3. Duty to bear extraordinary expenses in case of gratuitous as

well as non-gratuitous bailment (S. 158). In the case of a non-
gratuitous bailment, the bailor has no duty to pay for the ordinary
expenses incurred by the bailee, since they are incidental to the use
of the goods bailed. But in case of gratuitous bailment as well as in
case of non-gratuitous bailment, the bailor has to reimburse the
bailee for any extra-ordinary expenses incurred by the bailee,
provided the expenses incurred were not due to the negligence or
fault of the bailee.
Example : A leaves his cow in the custody of B to be taken care of, and B is to
receive no remuneration for keeping the cow in his custody, all the expenses incidental
thereto, i.e., feeding the cow, medical expenses, etc., should be paid back by A to B.
However, if A agrees to pay a certain amount to B per day for taking care of the cow, B is
not entitled to recover the feeding expenses. But, he can recover the medical expenses
provided he is not negligent in taking care of the cow.
4. Duty to compensate the bailee for premature termination of
bailment (Section 159). If a gratuitous bailment is made for a
specified time or purpose, and the bailor compels the return of the
thing bailed even before the expiry of the time or the
accomplishment of the purpose, having a right to do so, he has to
make good the loss in excess of the benefit suffered by the bailee, due
to such earlier demand of the thing bailed (Section 159).
5. Duty to indemnify the bailee (S. 160). Section 164 of the Act
provides that, “The bailor is responsible to the bailee for any loss
which the bailee may sustain by reason that the bailor was not
entitled to make the bailment, or to receive back the goods or to give
directions, respecting them.” Therefore, if the bailee is sued by a third
person who demands the thing bailed on the ground that the bailor
was not the owner, the bailee is entitled to reimbursement for
expenses incurred in the litigation.
Example : A gives a vehicle to B on hire. B gives this vehicle to his friend C for use
described it as his own. A files a suit against C for wrongful possession of vehicle and
succeeds in getting compensation from C. B has to indemnify C as B did not have the right
to make the bailment.
6. Duty to receive back the goods. It is the duty of the bailor to take
the goods back from the bailee after the expiry of the period of
bailment or the accomplishment of the purpose for which the goods
were bailed. If the bailor does not take back the goods, the bailee is
entitled to compensation from the bailor for the expenses incidental
to safe custody of the goods.
RIGHTS OF THE BAILEE (For details see duties of the bailor)

The bailee has the following rights against the bailor:
1. Right to claim damages for the loss or damage caused to him by the
bailor’s failure to disclose defects in the goods bailed (S. 150). [This
has been explained earlier].
2. Right to reimbursement of expenses incurred by him in the case of
gratuitous bailment, and of the extraordinary expenses in the case of
a non-gratuitous bailment (S. 158). [This has been explained earlier].
3. Right to indemnify in case of gratuitous bailment, if the bailor
compels the return of the goods, and the loss occasioned, thereby is
more than the benefit derived (S. 159). [This has also been explained
earlier].
4. Right to indemnify for any loss suffered, by reason of the defective
title of the bailor to the goods bailed (S. 164). [This has been
explained earlier].
5. Right to compensation for the expenses incurred on default by the
bailor to take delivery of the goods after the expiry of the period or the
accomplishment of the purpose (S. 160). [This has also been
explained earlier].
6. Right to return the goods to one of the joint owners without the
consent of all in the absence of any agreement to the contrary (S. 165).
Section 165 provides that, “If several 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.”
7. Right to deliver the goods to the bailor who has no title to do goods,
without incurring any liability (S. 166). Section 166 states that, “If
the bailor has no title to the 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.”
8. Right to apply to the court in case of conflicting claims, for deciding
the title to the goods (S. 167). Section 167 provides that, “If a person,
other than the bailor, claims goods bailed he may apply to the court
to stop delivery of the goods to the bailor, and to decide the title to
the goods.”
9. Right to sue a wrong-doer (S. 180). Section 180 provides that, “If a
third person wrongfully deprives the bailee of the use of possession of
the goods bailed, or does them any injury, the bailee is entitled to use
such remedies as the owner might have used in the like case if no
bailment had been made; and either the bailor or the bailee may
bring a suit against a third person for such deprivation or injury.”
10. Right of lien (S. 170 and S. 171). [This has been explained under the
next heading].
212 Business Laws
BAILEE’S LIEN
Lien is the right of a person to retain the possession of the goods
which is rightfully and continuously in his possession belonging to
another until the claims of the person in possession are satisfied.
Lien is a right by which a person in possession of the property holds it and
retains it against the other in satisfaction of a demand due to the party
retaining it; [Order 8, Rule 6(2), Civil Proceduie Code]. It arises when the
bailee has a right of continuing possession of the goods. The right of lien is
lost when possession is lost. Therefore, bailee’s lien is known as ‘possessory
lien’.
Lien is of two types: (1) Particular lien; and (2) General lien.
Particular lien (S. 170)

A lien may be general lien or particular lien. Section 170 confers the right
of particular lien upon a bailee. According to this section, “Where the bailee
has, in accordance with the purpose of bailment, rendered any service
involving the exercise of labour or skill in respect of the goods bailed, he has,
in the absence of a contract to the contrary, a right to retain such goods until
he receives due remuneration for the services he has rendered in respect of
them.”
Thus, a bailee has a particular lien when the following conditions are
satisfied:
(a) Rendering of services. The bailee must have rendered some
services in relation to the thing bailed. He must be entitled to some
remuneration for rendering the services. He must not have been paid
for the services.
(b) Exercise of labour and skill. The services rendered by the bailee
must be one involving the exercise of labour or skill in respect of the
goods bailed. It is also necessary that the labour or skill must have
resulted in the improvement of the goods, that is, the labour, or skill
must confer an additional value on the goods. For example, a job
master has no lien at all for the amount of his bill in respect of
feeding and keeping a horse at his stable, whereas a trainer does get
a lien upon a horse for the improvements.
Example : A delivers a rough diamond to B, a jeweller, to be cut and polished, which
is accordingly done. B is entitled to retain the stone till he is paid for the services he has
rendered. [Illustration (a) to S. 170].
CASE : In the leading case Chand Mal vs. Gonda Singh [(1885) Punjab Rec.
No. 60] page 126, a bailee claimed lien for safe custody charges for the storage of
sugar. It was held that there cannot be lien since safe custody does not involve the
exercise of labour or skill within the meaning of S. 170.
(c) Completion of work. The baliee must have performed the services
in full in accordance with the directions of the bailor, within the
agreed time or reasonable time. If the bailee fails to complete the

work, he has no right of lien.
(d) No credit-term. There must not be an agreement to perform the
service on credit.
Example : A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the
coat as soon as it is finished, and to give A three months credit for the price. B is not
entitled to retain the coat until he is paid. [Illustration ( b) to S. 170].
(e) No contract to the contrary. There must not be a contract to the

contrary. The bailee cannot exercise the right of lien on the goods
bailed even though he has rendered services involving the exercise of
labour or skill in respect of them. By an agreement to that effect a
particular lien may be converted into a general lien.
(f) No loss of a possession. Since the bailee’s lien is possessory, he
loses the right of lien if he surrenders possession of the goods, even
though he regains possession subsequently.
CASE : In Eduljee v. Cafe John Bros. [ILR 1944 Nag 37], A (the plaintiff) purchased
an old refrigerator from B. The vendor, B agreed to repair it for a fixed amount. After the
completion of the repair the refrigerator was delivered to A, but a part of the repair
money was still unpaid. The machine broke down again. The vendor took away engine
and another part for repair. He wanted to claim lien on these parts until the earlier
repair charges were pair. But he was not allowed to do so.
General lien (S. 171)

According to Section 171 of the Act, “Bankers, factors, wharfingers,
attorneys of High Court and policy brokers may, in the absence of a contract to
the contrary, retain as a security for a general balance of account, any goods
bailed to them; but no other persons have a right to retain, as a security for
such balance, goods bailed to them, unless there is an express contract to that
effect.”
General lien entitles a bailee [provided he belongs to any of the
classes referred to in S. 171] to exercise the right of retention for any
goods bailed to him, as security for a general balance of account, i.e.,
for any amount due to him whether in respect of those goods or any
other goods.
Bankers, factors, wharfingers, and policy brokers have general lien in the
absence of a contract to the contrary. A legal practitioner is also entitled to
general lien on the “goods bailed” to him and which are in his possession in
his professional capacity until his fee and other costs incurred by him are
paid.
But, a legal practioner has no lien on litigation papers and case files
and is obliged to return the same to his client on demand because litigation
and case files cannot be equated with “goods bailed” [R.D. Saxena v.
Balram Prasad Sharma, AIR 2000 SC 2912].
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Distinction between Particular lien and General lien

The following are the points of distinction between the two :
Basis Particular lien General lien
1. Exercise of A bailee is entitled to exercise General lien can be exercised
labour or skill the right of particular lien on any goods which are in the
only on those goods on which possession of the bailee.
he has rendered labour or
skill until he receives the
remuneration for the services
rendered.
2. Purpose for Particular lien can be General lien can be exercised
which lien can exercised for payment of for a general balance of
be exercised remuneration for the services account.
rendered.
3. To whom Right of particular lien is Right of general lien is
available, in available to all bailees available to bankers, factors,
the absence of wharfingers, attorneys of
contract to the High Court and policy
contrary brokers as per the Indian
Contract Act, 1872. However,
a legal practitioner has no
lien on litigation papers and
case files of his client.
4. Rendering of Particular lien can be General lien can be exercised
services exercised where the bailee even where no such services
has rendered services have been rendered.
involving labour or skill.
RIGHTS OF BAILOR (For details see duties of bailee)

The rights of the bailor are as follows:
1. Right to claim damages for loss, destruction or deterioration of the
goods bailed, owing to bailee’s negligence (S. 151). [This has been
explained earlier].
2. Right to terminate the bailment, if the bailee does any act with regard
to the goods bailed, inconsistent with the conditions of bailment (S.
153). [This has been explained earlier].
3. Right to compensation for any damage arising to the goods due to
unauthorised use of the goods by the bailee (S. 154). [This has been
explained earlier].
4. Right to compensation for the loss of the goods occasioned by the
bailee’s unauthorised mixture of his own goods with the goods bailed
(Sections 155,156 and 157). [This has been explained earlier].
5. Right to claim the goods back after the expiry of the time or
accomplishment of the purpose, or to give necessary directions for
otherwise disposing of the goods (S. 160). [This has been explained
earlier].
6. In the case of gratuitous bailment, right to demand the goods back

even before the expiry of the time or accomplishment of the purpose (S.
159). [This has been explained earlier].
7. Right to increase or profit from the goods bailed (S. 163). [This has
been explained earlier].
8. Right of action for damages against the bailee, if the bailee does not
or refuses to deliver the goods bailed (S. 161). If the bailee sells the
goods, the bailor can, in equity, follow the proceeds.
9. Right to sue a third person who wrongfully deprives the bailee of the
use of the goods, or does them any injury (S. 180). [This has been
explained earlier].
10. Right to have his share in the compensation received in any such suit
(S. 181). According to S. 181, “Whatever is obtained by way of relief
or compensation in any such suit shall, as between the bailor and the
bailee, he dealt with according to their respective interests”
Rights of Bailors and Bailees against Wrong-doers (S. 181)

If a third person wrongfully deprives the bailee of the use or possession of
the goods bailed, or does them any injury, the bailee is entitled to use such
remedies as the owner might have used in the like case if no bailment had
been made; and either the bailor or the bailee may bring a suit against a
third person for such deprivation or injury (S. 180). Whatever is obtained by
way of relief or compensation in any such suit shall, as between the bailor
and the bailee, be dealt with according to their respective interests (S. 181).
Example : A delivers woolen cloth to B a tailor, for making a suit. The tailor prepares
the suit. The suit is stolen by C from the tailor’s shop. In this case either A, the owner or B,
the tailor can bring a suit against C. If B brings an action against C, the wrongdoer, he
shall handover the recovered amount, alter deducting his charges, to A.
TERMINATION BAILMENT
A contract of bailment is terminated in the following cases:
1. Expiry of period. When a bailment is for a specific period, it
terminates on the expiry of that period.
2. Achievement of object. When a bailment is or a specific purpose, it
terminates on the achievement of the purpose.
3. Inconsistent use of the goods. A contract of bailment is voidable
at the option of the bailor, if the bailee does any act with regard to
the goods bailed, inconsistent with the conditions of bailment.
Example : A lets B, for hire, a horse for his own riding. B drives the horse in his
carriage. This is, at the option of A, a termination of the bailment.
4. Restoration of goods let gratuitously. Section 159 provides that
the lender of a thing for use may at any time require its return, if the
loan was gratuitous, even though he lent it for a specified time or
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purpose. But the bailor has to compensate the bailee in such a case if
the loss occasioned to the bailee thereby is more than the benefit
derived.
5. Death of the bailor or the bailee. Section 162 provides that a
gratuitous bailment is terminated by the death of the bailor or of the
bailee.
6. Destruction of the subject-matter. A bailment is terminated
when the subject-matter of the bailment is destroyed. It is also
terminated when the subject-matter of the bailment is by reason of a
change in its nature becomes incapable of use for the purpose of the
bailment.
PLEDGE OR PAWN
DEFINITION AND ESSENTIALS OF PLEDGE

Pledge is a form of bailment in which goods are delivered as security for
the repayment of a debt. According to Section 172 of the Act, “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 ‘pawee’.”
Example : A borrows 50,000 from B and delivers 500 shares of Reliance Industries
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Limited as security for payment of the debt. The bailment of shares is pledge.
Essentials of Pledge
The essentials of a pledge or pawn are:
1. Bailment. There must be bailment of goods pledged. Therefore,
delivery of the goods, whether actual, symbolic or constructive, is
necessary to constitute a pledge.
Supreme Court has held that, “delivery of the chattel pawned is a
necessary element in the making of a pawn but the delivery and
advance need not be simultaneous and a pledge may be perfected by
delivery subsequent to the advance made”. [Morvi Mercantile Bank
v. Union of India, AIR 1965 SC 1954]
It has been held that a bank advancing money against delivery of
Railway Receipt (document of title) is a pledge.
2. Bailment of goods as security. Bailment of goods must be by way
of security.
3. Purpose of security. Security must be for payment of a debt or
performance of a promise.
4. Special property. A pawnee has only a special property in the
pledge, the general property remains in the pawnor and wholly
reverts to him on discharge of the debt.
It has been held by the Supreme Court that the pawnee also
holds the conditional general property interest in the pledge,
the condition being that he can pass on that general property
only in the event of the pledge being brought to sale, that is,
in the event of the pledge remaining unredeemed resulting in
the sale of the goods pledged. It was further held in this case that
pawnee is liable to pay sale tax on the sale of the goods pledged
[Karnataka Pawnbrokers Association vs. State of Karnataka
(1998) 7 SCC 707].
5. Goods. The subject-matter of pledge is goods which are capable of
actual, symbolic or constructive delivery. Any kind of existing goods,
documents or valuable things of personal nature can be pledged.
Distinction between Bailment and Pledge

Though pledge is bailment of goods, the following are the points of
distinction between the two :
Basis Bailment Pledge

1. Purpose Bailment of goods is made for Pledge is for a specific
‘some purpose’ (e.g. use, safe purpose i.e., as security for
custody, repair, change of the payment of a debt or
form, etc.) performance of a promise.
2. Right to sell In case of bailment, the bailee In the case of pledge, the
the goods can exercise the right of lien pledgee can sell the goods
on the goods. But he has no after due notice to the pledger
right to sell those goods. on his default.
3. Right to use In case of bailment, the The pledgee or pawnee has no
bailee, may use the goods right to use the goods.
bailed as per the terms of the
contract.
RIGHTS OF PAWNEE
1. Right of retainer (S. 173). Section 173 of the Act confers upon the
pawnee the right of retainer. According to this section, the pawnee
can exercise the right of retainer by retaining the goods pledged not
only for payment of the debt or performance of promise, but for the
interest of the debt also. Further, the right of retention can be
exercised for all the necessary expenses incurred by him in respect of
the possession or for the preservation of the goods pledged.
The right of retainer is wider than the right of lien. It gives the pawnee
‘special interest’, or property in the goods pledged. It implies that the pawnee
can assign or pledge his special interest or property in the goods which is not
allowed in case of lien.
2. Right of retainer for subsequent advances. According to S. 174,
the pawnee cannot retain the goods pledged for a promise other than
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the debt or promise for which they were pledged, in the absence of a
contract to that effect. However, when subsequent advances are
made, a contract to that effect shall be presumed, and the right of
retainer extends to any subsequent advance also, in the absence of a
contract to the contrary.
3. Right to extraordinary expenses. According to Section 175 of the
Act, “The pawnee is entitled to receive from the pawnor extraordinary
expenses incurred by him for the preservation of the goods pledged.”
Thus, the pawnee is entitled to recover from the pawnor
extraordinary expenses incurred by him for preserving the goods
pledged. This right is only a right of action, i.e., filing a suit, but not
a right of lien.
Example : A pledges with B diamonds worth 10 lakhs and borrows 5 lakhs at 12%
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interest per annum for a year. Due to increase in number of incidents of burglary B insures
the diamonds and purchases a strong safe for keeping the diamonds. B is entitled to these
extraordinary expenses.
4. Right to sue the pawnor or sell the goods on default of the
pawnor. Section 176 of the Act confers two rights upon the pawnee,
in case of default by the pawnor.
These rights are : (a) he may bring a suit upon the debt, and
retain the goods pledged as collateral security; or (b) he may sell the
goods on giving the pawnor reasonable notice of the intended sale.
The power of sale conferred by this section, is for the benefit of the
pawnee. It can be exercised at his discretion. Accordingly, if the loan is
not repaid, the pawnee may straightway sell the goods even without
bringing any suit. But, this can be done only after giving the pawnor
reasonable notice of sale, which is statutory, and which cannot be
waived by an agreement to the contrary. The notice must be clear and
specific in its language and must indicate the intention of the pawnee to
dispose of the security. Notice may be oral or written. Sale without
reasonable notice is invalid, and cannot be upheld. Such sale will
amount to conversion. Vendee without notice of the pledge gets only the
limited rights or interest of the pawnee.
This section also lays down that, if the proceeds of sale are less
than the amount due by the pawnor, the pawnor is still liable to pay
the balance. If, on the other hand, the proceeds of sale are more than
the amount due, the surplus must be paid back to the pawnor.
In Standard Chartered Bank v. Custodian [AIR 2000 SC 1488], it
was held that where shares and debentures were pledged with the bank,
bonus shares, dividend and interest accrued on the pledged shares and
debentures were accretions to the pledged stock and formed part of the
pledged property. Hence such accretions is to be returned by the pledgee only
when the pledged goods are to be returned. In case of pownor’s default in
payment of the debt, the pawnee has the right to sell the accretion alongwith
the original goods pledged after giving reasonable notice.
Duties of Pawnee
Since pledge is a special kind of bailment, the duties of the pawnee are
just like a bailee. For details see duties of the bailee explained earlier.
RIGHTS OF THE PAWNOR

1. Enforcement of the pawnees duties. The duties of the pawnee
are the rights of the pawnor. For details see duties of the bailee
explained earlier.
2. Pawnor’s right to redeem (S. 177). The special interest of the
pawnee comes to an end as soon as the debt for which the goods were
pledged is discharged. Accordingly, as per section 177, the pawnor
has a right to redeem the goods pledged on paying the money due. If
no time is fixed for the repayment of the debt, the pawnor may pay
up what is due, and redeem the property at any time. If a time is
fixed for the payment, the right of redemption can be exercised after
the expiry of the time of payment.
By virtue of Section 177, the pawnor is entitled to redeem the
goods pledged at any time before the actual sale of goods, even
though he makes default in payment of the debt or performance of
the promise within the stipulated time. His right is not affected merely
because of the expiry of the time stipulated for repayment and his failure to
pay back within that time. His right extinguishes after the sale of the goods.
Hence, he enjoys the right to redeem the goods at any time before the actual
sale of the goods pledged. But he has to pay the expenses which have arisen
from his default. In fact, the period of limitation for a suit by the pawnor
against the pawnee to recover the things pledged is 30 years from the date of
the pawn.
PLEDGE BY NON-ONWERS
In the following cases, valid pledge can be made even by persons other
than the owner :
1. Pledge by mercantile agent (S. 178). Under S. 2(9) of the Sale of
Goods Act, 1930, a mercantile agent is an “agent having in the
customary course of business as such agent authority to sell the
goods, or to consign the goods for the purpose of sale, or to buy the
goods, or to raise money on the security of the goods.”
The pledge made by a person under S. 178 is valid if the following
(a) The pledge must be made by a mercantile agent. Therefore, a person
to whom the goods are entrusted for safe custody or under a contract
of hire cannot make a valid pledge.
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(b) The mercantile agent must be in possession of the goods or

documents of title to the goods (for example a railway receipt or a bill
of loading) as a mercantile agent.
(c) The possession must be with the consent of the owner.
(d) He should be acting in the ordinary course of business of a
mercantile agent.
(e) The pawnee should act in good faith and should not have, at the time
of the pledge, notice that the pawnor has no authority to make the
pledge.
2. Pledge by a person in possession under a voidable contract

(S. 178A). According to Section 178 A of the Act, if the pawnor has
obtained possession of the goods pledged by him under a voidable
contract, but the contract has not been rescinded at the time of the
pledge, the pawnee acquires a good title to the goods pledged,
provided he acts in good faith and without notice of the pawnor’s
defect in the title. (See Phillips vs. Brooks [(1919) 1 KB 243], in the
chapter on ‘Free Consent’).
Example : A purchases a diamond ring from B through fraud and pledges it with C
who acts In good faith before the contract is rescinded by B. The pledge is valid. B can
take back the goods only after the loan taken by A is paid off.
3. Pledge by a person having limited interest (S. 179). Section 179

of the Act states that where a person pledges goods in which he has
only a limited interest, the pledge is valid to the extent of that
interest. Accordingly, where a pledgee or bailee or a person who has
a lien with respect to goods, pledges them, the pledge will be valid to
the extent of such interest. Pledge will be valid even if the pledgee
knows about the limited interest of the pledger.
Example 1. If the finder of lost goods has incurred 100 for preserving the goods and
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has pledged the same for 150, the pledge is valid to the extent of 100. Hence, the true
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owner can recover the goods by paying only 100 to the pledgee.
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Example 2. A delivers a pant piece to B, the tailor master, for making a trouser and
agrees to pay 500 as sewing charges. B pledges the trouser with C for 800. The
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pledge is valid to the extent of B’s interest in the suit, that is, sewing charges of 500. A
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can, therefore, recover the trouser from C on paying to him 500.

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4. Pledge by a co-owner. Where there are several joint owners of

goods, and one of them is in possession of the goods with the consent
of the others, he can make a valid pledge of the same.
5. Pledge by a seller in possession after sale. Where a seller,
having sold the goods continues to be in possession of the same, not
being the owner of the goods any longer, cannot make a valid pledge.
However, Section 30(1) of the Sale of Goods Act empowers such a
person to make a pledge, and declares that any pledge made by him
will be as valid as if it is made by the owner himself, provided the

pledgee acted in good faith and had no notice of sale.
6. Pledge by a buyer in possession before sale. According to
Section 30(2) of the Sale of Goods Act, where a person, having
agreed to buy goods, obtains with the consent of the seller,
possession of goods or documents of title to the goods, before property
in the goods is transferred to him, pledges the goods or documents of
title to the goods, the pledge will be valid provided the pledgee acted
in good faith and had no notice of pledger’s defect in title to the goods
pledged.
REVIEW QUESTIONS
1. Explain three essentials of a contract of bailment. [B.Com. (Hons.), D.U.]
2. Discuss the duties and rights of a bailee.
3. Discuss the duties and rights of a bailor.
4. Explain the meaning of ‘Bailment’ as provided in the Indian Contract Act,
1872. When does a contract of bailment terminate ? [B.Com., D.U.]
5. Distinguish between Bailment and Pledge. [B.Com., D.U.]
6. Distinguish between Gratuitous Bailment and Non-gratuitous Bailment.
7. Who is a finder of lost goods ? What are his duties and rights ?
8. What is lien ? How does particular lien differ from general lien ? Explain.
9. Define pledge. Discuss the rights and duties of pawnor and pawnee.
10. Explain the pawnee’s right to sell the pledged goods and pawnor’s right to
redeem the pledge.
11. When a pledge created by non-owners valid ? Explain.
(a) When there is no remuneration payable to either the bailor or the bailee,
it is called gratuitous bailment.
(b) In case of pledge, the ownership of the goods passes to the pledgee.
(c) Pledge can be created only of immovable property.
(d) In bailments, the delivery of goods must be actual.
(e) All bailees are entitled to general lien.
(f) A gratuitous bailment is terminated by the death of either bailor or
bailee.
(g) A gratuitous bailment for a fixed period can be terminated at any time.
[Hint. True : (a), (c), (f), (g); False : (b), (d), (e)]
PRACTICAL PROBLEMS
2. A lends his motor car to B for a drive by him only B allows his daughter C,
who is an expert car driver, to drive the vehicle. C drives the car carefully but
its axle suddenly breaks and the car is damaged. Is B liable for the damage?
[Hint : Same as above.]
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3. A hires a carriage of B. The carriage is unsafe though B is not aware of it and

A is injured. Can A claim any damages from B for the injuries?
[Hint : Non-gratuitous bailment Hence, A can claim damages. Section 150.]
4. A had loaned his car to his brother, B, who obtained credit from C. C took
possession of the car from B and refused to return it until he was paid. Has A
any remedy against C? State the law of support your answer.
[Hint : A can recover the car from C along with damages caused to him due
to its wrongful seizure and detaining. It is not a case of pledge and B was
personally liable for the price of petrol and oil purchased.]
5. A lends his scooter, which he knows to be defective, to B. A does not disclose
the defect to B, who has a fall and is injured. B sues A for damages. Is A
liable? Will your answer be different if:
(i) A was ignorant of the defect of the scooter at the time of lending.
(ii) Instead of lending the scooter A gives the scooter on hire to B.
[Hint : B has a right to sue A for damages (Section 150). The answer would
be different if A was ignorant of the defect of the scooter at the time of
lending. In case the scooter is given on hire A would be liable whether he was
or was not aware of the defect in the scooter.]
6. A lends his car to B for his own driving. B asks C, his son to drive the car
while B and his family were going on a picnic. C drives the car with care but
unfortunately meets with an accident. The car is damaged and A has to pay a
sum of 10,000 for the repairs. Can A claim the amount from B? Decide
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giving reason.
[Hint : A can claim the amount from B. Section 154.]
7. A gives a shirt piece to B, a tailor, for making into a shirt, the agreed charges
being 200. B tenders 200 but B refuses to deliver the shirt till A pays an
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old debt of 500. Is B entitled to do so. Give reasons.

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[Hint : B is not entitled to refuse to deliver the shirt to A for the old debt as a
tailor has only particular lien and not general lien.]
8. A lady delivered her old jewellery to a goldsmith for the purpose of making
new jewellery out of it. Every evening she used to receive the unfinished
jewellery and put it into a box kept at the goldsmith’s shop and kept the key
of the box with herself. One night, the jewellery was stolen from the box. Is
the goldsmith liable for the loss? [B.Com. and B.Com. (H), D.U.]
[Hint : The goldsmith is not liable to make good the loss of jewellery as he
was not bailee at the time the goods were lost (Kaliaperumal Pillai vs.
Visalakshmi, A.I.R. 1938 Mad. 32]
9. (Finder of goods). Amit found a purse in a computer education centre. He
deposited the purse with proprietor of the centre so that the real owner can
claim it. However, no one claimed the purse. Amit wants the purse back. Can
he succeed?
[Hint : Amit is entitled to take back the purse.]
10. Amrit hires a van from Bhim and agrees to pay 2,000 as hire charges. The
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van was unsafe, though Bhim was unaware of it. Amrit was injured and he
claims compensation for injuries suffered by him, from Bhim. Bhim refuses to
pay. Discuss the liability of Bhim in this regard. [B.Com. (Hons.), D.U.]
[Hint : As it is a case of non-gratuitous bailment, Bhim is liable.]
15 Agency
LEARNING OBJECTIVES
➥ Definition and Essentials of Agency

➥ Kinds of Agents
➥ Creation of Agency
➥ Extent of Agent’s Authority
➥ Delegation of Authority
➥ Duties and Rights of Agent
➥ Relations with Third Parties
➥ Personal Liability of Agent
➥ Termination of Agency
The terms ‘agent’ and ‘agency’ are now-a-days used in very wide sense.
But in law these words have specific meanings.
DEFINITION AND ESSENTIALS OF AGENCY
Definition of Agent, Principal and Agency

According to Section 182 of the Act, “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’.’’
A ‘contract of agency’ is one by which an agent is authorised to
establish privity of contract between the principal and a third party.
It is not necessary to have a formal agreement. ‘Agency’ is the
relationship that arises when a person is appointed to represent
another in dealings with third persons. For example, where P appoints
A to buy certain quantity of particular goods on his behalf, P is the
principal and A is the agent and the relationship which arises between P
and A is called ‘agency’. If A purchases the goods on credit from T than there
is a contract between P and T and this can be enforced by P against T and by
T against P. In other words an agent is a connecting link between the
principal and third parties, and thereby establishes privity of contract
between them.
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According to Cheshire, Fifoot and Furmston’s Law of Contract, Twelfth

Edition, page 469, “Agency is a comprehensive word which is used to
describe the relationship that arises where one man is appointed to
act as the representative of another.”
General Rules of Agency

There are following two rules of agency:
(a) Firstly, all acts which a person can do himself can be done through
an agent. However, in case of contract which from their very nature
should be done by a person himself he cannot appoint an agent.
These include marriage and contracts of personal nature.
(b) Secondly, agency is based upon the principle “he who does a thing
through another does it himself”. This means that principal is bound
by the acts of his agent and can get the benefit of such acts as if he
had done them himself. Section 226 provides that contracts entered
into through an agent, may be enforced in the same manner, and will
have same legal consequences, as if the contracts had been entered
into and the acts done by the principal.
Example 1. A buys goods from B, knowing that he (B) is an agent for their sale but
not knowing who is the principal. 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. [Illustration (a) to S. 226].
Example 2. 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. [Illustration ( b) to S. 226].
Test of Agency
The usage of the word ‘agent’ is not conclusive for determining the correct
relationship between two parties. Further, every relationship in which one
works for another need not be agency relationship.
Every person who acts for another cannot be an agent, and every
relationship in which one works for another need not be agency relationship.
The essential element of agency is the exercise of delegated authority to
do a lawful act on behalf of another, and establish privity of contract between
such a person and a third party. Thus, the test of agency is whether the person
is purporting to enter into transaction on behalf of the principal or not i.e., to
create, modify or terminate contractual obligations between the principal,
whom he represents, and some third person.
Essential Elements of Valid Agency

The following are the essential elements of a valid agent :
1. Agreement between principal and agent. Ordinarily an
agreement between principal and agent is necessary for creation of
Agency 225
agency. It may be oral or in writing. However, in certain

cases agency may be created without agreement, e.g., by ratification,
etc.
2. The person must act in a representative capacity. The person
must act as a representative of the other in business negotiations,
that is to say, in the creation, modification or termination of
contractual obligations between the principal and third parties.
3. The principal must be competent to contract. Since the purpose
of agency is to empower the agent to bring the principal into
contractual relationship with third persons, any person who is
competent to enter into contracts himself, may act through an agent.
A person who is suffering from legal disability cannot appoint an
agent. According to Section 183 of the Act, “Any person who is of the
age of majority according to the law to which he is subject, and who is
of sound mind, may employ an agent.” Thus, any person who is
competent to contract has a right to appoint an agent.
4. Agent may not be competent to contract. Since a contract by an
agent is, in effect, the contract of the principal, it is immaterial
whether or not the agent has legal capacity to make a contract for
himself. Accordingly, even a minor can be an agent and this is clear
from Section 184 of the Act which lay down that, as between the
principal and third persons any person may become an agent.
According to this section, a person who is not of the age of majority
can certainly bring about contractual relation between the principal
and the third party. However, such a person will not be responsible
to the principal. To be responsible, he too should be a person of the
age of majority. In case, a minor happens to be an agent and he
mismanages the affairs of the agency, the principal cannot hold him
liable for his misconduct and recover compensation from him.
5. Consideration is not necessary to create an agency. One of the
essential requisites of a valid contract is consideration. But as
regards agency, Section 185 of the Act specifically states that “No
consideration is necessary to create an agency.” Accordingly, this may
be considered to be an exception to the rule that ‘an agreement made
without consideration is void.
6. Creation of legal relations. An agent establishes legal relations
between his principal and the third parties. Thus, he is a connecting
link between his principal and the third parties.
In most cases, there is an express or implied agreement to pay
remuneration for the agent’s services.
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Distinction between Agent and Servant*

The following are the points of distinction between the two :
Basis Agent Servant
1. Meaning An agent is a person A servant is a person who is
employed to do any act for employed by another to do
another or to represent certain types of work/job.
another in dealings with
third persons (S. 182)
2. Representative The agent is authorised to act A servant has no
character on behalf of his principal, and representative character. he
has power to create legal acts under the directions and
relations between his control of his employer. This
principal and third parties. occupation has no relation to
Thus, he has authority to the transaction with third
bind the principal towards parties. He does not have
third parties. authority to bind his employer.
3. Control and An agent is not subject to A servant acts under the direct
supervision direct control and supervision control and supervision of his
of the principal. A principal employer/master. An employer
has the right to direct what has the right to direct what the
the agent has to do. servant has to do. He also has
the right to say how it is to be
done.
4. Remuneration An agent usually get A servant usually gets salary
commission. or wages for his services.
5. Liability to In case of agency, the In case of master-servant
third parties principal is liable for the acts relationship, the master is
of the agent to the third liable for the servant’s wrong if
parties provided the acts of it has been committed in the
the gent are within the scope course of his employment.
of his real or apparent
authority.
6. Compensation In case of agency, the A workman entitled to
to agent/ principal must make compensation under the labour
servant compensation to his agent in laws if injury is caused during
respect of injury caused to his or in the course of
agent by principal’s employment.
negligence or want of skill.
7. Number of An agent usually allowed to A master usually does not
principals/ act on behalf of a number of allow his servant to serve for
masters principals. any other master.
8. Exercise of An agent usually exercises A servant may not be allowed
discretion his discretion while acting as to exercise his discretion while
an agent. doing his work.
* As per the Guidelines on Business Law, question on distinction between agent and
servant may not be asked in the examination in Delhi University.
Agency 227
Distinction between Agent and Independent Contractor

The following are the points of distinction between the two:
Basis Agent Independent Character
1. Meaning An agent is a person An independent contracter is
employed to do any work for one who undertakes to
another or to represent produce a given result. But
another in dealings with that in the actual execution of
third persons (S. 182). the work he is not under the
order or control of the person
for whom he does it, and may
use his own discretion in
things not specified before
hand.
2. Representative An agent established privity An independent contractor
character of control between his does not represent the person
principal and third parties. for whom he performs the
Thus, he has the authority work in relation to third
to bind the principal towards parties. He has no authority to
third parties. bind the person for whom he
performs the work
3. Liability A principal is liable for the The person who employs in
acts of the agent done within independent contractor is not
the scope of his real or liable for the conduct of the
apparent authority. independent contractor.
4. Remuneration An agent is usually paid An independent contractor is
commission. paid lumpsum or in
instalments as the work
progress.
5. Money An agent does not usually An independent contractor
investment invest any money. usually invests money.
6. Personal An agent is not personally An independent contractor is
liability liable for the acts performed personally liable for the acts
by him within the scope of performed by him as he does
his authority. not have representative
character.
Distinction between Agent and Bailee

The following are the points of distinction between an agent and a bailee :
Basis Agent Bailee
1. Meaning An agent is a person A bailee is a person to whom
employed to do any at for goods are delivered for a
another or to represent specific purpose. The goods
another in dealings with are to be returned to the
third parties (S. 182). bailor or disposed off as per
directions of the bailor.
Section 148 defines bailment.
228 Business Laws
2. Representative An agent represent his A bailee does not represent

capacity principal in dealings with the bailor. He merely
third parties. exercises, with the permission
of the bailor, certain powers
of the bailor in respect of his
property.
3. Power to make An agent has the authority The bailee has no power to
contracts on to make contracts on behalf make contracts on bailor’s
behalf of of his principal, within the benefit [ United Commercial
principal/ bailor scope of his authority. Bank v. Hem Chand
Sarkar, AIR 1990 SC 1329]
7. Liability of the The principal is liable to Bailor is not liable for acts of
principal/ bailor third parties for the acts of the bailee as the bailee does
the agent within the scope of not represent the bailor.
his real or apparent
authority.
5. Possession of An agent need not have In case of bailment,
goods possession of the goods. possession is transferred to
the bailee.
6. Remuneration An agent usually gets Bailment may be gratuitous
remuneration. or non-gratuitous.
7. Use of the goods An agent generally does not Bailee may use the goods for
use the goods. the purpose for which they
are delivered to him.
KINDS OF AGENTS
Special, General and Universal Agents
On the basis of their extent of authority, agents are divided into three classes
— special, general and universal.
1. Special agents. A special agent is one who is appointed for a
particular purpose. He is authorised by the principal to do a
particular act or transact a particular business affair, A special
agent is invested with limited powers. He has no authority to bind
the principal in respect of any other act, contract or transaction than
that for which he is employed.
Thus, if a person is employed to purchase a house, the authority of such a
person as a special agent comes to an end as soon as a house is purchased.
2. General agents. A general agent is one, who has authority to do all
such acts as are connected with a particular kind of business or
trade, or to transact a particular business at a certain place. If, for
instance, a person is placed in charge of a store as its manager, he
has authority to bind the principal for all his acts falling within the
scope of the business of managing the store. The principal is liable
for his acts if the acts are within the limits of his apparent authority
and it is immaterial if they are outside the scope of his actual
authority.
Agency 229
CASE : In Watteau vs. Fenwick,1 a firm of brewers who were the owners of a bar,
appointed a manager of the business. His name appeared on the door as licensee. He
had no authority to buy any goods for the business except bottled beer, the brewers
themselves supplying all other goods. A (A plaintiff), not knowing anything about the
limitation of the manager’s authority, sold some cigars to him on credit. Being unable to
obtained payment from the manager, A sued the brewers. It was held that the manager
was acting within the scope of his authority in buying cigars as they were such as
would usually be dealt in at a public-house, although the buying was outside the
authority actually conferred upon him, and the brewers could not set up any secret
limitation of that authority.
3. Universal agents. A universal agent is one who enjoys unlimited

authority to do all such acts as could be delegated, and which the
principal himself could lawfully perform.
An agent of this type is usually appointed by a businessman who owing to

his physical condition, wants to retire by giving a blanket power of attorney
to the agents to do anything that has to be done while he is in the service.
Mercantile and Non-mercantile Agents

Mercantile agents. In the business world, certain categories of agents
are well-known as mercantile agents. The nature of their work is quite
familiar, and their authority is well settled. According to S. 2(9) of the Sale of
Goods Act, 1930, “mercantile agent” means an agent having in the
ordinary course of business as such agent authority either to sell
goods, or to consign goods for the purpose of sale, or to buy goods or
to raise money on the security of goods. There are various types of
mercantile agents which are discussed as follows :
(a) Auctioneer. An agent appointed by the seller to sell his goods at a

public auction, usually for a reward in the form of commission, is
known as an auctioneer. He is primarily the agent of the seller. He
has to obey the instructions given to him by the principal. The
principal becomes liable to third parties even though he disobeys the
principal’s instructions, if any, privately given, provided he acts
within the scope of his apparent authority. Therefore, if the
auctioneer sells goods below the reserve price, either inadver tently
or contrary to the principal’s instructions, the sale will be binding on
the principal.
CASE : In Rainbow vs. Howkins,2 P, the owner of a pony, entrusted the same to A
(the defendant) for sale at an auction, subject to a reserve price of £ 25. A inadvertently
stated that there was no reserve price, and sold the pony to T (the plaintiff) for less than
£ 25. On discovering the mistake, he put the pony for sale again, and sold it. In a suit
by T, it was held that A had implied authority to sell without reserve price and hence the
sale was binding on the owner.
1. (1893) 1 QB 346
2. (1904) 2 KB 322
230 Business Laws
An auctioneer has implied authority to sign a contract on behalf of both

buyer and seller. The auctioneer has authority to receive the price of the goods
sold, and sue for the same in his own name. He has lien on the goods and their
price for his charges.
(b) Factor. A factor is a mercantile agent to whom goods are entrusted
for sale. He has authority to sell the goods or consign the goods for the
purpose of sale. He may sell the goods upon such terms as he deems
fit, and in his own name, receive the price, and gives a valid
discharge to the buyer. He may sell the goods on reasonable credit. He
may pledge the goods and receive money on the same.
Any sale, pledge, or other disposition of the goods made in the ordinary
course of business, is binding on the principal even though no such
authorisation was made by the principal. Persons who take the goods in good
faith, and do not have notice that the agent was not authorised to dispose of,
acquire a good title to them. A factor has a lien on the goods for a general
balance of account with the principal.
CASE : In Folkes vs. King,3 P (the plaintiff) entrusted his motor car to an agent for
sale at not below £ 575. The agent sold the car to T (the defendant) for £ 340 and
misappropriated the money. T bought the car in good faith. In a suit by P to recover the
car from T, it was held that T got a good title to the car since the agent was in
possession of the car with the consent of P for the purpose of sale.
(c)Broker. Broker is an agent employed to make bargains in matters of

trade, commerce, etc. between certain parties for a compensation
commonly called brokerage. Like a factor, a broker is also an agent
appointed by a person to buy or sell goods on his behalf. However,
unlike a factor, a broker is not entrusted with the possession of the
goods. He merely negotiates a contract between two parties. As such,
he is an intermediary acting for both the parties to a contract, and
his business is to bring them together.
A broker has no authority to sue in his own name. He has no lien on the
goods since he does not have possession of the goods. However, according to
Section 171 of the Act, only a policy broker has a lien on the policy for the
general balance due to him.
An estate agent, who is employed to find a purchaser for property, has
implied authority to make representations and give warranties relating to the
property. But he has no authority to enter into an actual contract for the sale
of property unless he has been expressly authorised to do so.
CASE : In Ryan v. Pilkington,4 it was held that an estate agent has implied authority
to receive a deposit from an intending purchaser as agent of the seller. In the instant
case the principal was held liable for misappropriation by his estate agent the deposit
received from an intending purchaser.
3. (1923) 1 KB 282
4. (1959) 1 WLR 403
Agency 231
(d) Commission agent. He is an agent employed to buy or sell goods on

behalf of his principal. He may or may not be entrusted with the
goods. His business is to buy or sell in his own name on behalf of his
principal on the most favourable terms. There is no privity of
contract between the principal and the third party unless otherwise
agreed. Commission agent is personally liable to the third party and
also to his principal. He is paid commission for his services.
(e) Del credere agent. He is an agent who guarantees the receipt of
payment from those he introduces to his principal. In consideration
of an extra commission, the del credere agent guarantees his
principal that third parties with whom he contracts, as for instance,
a buyer to whom he sells goods, will honour the financial obligation.
He bears the bad debts, if any, on the sales made by him on behalf of
his principal. However, he does not guarantee the performance of the
contract, e.g., in the case of a sale, taking delivery of the goods by the
buyer.
Non-mercantile agents. Non-mercantile agents are those who do not
come within the purview of the term ‘Mercantile agents’ as defined in the
Sale of Goods Act. An advocate, a wife, etc., are non-mercantile agents.
CREATION OF AGENCY
An agency may be created in any one of the following ways:
(1) By express agreement
(2) Agency implied or inferred from circumstances
(3) By ratification
(4) By operation of law
1. Agency by Express Agreement (Section 187)
Just as a contract may be express or implied, so also a contract of
agency may be express or implied. According to Section 187 of the
Act, “An authority is said to be express when it is given by words
spoken or written.” Express authority may thus be given by a
principal to his agent orally or in writing.
A power of attorney is the usual form of a written contract of
agency. It is a formal instrument by which one empowers another to
represent him, or act on his behalf for certain purposes. A power of attorney
may be general or special. A general power of attorney authorises an
agent to do all lawful acts on behalf of the principal or to act generally in the
business of the agency. A special power of attorney authorises an agent to
enter into a single transaction of a special nature. A special power of
attorney, for example, a vakalatnama, authorising an advocate to appear on
behalf of his client in a legal suit, should be in writing.
Example. P appoints A, an advocate, as his agent through “power of attorney”
(vakalatnama) to represent this case in a suit. This is an agency by express agreement.
232 Business Laws
2. Agency Implied or Inferred from Circumstances (Section 187

and 189)
Agency may be inferred from the circumstances of the case, that is,
from the conduct of the parties, or from the situation of the parties or
from necessity. According to Section 187 of the Act, “An authority is
said to be implied when it is to be inferred from the circumstances of
the case; and things spoken or written, or the ordinary course of
dealing, may be accounted circumstances of the case.”
Example : (Illustration to Section 187). A owns a shop in Serampur, living himself in
Calcutta (now Kolkata) and visiting the shop occasionally. The shop is managed by B, and
he is in the habit of ordering goods from C in the name of A for the purpose of the shop,
and of paying for them out of A’s funds with A’s knowledge. B has an implied authority
from A to order goods from C in the name of A for the purposes of the shop.
It is necessary to remember in this context that the principal cannot limit
the authority of the agent by private instructions to the prejudice of a third
party, without notice to, such a third party.
Implied agency may be any of the following forms:
(a) Agency by estoppel. This form of implied agency arises by the
conduct of the principal, who without conferring any authority upon
an agent, causes an inference to be drawn that authority has been
conferred upon him.
If a person, for instance, knowingly and without objection, permits
another to act as his agent, the law will find in his conduct an expression of
authorisation to the agent.
Example. A tells T within the hearing of P that he (A) is P’s agent. P does not object
to this statement of A. Later T supplies certain goods to A believing A to be the agent of P.
P is liable to pay the price of goods to T.
In other words, the conduct of the principal makes room for the
application of the principal of estoppel, and the person who is permitted to act
as the agent is deemed in law to have been permitted by the principal to act
as such. The persons who deal with him are entitled to assume that the agent
has authority to represent the principal. The principal will not, later be
permitted to deny such authority of the agent.
Agency by holding out

Agency by holding out is a part of the agency by estoppel. In this case, a
person, by his words or conduct, holds out another as his agent to make
contracts on his behalf. For instance, a principal may hold a person as being
still an agent who has been agent but is no longer so. It requires some
affirmative conduct on the part of the principal.
Example. A allows his servant B to purchase goods for him on credit from a third
party, and pays for them. A may be held liable for purchase made in the usual manner by
B after he leaves the service if A does not communicate this to the third party.
Agency 233
CASE : In Trueman v. Loder [(1840) 9 LJ QB 165], A appointed B as his agent to

purchase goods on credit from C. After some time, A terminated the agency of B but
did not inform C about this. Subsequently, B purchased on A’s name goods on credit
from C. A was held liable to C for the price of the goods as A held out B as his agent.
(b) Agency by necessity. A person may act on behalf of another under

certain circumstances which are compelling in nature. In such cases,
his acts will be binding upon the person on whose behalf he acts,
although without any authority. Thus, when a person is compelled
by circumstances to act as an agent of another, he becomes an agent
of necessity, and the law confers authority upon him to act as an
agent.
The following conditions must be fulfilled before a person is entitled to act

as agent of necessity:
(i) He could not communicate with his principal and get his
instructions.
(ii) The course he took was necessary as it was the only reasonable and
prudent course to take.
(iii) He acted bonafide in the interest of the parties concerned.
Agency by necessity arises in the following situations:

(i) Agent exceeding his authority, bonafide, in an emergency (S.
189). According to Section 189 of the Act, “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.
Subject to the conditions referred to above, agency by necessity arises
when the agent exceeds his authority in an emergency.
Example. [Illustration (b) to Section 189]. A consigns provisions to B at Calcutta (now
Kolkata) with directions to send them immediately to C at Cuttack. B may sell the
provisions at Calcutta, if they will not bear the journey to Cuttack without spoiling.
(ii) A person or a carrier of goods acting as bailee i.e. a non-agent

doing anything to protect or preserve the goods in an
emergency. Where a person is entrusted with the property of
another, and in an emergency it is necessary to do something for the
preservation of the property, and it is impossible to communicate
with the owner, the person entrusted with the property becomes an
agent of necessity with implied authority to do what is necessary to
save the property.
CASE : In Couturia v. Hastie [(1949) 1 KB 295], the goods consigned and on board
a ship were perishing rapidly. The master of the ship could not contact the owner and
took the ship to the nearest port and sold them at the best available price. It was held
that master was an agent of necessity and the owner was bound by the sale.
234 Business Laws
(iii) Where a husband improperly deserts his wife without

providing her means of sustainance. If a husband wrongfully
deserts his wife without providing her means of sustainance, she
becomes his agent of necessity. She has authority to pledge the credit
of her husband for necessaries for herself and her children. Her
authority to pledge the credit of her husband does not depend upon
cohabitation, but it arises from the facts of her marriage.
Accordingly, if she herself deserts the husband, unless justified by the
conduct of the husband, her authority is defeated. Further, her authority
subsists until she is able to obtain a decree from the court for her
maintenance. Further she has no authority if she has sufficient means to
support herself and her children.
Wife as an implied agent of husband for necessaries

When the husband and wife are living together in a domestic
establishment and wife managing household affairs, there is a presumption
that the wife is entitled to pledge his credit for necessaries of life. Thus, an
implied agency to buy necessaries is presumed if the following conditions are
satisfied.
(i) The husband and wife are living together.

(ii) They should be living in a domestic establishment.
(iii) The wife can pledge the credit of the husband only for necessaries
suitable to the style in which the husband chooses to live in.
This presumption can be rebutted by the husband in any one of three
ways : (1) by proving that he expressly warned the tradesman not to supply
his wife with goods on credit, (2) by proving that he had expressly forbidden
the wife to pledge his credit, (3) by proving that the wife was already supplied
with the articles in question or the wife was supplied with sufficient means
for the purpose of buying the articles, or (4) the order, though for necessaries,
was excessive or extravagant.
3. Agency by Ratification (Sections 196 to 200)
Where a person performs an act for someone without any authority,
or a person acting as the agent of another exceeds the authority
actually conferred on him, the person on whose behalf the act is done
may either disown the act, or adopt it. If he adopts it, the effect of
such adoption is the same as though the act has been done with his
authorisation. This adoption is known as “ratification.”
In other words, ratification means the subsequent adoption or affirmation
by a person of an unauthorised act done by another without authority.
Similarly, an agent who possesses limited authority, but exceeds his
authority, may bind the principal, if his act done in excess of the authority is
later ratified by the principal.
According to Section 196 of the Act, “Where acts are done by one
Agency 235
person on behalf of another; but without his knowledge or authority,

he may elect to ratify or to disown such acts. If he ratifies them, the
same effects will follow as if they had been performed by his
authority.”
For example, if a person insures the goods of another without his
authority, the owner of the goods may ratify the act. If he does so the policy
will be as valid as the person or the agent had been authorised to insure the
goods [Williams v. North China Insur Co., (1876) 1 757].
Ratification is retrospective. In stating the effect of ratification, this
section does not distinguish between an unauthorised act of an agent and the
act of a total stranger who purports to act as agent for the principal. In both
the cases, the effect is the same, i.e., an unauthorised act is converted into an
authorised act from the moment that act was done, and not from the time the
act was ratified.
Thus, ratification is retrospective, and relates back to the time of
performance of the unauthorised act. Thus, every ratification has a
retrospective effect and is equal to a previous mandate. An unauthorised
acceptance may, therefore, be ratified even if the offer has, in the meantime,
been withdrawn. Thus, ratification tantamounts to prior authority.
CASE : In the leading case Bolton Partners vs. Lambert [(1889) 41 Ch. D. 289],
the managing director of a company, purporting to act as an agent on the company’s
behalf, but without authority, accepted an offer by T (the defendant) for the purchase of
some sugar works belonging to them. Before the company ratified the managing
director’s acceptance, T withdrew the offer. The company brought an action, claiming
that once its agent had accepted the offer, the general rule applied under which, offers
once accepted could not be revoked. T, on the other hand, contended that since the
agent had accepted the offer without authority, the contract was not complete, leaving
him free to revoke the offer pending ratification. The court rejected this argument,
because “the ratification is thrown back to the date of the act done, and the agent is put
in the same position as if he had authority to do the act at the time the act was done by
him.”
Ratification may either be express or implied, as provided for in Section

197 of the Act. The Section states that, “ratification may be express or may be
implied in the conduct of the person on whose behalf the acts are done.”
Example 1. A, without authority, buys goods for B. Afterwards B sells them to C on
his own account. B’s conduct implies a ratification of the purchase made for him by A.
[ Illustration (a) to S. 197].
Example 2. A, without B’s authority, lends B’s money to C. Afterwards B accepts
interest on the money from B. B’s conduct implied a ratification of the loan. [ Illustration (b)
to S. 197].
Essentials of a valid ratification. Ratification becomes valid only
when the following conditions are satisfied:
1. The person must have acted as an agent for an identifiable
principal. The act must have been done on behalf of an identifiable
236 Business Laws
principal. “It is not necessary that he should be named but there

must be such a description of him as shall amount to a reasonable
designation of the person intended to be bound by the contract”
[Watson vs. Swann, (1862) 11 CB (NS) 756].
If a person does not hint at agency, but gives the impression that
he is contracting in his own name, the contract cannot, later be
adopted by another for whom the person really intended to act
CASE : In Keighley Maxsted & Co. vs. Durant [(1901) AC 240], Durant, a corn
merchant was authorised by the appellant company to buy wheat at a specified rate on
a joint account for himself and the company. Since wheat was not obtainable at that
price, the merchant, acting in excess of his authority, bought wheat at a higher rate. He
contracted in his own name and did not disclose the agency. Subsequently, his act
was ratified by the company, but the company failed to take delivery due to a fall in the
price of wheat. Durant (the corn merchant) sued the company for breach of the
contract. The action failed on the ground that Durant had contracted in his own
name without mentioning that the appellants were his principals. Consequently,
any ratification made by them was ineffective, and as such, they were under no
contractual obligation to Durant, the respondent corn merchant.
2. The principal must be in existence. For ratification to become

valid, the principal must be in existence at the time the contract was
made.
CASE : In Kelner vs. Boxter [(1866) LR 2 CP 174], in K agreed to sell a hotel to B,

who was acting as the agent of a company yet to be formed. The company ratified the
contract after its incorporation. Subsequently, it went into liquidation and K sued B upon
the contract. B contended that the liability had passed to the company by ratification
and hence, did not attach to him. The Court rejected this contention on the ground that
ratification can only be by a person in existence either actually or in contemplation of
law.
According to this ruling, a preliminary contract cannot be ratified by a

company before its incorporation. It is only with a view to mitigating the
harshness of this rule that Sections 15(h) and 19(e) of the Specific Relief Act,
1963 provide for the enforcement of a contract, entered into by the promoters
before incorporation by the company as well as by third parties, provided the
company accepts the contract and communicates its acceptance to the other
party to the contract. Such contract must be for the purposes of the company
and is warranted by the terms of its incorporation.
3. The principal must have contractual capacity. Ratification is

not possible if, at the time the contract was entered into by the agent
on behalf of the principal, the principal was incapable of contracting.
In other words, the principal can ratify the act by the agent provided
he himself could do the act which he intends to ratify.
4. The act must be capable of ratification. The act which the
principal purports to ratify should be legal, and not void from its
Agency 237
inception. Accordingly, the shareholders of a company cannot ratify

an ultravires contract made by the directors [Ashbury Railway
Carriage Co. vs. Riche, (1875) LR 7 HL 653].
Again, forgery cannot be ratified not only because it is a crime but also
because a forger does not profess to act as an agent [Brook vs. Hook, (1871)
6 Exch. 89].
5. The principal must have full knowledge of material facts. In
order that ratification may be binding on the principal, he must have
full knowledge of the facts.
According to Section 198 of the Act, No valid ratification can be made by
a person whose knowledge of the facts to the case is materially defective.
Example: An agent is employed to buy goods. He sells his own goods to the principal
at a higher price than the prevailing market price. The principal ratifies the transaction but
he does not know that the agent has sold his own goods and has charged more that the
market price. He is entitled to repudiate the transaction.
6. Whole transaction must be ratified. The person ratifying an act

cannot ratifying a part of the transaction and repudiate the rest. In
other words, a contract cannot be ratified partially. Section 199 of
the Act States: “A person ratifying any unauthorised act done on his
behalf ratifies the whole of the transaction of which such act formed a
part.”
The section clearly states that ratification of a part of the transaction
amounts to ratification of the whole of the transaction. As such, the person
ratifying cannot ratify that part of the transaction which is beneficial to him
and repudiate the rest.
7. Ratification should be done within a reasonable time.
Ratification can be effective only if it is made within a reasonable
time after the act is done on his behalf. For instance, in the case of a
contract to be performed within the time stipulated, ratification
should be made before the time of performance, as otherwise,
ratification will not be effective.
CASE : In Grover & Grover Ltd. v. Mathew [(1910) 2 KB 401], A without authority
of B (the owner) insured his good against fire. After the goods were insured, the goods
were destroyed by fire. Subsequent to the fire, B ratified A’s act of insuring the goods.
The policy of fire insurance was not allowed to be ratified after the occurrence of the
loss, because the owner himself could not have insured the goods after the occurrence
of the loss.
8. Ratification must not cause damage to the third party.

According to S. 200 an act cannot be ratified where its effect is to
subject a third person to damages or terminate any right or interest
of a third person.
238 Business Laws
Example 1. A, not being authorised thereto by B, demands on behalf of B, the

delivery of a chattal, the property of B, from C, who is in possession of it. This demand
cannot be ratified by B, so as to make C liable for damages for his refusal to deliver.
Example 2. A holds a lease from B, terminable on three months’ notice. C, an
unauthorised person, gives notice of termination to A. The notice cannot be ratified by B,
so as to be binding on A. [Illustration ( b) to S. 200].
4. Agency by Operation of Law

In some cases, law treats a person as an agent of another. For
instance, in case of partnership under the Indian Partnership Act,
1932 a partner is an agent of another partner. Similarly, under the
Companies Act, 2013, the directors are treated as agents of the
company.
EXTENT OF AGENT’S AUTHORITY

The authority of an agent means his capacity to bind the principal. It is
“the sum total of the acts it has been agreed between the principal and agent
that the agent should do on behalf of the principal” [Montrose, J.L.].
If the agent does any of these acts he is said to have acted within his
authority. As regards the enforcement and consequences of agent’s contracts
Section 226 provides that “Contracts entered into through an agent, and
obligations arising from an act 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.”
The authority of an agent to bind the principal may be of the following
types:
1. Actual or real authority
2. Ostensible or apparent authority
1. Actual or real authority (Sections 187 and 188). Actual
authority of an agent is the authority conferred on him by the
principal. Section 186 provides that, “The authority of an agent may
be express or implied.”
Section 187 gives the definition of express and implied authority. These
have already been explained under the heading “CREATION OF AGENCY”
Section 187 says, “An authority is said to be express when it is given by words
spoken or written. An authority is said to be implied when it is to be inferred
from the circumstances of the case; and things spoken or written, or the
ordinary course of dealing, may be accounted circumstances; of the case.”
CASE : In Ryan v. Pilkington [(1959) 1 WLR 403], it was held that an estate agent
has implied authority to receive a deposit from an intending purchaser as agent of the
sellers of property. Therefore, principal is liable to the intending purchaser for
misappropriation of deposit by the estate agent.
Agency 239
Section 188 provides the extent of agents authority. It is reproduced

below:
“An agent having authority to do an act has authority to do every lawful
thing which is necessary in order to do such act.”
“An agent having an authority to carry on a business has authority to do
every lawful thing necessary for the purpose, or usually done in the course of
conducting such business.”
Example 1. A is employed by B, residing in London to recover at Mumbai a debt due
to B. A may adopt any legal process necessary for the purpose of recovering the debt, and
may give a valid discharge for the same. [Illustration ( a) to S. 188].
Example 2. A constitutes B, his agent to carry on his business of a ship-builder. B
may purchase timber and other material, and hire workmen, for the purpose of carrying on
the business. [Illustration ( b) to S. 188].
2. Ostensible or apparent authority (Section 237). Ostensible or

apparent authority is the authority of an agent as it appears to
others. In Smith and Watt’s Mercantile Law (8th Ed. 1924, page
177), the “implied” and “ostensible” authority have been
distinguished as given below:
“Implied authority is real authority, the exercise of which is
binding not only as between the principal and the third party, but
also between principal and agent. It differs only from an express
authority in that it is conferred by no express words, but is to be gathered
from surrounding circumstances. The term ‘ostensible authority’, on the
other hand, denotes no authority at all. It is a phrase conveniently
used to describe the position which arises when one person has
clothed another, or allowed him to assume an appearance of
authority to act on his behalf, without actually giving him any
authority either express or implied, by which appearance of
authority a third party is misled into believing that a real authority
exists.”
If an act of an agent is in excess of his actual authority but it is within the
scope of his ostensible authority, the principal is bound by the act of the agent
as regards third party having no knowledge of the real position.
CASE : In the leading case Watteau v. Fenwick [(1893) 1 QB 346], A (the

defendant, a firm of brewers) bought a beer-house from B, but kept him as manager,
and his name appeared above the door. A instructed B not to buy cigars on credit,
although it was usual for such a business to deal in cigars. B bought some cigars on
credit from C (the plaintiff), who thought that he was the owner of the business and
gave credit to him. On coming to know that he was employed by A, the supplier C sued
A for the price of the cigars. A was held liable as an ostensible principal.
In Hely-Hutchinson vs. Brayhead Ltd. [(1967) 3 All ER 98], Denning,

L.J., explained the apparent authority as follows :
“Ostensible or apparent authority is the authority of an agent as
it appears to others. It often coincide with actual authority. Thus, when the
240 Business Laws
board appoint one of their members to be a managing director they invest

him not only with implied authority, but also with ostensible authority to do
all such things as fall within the usual scope of that office. Other people who
see him acting as the managing director, are entitled to assume that he had
the usual authority of a managing director. But, sometimes ostensible
authority exceeds actual authority. For instance, when the board
appoint the managing directors; they may expressly limit his
authority by saying he is not to order goods worth more than £ 500
without sanction of the board. In that case his actual authority is
subject to the £ 500 limitation, but his ostensible authority includes
all the usual authority of a managing director. The company is
bound by his ostensible authority in his dealings with those who do
not know of the limitation. Thus, if he orders goods worth £ 1,000 the
company is bound to the other party who does not know of the £ 500
limitation.”
Section 237 incorporates the doctrine of ostensible authority. Section
237 deals with the case where there is relationship of principal and
agent, and the agent has acted without authority of the principal.
The principal is bound by the unauthorised acts of the agent if by words or
conduct he induces a third party to believe that unauthorised acts are within
the scope of the agent’s authority.
Section 237 does not apply unless the relationship of principal
and agent is proved to exist between the parties [Benaras Bank Ltd.
v. Prem & Co., AIR 1937 All 255]. The doctrine of ostensible authority is
really an application of doctrine of estopple.
An act done by an agent in excess of his actual authority is not binding on
the principal with respect to those persons having notice that the act is
unauthorised.
Example 1. A consigns goods to B for sale, and gives him instructions not to sell
under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to
buy the goods at a price lower than the reserve price. A is bound by the contract.
Example 2. A entrust B with negotiable instruments indorsed in blank. B sells them in
violations of private orders on A. The sale is good. [Illustration (b) S. 237].
DELEGATION OF AUTHORITY
An Agent cannot further Delegate (Section 190)
General Rule : An agent cannot further delegate. Delegation of
authority means appointment of sub-agent by the age. Agency arises on the
basis of trust and confidence. A person employs another as his agent, only
because he has confidence in the agent, and relies upon the competence and
integrity of such a person. Hence, the agent cannot employ another and
entrust the work which he has himself undertaken to do. Having
Agency 241
derived the authority to act on behalf of his principal, the agent

cannot, in turn, transfer the authority to another person. This rule is
based on the maxim delegatus non potest delegate (a delegate cannot further
delegate). This maxim is founded on the confidential nature of the contract of
agency. Accordingly, auctioneers, factors, brokers, estate agents and other
agents in whom confidence is reposed, generally speaking, have no power to
delegate their authority.
This maxim has found expression in Section 190 of the Act according to
which “An agent cannot lawfully employ another to perform acts which he has
expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub-agent may, or, from the nature of the agency, a
sub-agent must be employed.”
Exceptions
But there are certain exceptions to this general rule. An agent can
delegate his authority to another person, that is to a sub-agent, in the
following cases:
1. Nature of agency. When the nature of agency demands it or
permits the appointment of a sub-agent (S. 190). For example, an
agent is permitted to file a suit against a debtor then he can appoint
an advocate to file the suit.
In Summon Singh vs. National City Bank of New York [AIR
1962 Punj 172], it was held that a banker entrusted to make
payment to a particular person at a particular place may appoint a
banker who has an office at that place.
2. Custom of trade. When the ordinary custom of trade in a particular
business allows the appointment of a sub-agent (S. 190). For
example, architects appoint surveyors to assist them.
3. Principal’s express permission. Where the principal has expressly
permitted the agent to appoint a sub-agent the agent can appoint a
sub-agent.
4. Principal’s implied permission. Where the principal has
impliedly permitted the delegation of authority the agent can
appoint a sub-agent. For example, where the principal knows the
intention of the agent to appoint a sub-agent but does not object to it.
5. Unforeseen emergencies. Where unforeseen emergencies arises
which make the appointment of sub-agent necessary. For example,
where an agent is injured in an accident, he may appoint a sub-agent
for the time being.
6. Ministerial or clerical acts. Where the acts to be done are purely
ministerial in nature and thus not involving any discretion. For
example, an agent may appoint a sub-agent for doing clerical
work.
242 Business Laws
Sub-Agent (Sections 191 to 193)

Delegation of authority by the agent results in the appointment of a sub-
agent. According to Section 191 of the Act, “A sub-agent is a employed by and
acting under control of the original agent in the business of the agency.” This
section clearly states that the sub-agent is appointed by the agent, and is
under his control in the business of the agency.
In order to know the relationship of the sub-agent with the principal and
third parties, it is necessary to refer to the provision contained in Section 192
and 193 of the Act. These sections tell us about the effect of sub-agent when
the sub-agent is properly appointed and also when his appointment is
improper.
Relationship between principal and agent when sub-agent is
properly appointed. According to Section 192, where the agent is properly
appointed, i.e. under any of the circumstances or exceptions mentioned above,
then following are the effects of such an appointment :
(a) The principal becomes liable to third parties for the acts done by the
sub-agent. This is because, from the point of view of third parties, he
is deemed to be an agent originally appointed by the principal to
represent him in his dealings with third parties. Further, a sub-
agent establishes privity of contract between third parties and the
principal.
(b) The agent is liable to the principal for the acts of the sub-agent.
(c) The sub-agent is responsible for his acts to the agent, but not to the
principal, except in case of fraud and willful wrong. Thus, except in
case of fraud or willful wrong, the sub-agent is not liable to the
principal. In case of fraud or willful wrong by the sub-agent, the
principal may directly sue the sub-agent.
Contracting out of liability. It has been held in Summan Singh vs.
National City Bank of New York [AIR 1962 Punj 172] that an agent may
exempt himself from liability for negligence of a sub-agent by a special term
in the contract.
CASE : In Summan Singh case A had instructed an American bank to remit money
to B in Jullandur. The American bank instructed its Bombay (Mumbai) branch
accordingly. The Bombay branch appointed Punjab National Bank to deliver the
money. There were in Jullundur two persons of the name of B, and the Punjab National
National Bank, paid the money to the wrong person. It was held that A could not
recover the money from the Punjab National Bank as there was no privity of contract
between them. It was further held that A could not recover the money from the
American bank as there was an exemption clause protecting the American bank (Agent
in this case) from liability.
Relationship between principal and sub-agent when he is not

properly appointed. A sub-agent is said to be not properly appointed when
the agent employs him without authority to do so, i.e., when the appointment
does not fall under any of the exceptions already mentioned. Section 193 of
the Act states the consequences of a sub-agent’s appointment being improper.
Agency 243
According to Section 193, the following are the consequences when the
agent is improperly appointed:
(a) The principal is not represented by the sub-agent, and hence, he is
not responsible for the acts of the sub-agent to third parties.
(b) The agent is responsible for the acts of the sub-agent both to the
principal and third parties.
(c) The sub-agent is not responsible to the principal even for fraud or
willful wrong.
Substituted Agent (Sections 194 and 195)

Sections 194 and 195 of the Act contain provision relating to a substituted
agent According to Section 194, “Where an agent, holding an express or
implied authority to name another person to act for the principal in the
business of the agency, has named another person accordingly, such person is
not a sub-agent, but an agent of the principal for such part of the business of
the agency as is entrusted to him.”
Thus, this section clearly lays down that a substituted agent appointed by
the agent holding express or implied authority to name another person to act
for the principal, is not a sub-agent, but an agent of the principal.
Example : ( i) A directs B, his solicitor, to sell his estate by auction, and to employ an
auctioneer for the purpose, B names C, an auctioneer, to conduct the sale. C is not a sub-
agent but is A’s agent for the conduct of sale. [Illustration ( a) to S. 194].
Example : (ii) A authorises B, A merchant in Calcutta, to recover the money due to A
from C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co. for the
recovery of money. D is not a sub-agent, but is solicitor for A. [Illustration ( b) to S. 194].
It is necessary to remember in this context that, as soon as the substitute

is appointed, the agent gets out of the picture making room for the substitute
to perform the act for which he is appointed on behalf of the principal. The
substitute, thus, becomes responsible to the principal for the due discharge of
his duties as if he were appointed by the principal himself.
Section 195 of the Act casts a duty upon the agent to be reasonably
careful while naming the substitutes. It states that, “In selecting such agent
for his principal, an agent is bound to exercise the same amount of discretion
as a man of ordinary prudence would exercise in his own case; and, if he does
this he is not responsible to the principal for the acts or negligence of the agent
so selected.”
Example : (i) A instructs B, a merchant, to buy a ship for him. B employees a ship
surveyor of good reputation to choose a ship for A. The surveyor makes the choice
negligently and the ship turns out to the unseaworthy, and is lost, B is not, but the
surveyor is, responsible to A. [Illustration (a) to S. 195].
(ii ) A consigns goods to B, a merchant for sale. B, in due course, employs an
auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive the
proceeds of sale. The auctioneer afterwards becomes insolvent without having accounted
for the proceeds. B is not responsible to A for the proceeds. [Illustration ( b) to S. 195].
244 Business Laws
Difference between Sub-Agent and Substituted Agent

The following are the points of difference between a sub-agent and a
substituted agent :
Basis Sub-Agent Substituted Agent
1. Appointment/ A sub-agent is appointed by A substituted agent is
selection the agent. He is appointed selected by the agent to act
usually as an exception to the for the principal. He is
general rule delegatus non selected or named by the
protest delegate. agent by virtue of authority,
express or implied, vested in
the gent.
2. Responsibility A sub-agent is not responsible The substituted agent is

to the principal for his acts, responsible to the principal
except in case of fraud or wilful for all his acts in such
wrong, particularly when he is capacity.
improperly appointed.
3. Privity of There is no privity of contract There is privity of contract

contract between the sub-agent and the between the substituted
principal. agent and the principal.
4. Direction and A sub-agent works under the A substituted agent works

control directions and control the under the direction and
agent. control of the principal.
5. Liability of The agent is responsible for The agent is not responsible

agent the acts of sub-agent to the for the acts of the substituted
principal. agent to the principal.
6. Responsibility Where the sub-agent has been The principal is liable for the
of principal improperly appointed by the acts of the substituted agent.
agent, the principal is not
responsible for the acts of the
sub-agent.
DUTIES OF AGENT*
The duties of an agent to his principal are the following:
1. Duty to follow Principal’s Instructions (Section 211)
According to Section 211 of the Act, it is the duty of an agent to
conduct the business of his principal according to the latter’s
directions, and in the absence of any such directions, according to the
custom which prevails in doing business of the same kind at the
place where the agent conducts such business.
* As per the Guidelines on Business Law, questions may not be asked in the
examination on Duties of Agent in Delhi University.
Agency 245
Section 211 further provides that when the agent acts otherwise, and if
any loss is sustained, he must make it good to his principal, and if any profit
accrues, he must account for it.
CASE : In Lilley vs. Doubeday [(1881) 7 QBD 510], an agent, the defendant, was
instructed to warehouse goods at a particular place. The agent warehoused a portion of
the goods at another place where they were destroyed by fire without any negligence
on the part of the agent. It was held that the agent was absolutely liable to the principal
for the value of the goods destroyed since he departed from the instructions given to
him by his principal.
Example. According to illustration (b) to this section, B, a broker, in whose business it

is not the custom to sell on credit, sells goods of A on credit to C, whose credit at the time
was very high. C, before payment, becomes insolvent. B must make good the loss to A.
CASE : In Pannalal Jankidas vs. Mohanlal [AIR 1951 SC 144], the agent was
directed to insure the goods against fire. But he did not comply with the directions. The
goods were subsequently destroyed owing to an explosion in the Bombay docks. It was
held that the principal was entitled to recover from the agent the loss suffered by him.
2. Duty to conduct the business with Skill and Diligence

(Section 212)
According to Section 212 of the Act, it is the duty of the agent to
conduct the business of the agency with as much skill as is generally
possessed by persons engaged in similar business, unless the
principal has notice of his want of skill.
It is also the duty of an agent to exercise reasonable diligence in the
performance of the work entrusted to him, and to display such skill as he
possesses. If, as a direct consequence of his negligence, want of skill or
misconduct, the principal suffers any loss or damage, the agent is responsible
for any such loss or damage caused or remotely.
Examples : (i) A, a merchant in Calcutta (now Kolkata), has an agent, B, in London,
to whom a sum of money is paid on A’s account with orders to remit. B retains the money
for a considerably time. A, in consequence of not receiving the money, becomes insolvent.
B is liable for the money and interest from the day on which it ought to have been paid,
according to the usual rate, and for any further direct loss as by variation of rate of
exchange but not further. [Illustration ( a) to S. 212].
(ii) A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit, without making the proper and usual inquiries as to the insolvency of B. B, at the
time of such sale, is insolvent, A must make compensation to his principal in respect of
any loss thereby sustained. [Illustration ( b) to S. 212].
3. Duty to render Proper Accounts (Section 213)

According to Section 213 of the Act, an agent is bound to render
proper accounts to his principal on demand. Rendering proper
accounts, within the meaning of the section means, not only
producing accounts with the relevant vouchers, but also explaining
them.
246 Business Laws
4. Duty to Communicate with the Principal (Section 214)

According to Section 214 of the Act, “It is the duty of an agent, in
cases of difficulty, to use all reasonable diligence in communicating
with his principal, and seeking to obtain his instructions.”
However, even in cases of difficulty, if the principal cannot be contacted
without losing time, and there is the need for taking immediate action to save
the property of the principal, the agent can act on his own by becoming an
agent of necessity as prescribed in S. 189 and explained earlier.
5. Duty Not to deal on his Own Account (Section 215)
According to Section 215 of the Act, the agent should not deal on his
own account in the business of the agency, without the consent of the
principal. For example, a broker employed to sell certain property
should not himself become the buyer without notice to the principal.
If the agent has to deal on his own account, it is his duty to acquaint
the principal with all material circumstances which have come to his
knowledge, and obtain his consent. The principal can repudiate the
transaction if he could show that there has been dishonest
suppression of a material fact, or that the transaction is
disadvantageous to him.
Example 1. A directs B to sell A’s estate. B buys the estate for himself in the name of
C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he
can show that B has dishonestly concealed any material fact, or that the sale has been
disadvantageous to him. [Illustration (a) to S. 215].
Example 2. A directs B to sell A’s estate. B, on looking over the estate before selling
it, finds a mine on the estate which is known to A. B informs A that he wishes to buy the
estate for himself, but conceals the discovery of the mine. A allows B to buy in ignorance
of the existence of the mine. A, on discovering that B knew of the mine at the time he
bought the estate, may either repudiate or adopt the sale at his option. [Illustration ( b) to S.
2151.
CASE : In Armstrong v. Jackson [(1917) 2 KB 822], a (the plaintiff) employed P

(the defendant), a stock broker, to buy some shares for him. P sent a contract note to A
purporting to show that the shares had been bought, but the note was, in fact, a sham.
P had sold his own shares to A. In a suit by A, it was held that he was entitled to
rescind the contract.
6. Duty Not to make Secret Profit (Section 216)

The relationship of the agent with his principal is of a fiduciary
nature. Therefore, Section 216 provides that if an agent, without the
knowledge of the principal, deals in the business of agency on his
own account instead of on account of his principal, the principal is
entitled to claim from the agent any benefit which may have resulted
to him from the transaction. The term ‘any benefit’, used in this
section, includes all secret profits and advantages, including bribe
made or received by the agent, extra commission received beyond the
commission or other remuneration to which he is entitled.
Agency 247
Example. A directs B, his agent, to buy a certain house for him. B tells A it cannot be
bought, and buys the house for himself. A may on discovering that B has bought the
house, compel him to sell it to A at the price he gave for it. [Illustration to S. 216].
CASE : In Rejier v. Campvell-Stuart [(1939) 3 All ER 235], A was appointed as an

agent to find a suitable house for the principal. He bought a house himself and then by
a fictitious sale made his brother-in-law purchase it and then sold it to the principal at a
larger profit of about £ 3000/- It was held that he was not precluded from buying the
house himself and then sell to the principal but it was his duty to disclose the true facts.
In the absence of such disclosure, he was held liable to account for the secret profit.
7. Duty to pay Sums Received (Sections 217 and 218)

Section 218 read with S. 217 of the Act lays down that it is the duty
of the agent to pay to his principal all sums received on his account,
after retaining all moneys due to himself in respect of advances
made or expenses property incurred by him in conducting the
business. Even if the agent receives money on behalf of his principal
under an illegal or void contract, he has to account to the principal
for the money so received.
8. Not to Delegate Authority (Section 190)
It has already been pointed out that under Section 190 of the Act, an
agent, to whom the principal has delegated authority for doing a
particular work, cannot further delegate, except under the
circumstances mentioned therein, and the others enumerated in that
context.
9. Duty to protect and preserve the Principal’s Interest on his
death or insanity (Section 209)
According to Section 209 of the Act, on the principal’s death or
insanity, when the agency is terminated, it is the duty of the agent to
protect and preserve the interests of his principal on behalf of the
latter.
RIGHTS OF AGENT*
Besides the duties of an agent enumerated above, there are also some
rights which he enjoys against the principal. These rights are:
1. Right of Retainer (Section 217)
Section 217 of the Act confers upon an agent the right to retain, out
of any sums received on account of the principal in the business of
the agency, all moneys due to himself in respect of advances made
or expenses properly incurred by him in conducting such business.
2. Right to Remuneration (Sections 219 and 220)
The agent is entitled to remuneration for his services, unless he has
consented to act gratuitously. Section 219 of the Act, in this context,
examination on Rights of Agent in Delhi University.
248 Business Laws
lay down that an agent is entitled to his remuneration only after

the completion of the act as a result of the agent’s services in
regard to which the remuneration is payable, in the absence of a
special contract to that effect.
Accordingly, if an agent brings about privity of contract between his
principal and a third party, he becomes entitled to remuneration
although the contract is never executed on account of breach either
by the principal or by the party. But this section does not prevent the
parties from contracting that the payment will not be due until some
event has taken place.
CASE : In Sheikh Farid Baksh v. Hargulal Singh [AIR 1937 All 46], A was
appointed by P sell a property. He introduced a purchaser willing to purchase P’s
property. The sale was settled and earnest money paid, but the transaction could not
be completed due to purchaser’s inability to arrange money. The agent was held
entitled to the agreed commission.
Effect of misconduct. According to Section 220 of the Act the effect of

misconduct is two fold : (a) An agent who is guilty, of misconduct in the
business of the agency is not entitled to any remuneration in respect of that
part of business which he has misconducted, (b) and the principal is entitled
to recover compensation for any loss cause by his misconduct.
Example 1. [Illustration (a) to S. 220]. A employs B to recover 1,00,000 rupees from
C, and to lay it out on good security. B recovers 1,00,000 rupees, and lays out 90,000
rupees on good security, but lays out 10,000 rupees on security which he ought to have
known to be bad, whereby A loses 2,000 rupees. B is entitled to remuneration for
recovering the 1,00,000 rupees and for investing the 90,000 rupees. He is not entitled to
any remuneration for investing the 10,000 rupees, and he must make good the 2,000
rupees to B (it must be noted that the last word in this illustration is B in the Act, but it
should obviously be A).
Example 2. [Illustration (b) to S. 220]. A employs B to recover, 1,000 rupees from C.
Through B’s misconduct the money is not recovered. B is entitled to no remuneration for
his services, and must make good the loss.
3. Right of Lien (Section 221)

Section 221 of the Act confers upon an agent the right of lien on the
property of the principal. The agent is entitled to retain goods,
papers and other property, whether movable or immovable, of the
principal received by him, until the amount due to himself for
commission, disbursements and services in respect of the same had
been paid or accounted for to him.
The right of the agent’s lien on the principal’s property is restricted to the
goods in respect of which the commission was earned, disbursements made or
service rendered. By a contract an agent may have general lien also. The right
enables the agent to retain possession of the property of the principal till his
dues are paid. The agent has no right to sell the property of the principal or
dispose of the same in any other manner without the latter’s consent. Further,
Agency 249
the lien is limited only to the extent of the right that the principal has on the
property.
It has been held by the Supreme Court that the agent has no lien over the
property where it is entrusted to him for a special purpose which is
inconsistent with the lien claimed [Ram Prasad vs. State of Madhya
Pradesh, AIR 1970 SC 1818].
4. Right to be Indemnified against consequences of Lawful acts
According to S. 222 of the Act, the agent is entitled to be indemnified
by the principal against the consequences of all lawful acts done by
him in the exercise of the authority conferred upon him.
Example. [Illustration (a ) to S. 222]. B at Singapore, under instructions from A, of
Calcutta (now Kolkata), contracts with C to deliver certain goods to him. A does not send
the goods to B and C sue B for breach of contract. B informs A of the suit, and A
authorises him to defend the suit. B defends the suit and is compelled to pay damages
and costs and incurs expenses. A is liable to B for such damages, costs and expenses.
It is an essential condition to enable an agent to claim indemnity under
the section that the agent’s act must be lawful; but it may be void.
CASE : In Kishan Lal vs. Bhanwar Lal [AIR 1954 SC 500], a suit was brought by a
betting agent against his principal to recover a loss on betting paid by the agent,
principal refused to indemnify the agent for the loss. The Supreme Court held the
principal liable to make good the loss.
Section 224 provides that, “Where one person employs another to do an act
which is criminal, the employer is not liable to the agent, either upon an
express or an implied promise to indemnify him against the consequences of
that act.”
Example. Illustration (a) to S. 224]. A employes B to beat C, and agrees to indemnify
him against the consequences of the act. B thereupon beats C and has to pay damages to
C for so doing. A is not liable to indemnify B for those damages.
5. Right to be Indemnified against consequences of acts done in

Good Faith (Section 223)
Section 223 provides that’ “Where one person employs another to do
an act, and the agent does the act in good faith, the employer is liable
to indemnify the agent against the consequences of that act, though it
cause on injury to the rights of third persons. Thus, the right to
indemnify extends even to the consequences of an act which may
injure the rights of third persons.
Example. [Illustration (b ) to S. 223]. B, at the request of A, sells good, in the
possession of A, but which A had no right to dispose of. B does not know this, and hands
over the proceeds of the sale to A. Afterwards, C, the true owner of the goods, sues B,
recovers the value of the goods and cost. A is liable to indemnify B for what he has been
compelled to pay C, and for B’s own expenses.
6. Right to Compensation (Section 225)

If, in the course of conducting agency business, any injury is caused
250 Business Laws
to the agent by the principal’s negligence, or want of skill, the agent

has a right to be compensated by the principal. This right of an agent
is recognised by Section 225 of the Act.
Example. [Illustration to S. 225]. A employs B as a bricklayer in building a house, and
puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in
consequence hurt. A must make compensation to B.
DUTIES OF PRINCIPAL
The rights of an agent are obviously the duties of a principal. These
duties are listed below :
1. To remunerate the agent for his services. (Section 219).
2. To indemnify the agent against the consequences of all lawful acts.
(Section 223).
3. To indemnify the agent against the consequences of an act done in
good faith, even though the act causes injury to the rights of third
persons. (Section 222).
4. To make compensation to the agent in respect of injury caused to
such agent by his negligence or want of skill. (Section 225).
RIGHTS OF PRINCIPAL
The duties of the agent are indirectly the rights of the principal. The
rights of the principal are listed below:
1. To see that the agency business is conducted according to his
instructions, or in their absence, according to the custom which
prevails in the place where similar business is conducted. (Section
211).
2. To be entitled to compensation for loss, or any profit accruing, owing
to departure from instructions. (Section 211).
3. To be entitled to compensation in respect of the direct consequences
of the agent’s negligence, want of skill, or misconduct (Section 212).
4. To get proper accounts on demand. (Section 213)
5. Right to give instructions in cases of difficulty, when contacted by
the agent. (Section 214).
6. To repudiate the transaction, if a material fact is concealed or the
leading by the agent on his own account is disadvantageous to him.
(Section 215).
7. To claim the benefit, if any, arising from a transaction entered into
by the agent on his own account (Section 216).
8. To receive all moneys due to him, subject to such deductions by the
agent as are permissible. (Section 218).
9. To remunerate the agent only after the completion of the act.
(Section 219).
Agency 251
10. To refuse to pay the remuneration if the agent is guilty of

misconduct. (Section 220).
PRINCIPAL’S RIGHTS AND LIABILITIES FOR THE ACTS OF THE

AGENT IN RELATION TO THIRD PARTIES
Having considered the rights and duties of an agent and his powers to
alter his principal’s legal relations with third parties, it is now necessary to
examine the principal’s rights and liabilities in relation to third parties.
The position with regard to contract made by an agent on his
principal’s behalf depends on whether the principal was named,
unnamed or undisclosed.
I. Agent contracting for Named Principal
(a) When an agent acts within the scope of his actual
authority (S. 226). If an agent makes a contract within the
scope of his actual authority, on behalf of a named principal,
privity of contract is established between the third party and
the principal. Therefore, the only contracting parties are the
principal and the third party. Accordingly, the principal is liable
to third parties for the acts of his agent.
The authority of an agent to bind his principal and, thus, make him liable
to third parties is conferred upon him by Sections of the Act. Section 226
clearly states that “contracts entered into through an agent, and obligation
arising from 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.”
(b) When an agent acts in excess of his authority, actual and
apparent (Sections 196, 226 to 228). When an agent exceeds his
authority, actual and apparent, the principal may ratify them, and in
such a case, according to Section 196 of the Act, the acts of the agent
become the acts of the principal, and the principal becomes liable to
third parties for such acts of his agent.
In case the principal does not ratify the unauthorised acts of his agent,
and it is possible to separate what is within the authority of the agent from
what is beyond his authority, the principal becomes bound, and hence liable
to third parties, only for what is done by his agent within the scope of his
authority. This is laid down in Section 227 of the Act
Example. [Illustration to S. 227]. A, being owner of a ship and cargo, authorises B to
procure an insurance for 4,000 rupees on the ship. B procures a policy for 4,000 rupees
on the ship, and another for the like sum on the cargo. A is bound to pay the premium for
the policy on the ship, but not the premium for the policy on the cargo.
Section 228 of the Act declares that, where an agent acts beyond the
scope of his authority, and what he does, cannot be separated from what is
within his authority, the principal is not bound to recognise the transaction.
252 Business Laws
Example. (Illustration to S. 228). A authorises B to buy 500 sheep for him. B buys
500 sheep and 200 lambs for a sum of 6,000 rupees. A may repudiate the whole
transaction.
(c) When an agent acts in excess of his actual authority but

within the scope of his apparent authority (S. 237). According
to S. 237, “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 agent’s authority”. This is
based on the principle of estoppel and also incorporates
doctrine of ostensible authority.
This section rests on the principle that when a person is held out as being
employed in a certain capacity, persons who deal with him are entitled to
assume that his authority is within the scope of his employment, unless, they
have notice that his authority has been curtailed by the principal.
CASE : In Trickett vs. Tomlinson [(1883) 12 CBNS 663], a principal wrote to a third
person saying he had authorised the agent to see him, and if possible come to an
amicable arrangements, and gave the agent instructions not to settle for less than a
certain amount. The third person did not have any knowledge of the verbal instructions.
It was held that the principal was bound by a settlement by the agent for less than the
directed amount.
(d) Liability of the principal for misrepresentation and fraud of

the agent (S. 238). According to S. 238, the principal becomes liable
to third parties even for misrepresentation made and frauds
committed by his agent acting in the course of agency business. But,
the principal does not render himself liable to third parties if the
misrepresentation is made or fraud is committed by the agent in
matters which do not fall within the course of agency business.
Example 1. A, being B’s agent for the sale of goods, induces C to buy them by a
misrepresentation, which he was not authorised by B to make. The contract is voidable as
between B and C at the option of C. [Illustration (a) to S. 238].
Example 2. A, the captain of B’s ship, signs bills of lading without having received on
board the goods mentioned therein. The bills of lading are void as between B and the
pretended consignor. [Illustration (b) to S. 238].
(e) Notice given to an agent as notice to principal (S. 229). Since

the agent is a medium of communication between third parties and
the principal, any notice given to or information obtained by the
agent in the course of business of the agency, will be as between the
principal and third parties, will have the same legal consequences as
if the notice is given or information is obtained by the principal
himself (S. 229).
Example. A is employed by B to buy from C certain goods, of which C is the apparent
owner, and buys them accordingly. In the course of the treaty for the sale, A learns that
Agency 253
the goods, really belonged to D, but B is ignorant of that fact. B is not entitled to set off a
debt owing to him from C against the price of the goods. [Illustration ( a) to S. 229],
II. Agent contracting for Unnamed Principal

Where an agent expressly contracts disclosing his representative
character, but without naming or disclosing the identity of his
principal, the principal is said to be unnamed. In such a case, the
rights and liabilities of the principal are the same as if the principal
was named.
It is only where there is a trade custom to the contrary (such as in case of
stock exchange transactions a jobber can make the broker personally liable)
or the agent does not disclose his representative character, he becomes
personally liable on the contracts entered into by him. Further, if the agent
declines to disclose the identity of the principal, he becomes personally liable.
III. Agent contracting Without Disclosing the Principal’s
Existence
An agent, while acting within the scope of his authority, may make a
contract on behalf of his principal, without disclosing the existence of
the principal to the third party. In such a case, the principal becomes
undisclosed.
In the case of undisclosed principal, the agent gives an impression to the
third party that he is contracting in an independent capacity whereas in fact,
he contracts on behalf of his principal.
The position of the agent, principal and the third party in such a case is
discussed below.
(a) Position of agent (S. 231). According to S. 231, if an agent makes a
contract with a person who neither knows nor has reason to suspect
that he is an agent, the agent becomes personally bound by such
contract and is entitle to enforce it. He may be sued on the contract
by the third party and he has the right to sue the third party, if the
principal remains undisclosed. As between the principal and the
agent, the agent has every right against the principal.
(b) Position of undisclosed principal (S. 231). Section 231 provides
that if an agent makes a contract with a person who neither knows
nor has reason to suspect that he is an agent, the principal has the
right to intervene and assert his rights against the third party, of
enforcing performance of the contract. The principal has to adopt the
whole contract; else he may repudiate the contract altogether.
Section 232 provides that if the principal requires the performance of the
contract he can only obtain such performance subject to the rights and
obligations subsisting between the agent and the other party to the contract.
Thus, though the undisclosed principal has a right to intervene, he cannot
exercise his rights to the prejudice of the third party with whom the agent
254 Business Laws
has contracted in his own name. The following illustration is appended to the
section:
Example. A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B. A is
acting as an agent for C in the transaction, but B has no knowledge nor reasonable
ground of suspicion that such is the case. C cannot compel B to take the rice without
allowing him to set-off A’s debt. [Illustration to S. 232].
(c) Position of third party (Sections 231 to 233). If the principal

discloses himself before the contract is completed, the other
contracting party may refuse to fulfill the contract if he can show
that he would not have entered into the contract has he known who
the principal was, or that agent was not the principal. This principle
is applicable where some personal consideration is of material
importance (S. 231).
Where the principal requires the performance of contract, the other
contracting party has, as against the principal, the same rights as he would
have had as against the agent if the agent has been principal. It means that
the third party can claim the right of set-off. The example given above is
appropriate here also (S. 232).
Where the agent is personally liable, the third party is entitled to sue
either the agent or the principal, or both of them. Thus, the third party has
the option to sue either the agent or the principal or both of them, choice once
made shall be binding (S. 233).
Example. A enters into a contract with B to sell him 100 bales of cotton, and
afterwards discovers that B was acting as agent for C. A may sue either B or C, or both,
for the price of cotton. [Illustration to S. 233]
PERSONAL LIABILITY OF AGENT TO THIRD PARTY

An agent enters into transaction on behalf of the principal, i.e., he
creates, modifies or terminates contractual obligations between his principal,
whom he represents, and third persons. Therefore, as a general rule an agent
can neither sue a third party nor be sued on a contract entered into with a
third party on behalf of his principal. Section 230 of Act lays down that, “In
the absence of any contract to that effect an agent cannot personally enforce
contracts entered into by him on behalf of his principal, nor is the personally
bound by them.” There are certain exceptions to this rule. It may be noted
that where an agent is personally liable, the third party is entitled to sue, as
per S. 233, either the agent or the principal or both of them.
An agent is presumed to be personally liable in the following cases, unless
a there is contract to the contrary:
1. Where the agent acts for a foreign principal [S. 230(1)]. Where
the contract is made by an agent for the sale or purchase of goods for
a merchant resident abroad, there is the presumption, according to
Section 230(1) of the Act, that the agent undertakes; personal
Agency 255
liability. The presumption stands but has weakened in importance

with the changed conditions of international trade and faster means
of communications. However, this presumption can be rebutted by
showing an intention to the contrary. The personal liability can be
excluded by a clause in the contract to the contrary.
For the purposes of this section, a company having its registered
office in England, but engaged in business in India, is demand to be
a foreign principal.
2. Where the agent acts for an unnamed principal [S. 230(2)].
According to S. 230(2) where the agent does not disclose the name of
his principal there is a presumption that the agent would be
personally liable. The presumption can be rebutted.
3. Where the principal, though disclosed, cannot be sued [S.
230(3)]. According to S. 230(3) an agent is presumed to incur
personal liability where he contracts on behalf of a principal who,
though disclosed, cannot be sued. Foreign Sovereigns and their
accredited agents would seem to come within the description of
possible principals who cannot be sued. Similarly, where the
promoters of a company enter into a contract on behalf of a company
not yet in existence, they are held personally liable as the company
cannot be sued.
4. Where the agent acts for an undisclosed principal (S. 231).
Where an agent contracts for an undisclosed principal, he is
personally liable, being a party to the contract. In this case the agent
definitely is personally liable (In case of unnamed principal there is
only a presumption of his personal liability). The personal liability of
the agent arises only if the other contracting party neither knows nor
has reason to suspect that he is an agent. If the third party later
comes to know of the existence of the principal, he may elect to hold
either the agent or the principal or both of them liable on the
contract.
5. Where the agent expressly agrees (S. 230). If an agent at the
time of contracting with a third party expressly agrees to undertake
personal liability, he can be held personally liable for the breach of
the contract. (S. 230)
6. Where the agent signs a contract or a negotiable instrument
in his own name. If an agent contracts by deed in his own name he
becomes personally liable to third parties on contracts entered into
with them. For example, if an agent signs a negotiable instrument in
his own name without mentioning the fact of agency, then he would
be personally liable.
7. Where the agent exceeds his authority (Sections 227 and 228).
When an agent acts without authority, or beyond the scope of his
256 Business Laws
real as well a apparent authority he is said to commit breach of

warranty of authority. In such a case, he becomes personally liable to
the third party with whom he has contracted (S. 227 and S. 228).
8. Where there is a trade customer or usage. In the absence of a
contract to the contrary, any usage or custom of trade may also make
the agent personally liable. For example, a jobber may sue a broker
in case of stock exchange transactions.
9. Where agent’s authority is coupled with interest. Where an
agent himself has an interest in the subject-matter of the contract
with a third party, the agent is personally liable to the extent of his
interest. For details see the heading Irrevocable Agency’.
Example. P purchases goods from A for R 50,000 on credit. To enable A to recover

this money P appoints A as his agent to recover rent from his tenants to repay himself out
of the rent received from the tenants. If P’s tenants are entitled under the lease agreement
to reimbursement of money spent on repairs of the house by them, then P and his agent A
both would be liable to reimburse the amount to the tenants.
10. Where agent receives money by mistake or fraud. Where an

agent receives money by mistake or fraud, he becomes personally
liable to repay it.
Pretended Agent (Sections 235 and 236)

According to S. 235 of the Act, if a person, not being an authorised
agent, represents himself to a third party to be an agent of another, and
thereby induces the third party to deal with him as such agent, is personally
liable, if his alleged principal does not ratify his acts. The purported agent
must compensate the third party for any loss or damage incurred by so
dealing.
The following are the conditions for the application of the section:
(a) the agent has made an untrue representation that he is an

authorised agent (it may also be a representation as to the extent of
the authority of the agent);
(b) The representation relates to a fact;
(c) the third party has been misled or induced to deal with the agent on
the faith of such representation;
(d) the alleged principal has refused to ratify the transaction;
(e) the third party has suffered a loss in consequence.
Section 236 provides that if an agent who has no principal, disclosed or

undisclosed, but nevertheless poses as an agent cannot demand performance
from the third party because he has been acting in reality, on his own
account, and not as an agent. Thus, the third party is entitled to set aside the
contract.
Agency 257
TERMINATION OF AGENCY*
An agency may be terminated in any of following ways:
(A) By act of the parties, or
(B) By operation of law.
(A) Termination of Agency by Act of the Parties

An agency may be terminated by the act of the parties in the following
ways:
1. Agreement. The principal-agent relationship based on mutual
consent can be terminated, like any other contract, at any time, by
agreement between the principal and the agent.
2. Revocation by the principal. According to Section 201 read with
Sections 202 and 203, the principal has the power to revoke the
authority of the agent at any time, except where the agent
has an interest in the subject-matter of the agency, or the
agent has exercised his authority so as to bind his principal.
This right of revocation is subject to the liability to third parties
under the principle of apparent authority and to the right of the agent
to claim damages.
According to S. 207 revocation of agency may be expressed or may be
implied in the conduct of the principal.
Example. A empowers B to let A’s house. Afterwards A lets it himself. This is an
implied revocation of B’s authority. [Illustration to S. 20].
Revocation of agency by the principal is subject to the following
conditions:
(a) Revocation is prospective and not retrospective. Section
204 states that when the authority is partly exercised, the
principal becomes bound by the acts and obligations arising
from such exercise of the authority. Consequently revocation is
only prospective and not retrospective. The principal cannot
exonerate himself from the obligations created by the part
exercise of the authority by the agent.
(b) Compensation for premature revocation. Section 205
provides that if there is an express or implied contract that the
agency should be continued for any fixed period of time then the
principal must make compensation to the agent, if he revokes
the latter’s authority before the expiry of that period without
sufficient cause.
The principal is entitled to revoke the agency where the agent
has taken a bribe or where the agent has committed breach of
examination on Termination of Agency in Delhi University.
258 Business Laws
any of his duties or has committed misconduct, or where the

agent has been guilty of misrepresenting facts.
(c) Reasonable notice of revocation. According to S. 206 it is
also necessary for the principal to give reasonable notice of
revocation to the agent, and in case of failure to do so, he must
make good the damage thereby resulting to the agent.
3. Renunciation by the agent. Section 201 of the Act empowers the

agent also to renounce his authority, just as the principal can revoke
the agent’s authority. Renunciation may also be express or implied.
Further, the provisions of Section 205 and 206 of the Act regarding
compensation for premature renunciation without sufficient cause
and notice, are equally applicable to the agent in the case of
renunciation.
Thus if the agency is for a fixed period, the agent would have to
compensate the principal for any loss caused to the principal due to
earlier termination of agency without sufficient cause. The agent
should also give reasonable notice of renunciation to the principal.
According to S. 207 renunciation may be express or implied in the
conduct of the agent.
(B) Termination of Agency by Operation of Law

The principal-agent relationship is automatically put to an end by the
operation of law in the following cases:
1. Completion of the agency business. An agency is terminated

when the business of agency is completed (S. 201). For example, the
business of agency of a sale of goods is completed on completion of the
sale and receipt of the price by the agent.
2. Death or insanity of the principal or the agent. The relationship
between the principal and agent ceases upon the death of the
principal. Similarly, agency is terminated on the death of agent also.
(S. 201).
Section 201 further states that an agency is terminated by the insanity of

either the principal or the agent.
Section 209 of the Act casts a duty upon the agent to take, on behalf of
the representatives of his principal who has died or has become of unsound
mind, all reasonable steps for the protection and preservation of the interests
entrusted to him, when the agency is terminated by the death or insanity of
the principal.
3. Insolvency of the principal. According to Section 201, insolvency of

the principal puts an end to the agency relationship. The Act is silent
on the insolvency of the agent.
Agency 259
4. Expiry of time. If an agent has been appointed for a definite

period of time, the agency relationship ceases upon the expiry of the
time agreed upon although the business might not have been
completed.
5. Destruction of the subject-matter. In the case of agency, if an
agent is appointed to deal with a particular subject-matter on behalf
of the principal, the destruction of the subject- matter automatically
puts an end to the agency. If, for instance, an agent is employed to
sell his principal’s motor car, and the car is destroyed by fire in a civil
disobedience movement, the agency gets terminated.
6. Principal or the agent becomes an alien enemy. If principal or
agent becomes an alien enemy, the agency is terminated.. This is
obvious for the reason that a contract of agency stands suspended
during a period of war and performance becomes unlawful.
7. Termination of sub-agent’s authority. Section 210 of the Act has
laid down that termination of the authority of an agent causes the
termination of the authority of all sub-agents appointed by him.
When Termination of Agency Takes Effect

S. 208 provides that, “The termination of the authority of an agent does
not; so far as regard the agent, take effect before it becomes known to him or,
so far as regards third persons, before it becomes known to them.” F o r
example, if a principal writes a letter to his agent revoking his
authority, the agency comes to an end as between the principal and
the agent not from the time of posting the letter of revocation but
from the time the letter is received by the agent. Although after
receiving the letter the agency is terminated, the agent can still bind
the principal towards third parties until they come to know of the
revocation of agent’s authority. Therefore, it is necessary that the
principal must also give a public notice to the effect that the agency has been
terminated. Similarly, when the agency is terminated automatically by the
death or insanity or insolvency of the principal the termination of agency, so
far as regards agent, takes effect when it becomes known to him; and so far
as regards third parties, when it becomes known to them.
Example 1. A directs B to sell goods for him, and agrees to give B 5 percent
commission on the price fetched by the goods. A afterwards, by letter, revokes B’s
authority. B, after the letter is sent, but before he receives it, sells the goods for 100
rupees. The sale is binding on A, and B is entitled to five rupees as his commission.
Example 2. A, at Madras, by letter, directs B to sell for him some cotton lying in a
warehouse in Bombay, and afterwards, by letter revokes his authority to sell, and directs B
to send the cotton to Madras. B, after receiving the second letter, enters into a contract
with C who knows of the first letter, but not of the second for the sale to him of the cotton.
C pays B the money, with which B absconds. C’s payment is good as against A.
[Illustration (b) to S. 208].
260 Business Laws
Irrevocable Agency
When the authority given to an agent cannot be revoked, it is called
irrevocable agency. Although S. 201 of the Act empowers the principal to
revoke the authority conferred upon the agent by his unilateral action, he
cannot revoke t h e authority of t h e agent at h i s pleasure in t h e following
cases:
1. Where agent’s authority is coupled with interest. Section 202 of
the Act states that, “Where the agent has himself an interest in the
property which forms the subject-matter of the agency, the agency
cannot, in the absence of an express contract, be terminated to the
prejudice of such interest.” The rule of this section applies only to
cases where authority is given to the agent for the purposes of being a
security or as part of the security. In an agency of this type, the
agent’s authority is stated to be ‘coupled with interest’.
Thus an agency is said to be coupled with interest when agent
has interest in the subject-matter of agency at the time of its
creation. It cannot be terminated even by death, insanity or
insolvency of the principal.
Examples : ( i ) A gives authority to B to sell A’s land, and to pay himself out of the
proceeds, the debts due to him from A. A cannot revoke this authority nor can it be
terminated by his insanity or death. [Illustration (a) to S. 202].
(ii ) A consigns 1,000 bales of cotton to B, who has made advances to him on such
cotton, and desires B to sell the cotton, and to repay himself, out of the price, the amount
of his own advances. A cannot revoke this authority nor is it terminated by his insantity or
death. [Illustration ( b) to S. 202].
The section is intended to protect the interest of the agent. But it does not
apply to cases where authority is given independently, and the interest of the
agent arises afterwards, and incidentally only. The agent should have
interest in the property which forms the subject-matter of the agency and it
should exist at the time of creation of agency.
CASE : In the leading case Smart vs. Sandars [(1848) 5 CB 895], goods (wheat in
this case) were consigned by A (the plaintiff) to B, a corn factor (the defendant) for sale
on his behalf. This conferred an implied authority to sell. Afterwards, the factor
advanced a sum of £ 3,000 to A, which he A failed to repay. A gave order that the
goods was not to be sold, but B sold them to secure his advance. It was held that this
was not an authority coupled with interest, but an independent authority and interest
arose subsequently.
Note: Factor is an agent who has authority to sell the goods or cosign the goods for the
purpose of sale.
2. Where the authority has been partly exercised by the agent.

According to Section 204 of the Act, where the agent has partly
exercised his authority, the principal cannot revoke the agent’s
authority so far as regards such acts and obligations as arise from
such an exercise of the authority.
Agency 261
Example. A authorises B to buy 1,000 bales of cotton on account of A and pay for it
out of A’s money remaining in B’s hands. B buys 1,000 bales of cotton in A’s name, so as
not to render himself personally liable for the price. A can revoke B’s authority to pay for
the cotton. [Illustration ( b) to S. 204].
3. Where the agent has made himself personally liable for the
price. The principal cannot revoke the agent’s authority, if the agent
has, in the exercise of his authority, incurred any personal liability.
Example. A authorises B to buy, 1,000 bales of cotton on account of A, and to pay for
it out of As money remaining in B’ hands. B buys 1,000 bales of cotton in his own name so
as to make himself personally liable for the price. A cannot revoke B’s authority so far as
regards payment for the cotton. [Illustration ( a) to S. 204].
REVIEW QUESTIONS
1. Define the term ‘agent’ and ‘principal’. How does an agent differ from a
servant? Can a minor be appointed an agent?
2. Explain the different kinds of agents.
3. Explain the various ways of creation of agency.
4. What is mean by ‘Agency by Estoppel’ and ‘Agency by Necessity? Explain the
provisions of the Indian Contract Act relevant to the above under the
Contract of Agency.
5. “Ratification is tantamount to prior authority”. Comment.
6. Explain the meaning of ‘agency by ratification’. What are the essentials of a
valid ratification? [B.Com. and B.Com. (H), D.U.]
7. Distinguish between the following:
(a) Actual and Ostensible Authority.
(b) Implied and Apparent Authority.
(c) Sub-Agent and Substituted Agent. [B.Com. and B.Com. (H), D.U.]
8. ‘Delegatus non protest detegare’. Comment.
9. Who is a sub-agent. When can an agent appoint a sub-agent? Distinguish
between a sub-agent and a substituted agent. Explain the consequences of
appointment of a sub-agent. [B.Com. (H), D.U.]
10. Explain the duties and rights of an agent.
11. Explain the effect of a contract made by an agent with a third party when he
acts for
(a) a named principal,
(b) an unnamed principal, and
(c) an undisclosed principal.
12. When is an agent personally liable for the acts done by him for his principal?
13. Write a note on irrevocable agency. [B.Com. (H), D.U.]
14. In what ways may a contract of agency be terminated by act of the parties?
15. Write a note on agency coupled with interest.
16. State with reasons whether each of the following statements is true or false:
(a) An agent is a servant.
(b) A minor can be an agent but not a principal.
(c) A delegate cannot further delegate.
262 Business Laws
(d) Ratification is tantamount to prior authority.

(e) A part of the transaction can be ratified.
(f) If the disclosed principal cannot be sued, the agent is personally liable.
(g) There is privity of contract between the principal and the substituted
agent.
(h) An agency is always revocable.
[Hints : True : (b), (c), (d), (f); False : (a), (e), (h).]
PRACTICAL PROBLEMS
1. A enters into a contract with B for buying B’s car as agent of C without C’s
authority. B repudiates the contract before C comes to know of it. C
subsequently ratifies the contract and sues B to enforce it. Will he succeed?
[Hint: Yes; ratification relates back to the time of making the contract
[Boulton Partners vs. Lambert, (1889) 41 Ch. D. 295.]
2. A, a carrier, discovers that a consignment of tomatoes owned by B has
deteriorated badly before the destination has been reached. He, therefore
sells, the consignment for what he can get, thus about a third of the market
price for good tomatoes. B has now sued A for damages. A claims he was an
agent of necessity. Advise him.
[Hint: A is an agent of necessity. A is advised accordingly.]
3. A asks B, his agent, to get a ship for A. B asks C, a competent surveyor, to get
a good ship for A. The surveyor makes a bad bargain and A suffers loss.
Discuss the liability of B and C to A
[Hint: C is liable to A but not B to A (Section 195).]
4. A appointed B as his agent to purchase certain goods. B, without disclosing
his representative character, entered into a contract with C for the purchase
of the goods. C supplied the goods. C neither knew nor had reason to suspect
that B was acting as an agent. Afterwards C discovered that B was acting as
the agent of A. Advise C as to the person against whom he should bring a suit
for price of the goods supplied.
[Hint: C may sue either B or A or both, for the price of the goods (S. 233).]
5. A consigned certain goods to B for sale and instructed him not to sell the
goods below R 10,000. C being ignorant of A’s instructions enters into a
contract with B to buy the goods at 9,600. Is A bound by the contract?
R
[Hint: Yes; A is bound by the contract (S. 237)]

6. A, who owes B 50,000, appoints B to sell his land at Hissar, and instructs
R
him that after paying to himself his claim, i.e. 50,000, he should hand over
R
the balance to A. Can A revoke the authority given to B?

[Hint: A cannot revoke the authority gives to B as it is an agency coupled
with interest.]
7. A holds a lease from B, terminable on three month’s notice. C, an
unauthorised person, gives notice of termination to A. Can the notice be
ratified by B, so as to be binding on A?
[Hint: The notice cannot be ratified by B, so as to be binding on A (S. 200).]
Contract of Sale of
16 Goods
LEARNING OBJECTIVES
➥ Definition and Essentials of Contract of Sale

➥ Distinction between Sale and Agreement to Sell
➥ Distinction between Sale and Hire Purchase Agreement
➥ Distinction between Sale and Contract for Work and Service
➥ Types of Goods and Effect of Perishing of Goods
➥ Price and Stipulation as to Time
The contract of sale of goods is the most common of all mercantile

contracts. It is a special contract dealt with in the Indian Sale of Goods Act,
1930. Prior to the enactment of this Act, the law relating to sale of goods was
embodied in the Indian Contract Act, in Sections 76 to 123. The repealing of
the same gave birth to the Sale of Goods Act, 1930. Section 3 of the Sale of
Goods Act has laid down that the provisions of the Contract Act shall
continue to apply to contracts for the sale of goods, in so far as they are not
inconsistent with the express provisions of this Act.
SCOPE OF THE ACT

The Sale of Goods Act, 1930 came into force on July 1, 1930.
Its provisions are applicable to contracts of sale of goods, i.e., movables
other than actionable claims and money. The Act is not applicable for sale of
immovable properties like land, flat, shop, house.
Expressions used but not defined in the Sale of Goods Act, 1930 and
defined in the Indian Contract Act, 1872, have the meanings assigned to
them in that Act [S. 2(15)].
A custom or usage will bind both the parties if it is reasonable, and is
known at the time of the contract, and is not inconsistent with the express
terms of the contract.
264 Business Laws
DEFINITION AND ESSENTIAL ELEMENTS OR FEATURES OF A

CONTRACT OF SALE
Definition of a Contract of Sale
Section 4(1) of the Act defines a contract of sale as “a contract whereby
the seller transfers or agrees to transfer the property in goods to the
buyer for a price.”
A contract of sale may be absolute or conditional.
A contract of sale includes “sale” and an “agreement to sell”. In case of
sale, the property (ownership) is transferred to the buyer immediately. In
case of an agreement to sell, the property in the goods is transferred to the
buyer at a future time or subject to some conditions, thereafter to be fulfilled.
Example. (i ) A, on 1st March, agrees to sell certain goods to B for 500 so that
R
ownership is transferred to B immediately. B agrees to pay the price on 5th March. It is a

sale.
(ii ) A agrees to buy B’s car and pay for it at a certain price, if his wife approves. It is
an agreement to sell.
Essentials of a Contract of Sale

The following are the essentials of a contract of sale of goods:
1. Two parties. A contract of sale is a bilateral contract, that is, it
requires two parties: (a) the seller and (b) the buyer. “Seller” means a
person who sells or agrees to sell the goods and the “buyer” means a
person who buys or agrees to buy the goods. The seller and the buyer
must be two different parties. If a person buys his own goods there is no
sale.
CASES : (i ) In Graff vs. Evans [(1882) 8 QBD 373], it was held that transfer of
liquor by the manager of an unincorporated club to a member for money was not a
sale. The basis of the decision was that the member was himself a undivided joint
owner of the liquor, and as such, he consumed his own liquor and payment made by
him was only to restore to the club what he consumed to enable the club to buy and
supply liquor to its members.
(ii ) In State of Gujarat vs. Ramanlal S. & Co. [AIR 1965 Guj. 60], on the dissolution of
a partnership, the surplus assets including some goods were divided amongst the
partners. This was sought to be taxed by the sales tax officer. The Court observed that,
“they (partners) were themselves the joint owners of the goods and they could not be
both sellers and buyers. Moreover no money consideration was promised or paid by
any partner to the firm as consideration for the goods allotted to him.”
Section 4(1) lays down that “There may be contract of sale between,
one part-owner, and another.” Therefore, a joint owner, whose share is
not known, should be distinguished from a part-owner who is a joint owner
but whose divisible share is known. Members of a club or voluntary society
are undivided joint owners, not part owners. When a part-owner sells goods
to another part-owner, the latter becomes the sole owner.
Contract of Sale of Goods 265
A partner may buy goods from the firm in which he is a partner.

Similarly, a partner may sell his own goods to the firm.
It has been held that where three shareholders of a company who were
the only shareholders formed a partnership and the company transferred, by
resolution, a number of buses to the partnership for a certain sum, the
transaction was held to be sale by the Supreme Court [Chittor Motor
transport Co. v. Income Tax Officer, AIR 1966 SC 570].
Where a shareholder receives money on distribution of net assets on
winding up of a company he receives that money in satisfaction of the right
which belongs to him by virtue of holding the shares. The transaction does
not amount to a sale [CIT, Madras v. Madurai Mills Co. Ltd., 1973 SC
Page 109]
Exception. Where the goods of a person are sold in execution of a decree
he may himself buy the goods to retain their ownership.
2. Transfer of property. It is necessary for a contract of sale that the
seller transfers or agrees to transfer the property in goods to the buyer. The
word “property” here means ownership. Section 2(11) of the Act defines
property as the general property in goods, and not merely a special property.
A pawnee has only a special property in the goods pledged to him, the general
property remains in the owner. The time of transfer of ownership depends
upon the intention of the parties.
3. ‘Goods’ is subject matter of contract of sale. The subject matter of
contract of sale is goods. Section 2(7) of the Act has defines ‘goods’ as
follows:
‘Goods’ means 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.
‘Goods’ includes only movable properties. The transactions relating to
immovable properties such as land, flat, house or shop are subject - matter of
Transfer of Property Act, 1882.
‘Goods’ includes 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. They are immovable property so long as they are not severed
from land. Things attached to the land or forming part of the land become
‘goods’ if they are agreed to be severed before sale or under the contract of
sale.
The following are included in ‘goods’ :
(i) Every kind of movable properties.
(ii) Crops, grass and things attached to or faming part of land which are
agreed to be severed before sale or under the contract of sale. For
example, standing timber may be a subject matter of sale if it is
266 Business Laws
agreed to be severed before sale or under the contract of sale within

reasonable time. Similarly, fruits grown on the trees and vegetables
grown on the plants may be subject-matter of sale if they are agreed
to be severed before sale or under the contract of sale.
(iii) Stock and shares after allotment. However, till allotment of shares
takes place, shares do not exist. Therefore, they cannot be called
goods.
(iv) Sale of degree of a court of law is a sale of goods.
(v) Electricity is goods because it can be transmitted, transferred,
delivered, possessed, stored, etc. Similarly, water and gas are goods.
(vi) Domestic animals are treated as goods. But wild animals not in
captivity are not goods because they are not capable of being owned
absolutely.
(vii) Foreign coins and currency notes are goods. Old coins which are not
in circulation may form the subject-matter of sale.
(viii) Intangibles such as goodwill, patents, copyrights may be subject-
matter of sale.
(ix) Replenishment licenses (i.e. exim-scrips) can be transferred by a
holder to another. Such a transfer has been held sale of goods by the
Supreme Court [Vikas Saler Corporation v. CCT, (1996) 4SCC433
and Commercial Tax Officer v. SBI, (2016) 10 SCC 595].
It may be noted that replenishment licenses give permission to an
exportor to take credit for the exports made. These are freely transferable.
The following are not included in ‘goods’:
1. ‘Goods’ does not include actionable claims and money. An actionable
claim means a claim to any debt or any beneficial interest in movable
property not in possession. It is a claim which can be enforced by a legal
action or by filing a suit. These are as follows :
(i) Trade and other receivables are actionable claims. They can be
sold/assigned.
(ii) Similarly, amount receivable on a promissory note or a bill of
exchange is an actionable claim.
(iii) Further money, being itself the legal tender, is expressly excluded
from ‘goods’. Therefore, coins and notes which are currently legal
tender are not ‘goods’.
(iv) Again, debentures are actionable claims [R.D. Goyal v. Reliance
Industries, (2003) 1 SCC 81].
(v) Sale of lottery-tickets was held to be a transfer of actionable claim
[Sunrise Associates v. Government of NCT of Delhi, (2006) 5
SCC 603]
2. Goods does not include immovable property. Immovable property is
subject-matter of Transfer of Property Act. For example, sale of plot of land,
flat, house, shop and coal-mine are not subject matter of Sale of Goods Act,
1930.
4. Price. Price is the essential elements of a contract of sale. The buyer is

required to pay price as consideration in return for the seller parting with
goods. Thus, consideration moving from the seller is the parting with the
goods; and consideration moving from the seller is payment of price of the
goods. Price means the money consideration for a sale of goods.
It is, therefore necessary that goods should be exchanged for money. If
goods are exchanged for goods, the transaction would not become a sale but
only barter. However, a contract for transfer of movable property for a
definite price, payable partly in goods and partly in cash has been held to be a
contract of sale of goods.
CASE : : There was a contract for sale of 52 bullocks valued at £ 6 each against 100
quarters of barley valued at £ 2 per quarter, the difference to be paid in cash. It was
held to be a contract of sale of goods [Aldridge vs. Johnson], (1857) 7E & B 385]. £
is sign of pound sterling.
5. Includes both a ‘sale’ and an ‘agreement to sell’. It is clear from

the definition that a contract of sale includes both a ‘sale’ and an ‘agreement
to sell’.
Sale. Section 4(3) of the Act states that where under a contract of sale the
property in the goods is transferred from the seller to the buyer, the contract is
called a sale. Thus in the case of a sale, the ownership of the goods is
transferred to the buyer immediately.
Example. A, on 1st March, agrees to sell certain goods to B for 500 so thatR

sale.
Agreement to sell. Section 4(3) of the Act further states that where under
a contract of sale the transfer of property in the goods is to take place at a
future time or subject to some condition thereafter to be fulfiled, the contract is
called an agreement to sell. Thus, in case of an agreement to sell, the
ownership of the goods is transferred at a future time or subject to some
conditions thereafter to be fulfiled.
Examples : (i ) A, on 1st March, agrees to sell certain goods to B for 500 after a
R
week. B agrees to pay the price on delivery. It is an agreement to sell since A agrees to
transfer the ownership of the goods to B at a future time.
(ii ) A agrees to buy B’s car and pay for it at a certain price, if his wife approves. It is
an agreement to sell.
(iii ) On 1st January, A agrees with B that he will sell B his scooter on 15th January for
a sum of 5,000. It is an agreement to sell, because A agrees to transfer the ownership of
R
the scooter to B at a future time.

According to Section 4(4) of the Act, an agreement to sell becomes
a sale after the lapse of time or fulfilment of the conditions subject to
which property in the goods is to be transferred.
268 Business Laws
6. No particular form to make a contract of sale. The Sale of Goods

Act, 1930 does not prescribe any particular form to make a contract of sale.
Section 5 provides that a contract of sale is made by an offer to buy or sell
goods for a price and acceptance of such offer. The contract may provide for
immediate delivery of goods or immediate payment of the price or both. The
parties may provide for the delivery or payment by instalments or that
delivery or payment or both may be postponed.
A contract of sale may be made up in writing or word of mouth or may be
implied from the conduct of the parties.
7. Essentials of a valid contract. All essentials of a valid contract must
be present in a contract of sale. In order to constitute sale, there must be an
agreement between the parties for the purpose of transferring tittle to the
goods. The seller and the buyer must be competent to contract. The
agreement must be supported by money consideration.
ABSOLUTE AND CONDITIONAL CONTRACT OF SALE

A contract of sale may be absolute or conditional.
Absolute Contract of Sale : Contracts are absolute when their
enforceability do not depend upon the performance a fulfilment of some
condition. For example, A, on 1st March, 2020, agrees to sell certain goods to
B for R 10,000 so that ownership is transferred immediately. B agrees to pay
the price on 5th March, 2020. It is an absolute contract of sale.
It may be noted that contracts containing ‘retention of title, clauses are
absolute contracts. For example, the transfer of goods may be subjected to a
term of contract of sale to a condition that ownership shall not pass to the
buyer until the price is paid in full. This is an absolute contract of sale.
Conditional Contract of Sale “Contracts are conditional when their
enforceability against one or both of the parties depends upon the
performance or fulfilment of some condition, precedent or
subsequent” [Pollock and Mulla, Tenth Edition, page 85].
CASE : : In Venkateshwara Minerals and Another v. Jugalkishore Chiranjilal

[AIR 1986 Kant 14], it was provided under the contract that the seller shall furnish to
buyer, analysis report and geological permit in respect of red oxide, which was the
subject matter of sale, to enable the buyer to requisition wagons from the railways for
loading the goods. It was a case of conditional contract of sale. The seller was not
ready to fulfil the condition at the relevant time. He was held liable for breach of
contract.
DISTINCTION BETWEEN SALE AND AGREEMENT TO SELL

The definition of a contract of sale given in Section 4(1) of the Act makes
it clear that a contract of sale includes a sale as well as an agreement to sell.
According Section 4(3). “Where 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 condition thereafter to be fulfiled, the contract is called
an agreement to sell.”
Thus, in the case of sale, the property in the goods must be transferred
immediately. In the case of an agreement to sell, however, the transfer of
property takes place at a future time or subject to some conditions thereafter
to be fulfiled. An agreement to sell becomes a sale, according to Section 4(4),
after the lapse of time or fulfilment of the conditions subject to which
property in the goods is to be transferred.
Examples : (i ) A, on 1st March, agrees to sell certain goods to B for 500 so that the
R

sale.
(ii ) A, on 1st March, agrees to sell certain goods to B for 500 so that the ownership
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is transferred to B immediately. B agrees to pay the price on delivery. It is an agreement to

sell.
A sale differs from an agreement to sell in the following respects:

Points of Difference Sale Agreement to Sell
1. Transfer of In case of sale, the property In case of an agreement to
ownership (ownership) in the goods is sell, the property (ownership)
immediately transferred in the goods is transferred to
from the seller to the buyer the buyer after the lapse of
so as to constitute the buyer a certain time or the
the owner of the goods. fulfulment of some
condition.
2. Risk of loss The general rule is that the In case of an agreement to
risk prima facie passes with sell, since the ownership of
property. Therefore, in case the goods passes to the buyer
of sale, the buyer has to subsequently, the risk of loss
bear the loss if the goods of goods will not pass to the
are destroyed even though buyer till then. Therefore,
the goods may be in the seller has to bear the loss
possession of the seller as if goods are destroyed,
the ownership has already although the goods may be in
passed to the buyer. the possession of the buyer.
3. Consequences of In case of sale, if the buyer In case of an agreement to
breach by the wrongfully refuses to pay the sell, if the buyer makes a
buyer price of the goods, the seller breach of contract, the seller
can sue him for the price, can sue him for damages
even though the goods are and not for the price of the
still in his possession. goods.
4. Consequences of In case of seller’s failure to In case of seller’s failure to
breach by the deliver to the goods, the deliver the goods, the buyer
seller buyer can claim the goods by can claim damages. Only in
filing a suit in a court. certain cases, specific
performance may be allowed.
270 Business Laws
5. Nature of right A sale creates a jus in rem An agreement to sell creates

of the buyer (right against the whole only a jus in personam (right
world), because the buyer against an individual).
becomes the absolute owner Therefore, in case of breach of
of the goods and use the contract by the seller, the
same in any manner he buyer’s rights are only
likes. personal. He can sue the
seller for damages in case of
breach of contract.
6. Right of re-sale In case of sale, the ownership In case of an agreement to
is with the buyer. Therefore, sell, the seller is the owner of
if the seller is in the the goods. Therefore, he can
possession of the goods re-sell the goods and
after sale, and re-sells the convey good title to a
goods and the second third party. If the seller re-
buyer is aware of the sells the goods, the original
previous sale, he does not buyer can sue the seller for
get a title to the goods. the breach of contract.
Thus the original buyer, as
owner, will be entitled to
recover the goods from the
third person, unless such
third person buys them in
good faith without notice of
the previous sale. The
original buyer can also sue
the seller for conversion.
7. Insolvency of In case of sale, if the buyer In case of an agreement to
the buyer before becomes insolvent without sell, ownership having not
he pays for the paying for the goods, t h e passed to the buyer, t h e
goods seller has to deliver the seller can refuse to deliver
goods to the Official the goods to the Official
Receiver or Official Receiver or Official
Assignee as the case may Assignee, is the case may be,
be. In such a case, the seller of the insolvent unless the
becomes entitled only to a price is paid by him.
rateable dividend from the
buyer.
8. Insolvency of In case of sale, if the seller is In case of an agreement to
the seller if the adjudged insolvent after sell, the buyer cannot
buyer has payment of the price by the claim the goods since the
already paid the buyer, the buyer will be ownership has not passed
price entitled to claim the to him. He is only entitled to
goods from the Official rateable dividend for the
Assignee or Official price paid.
Receiver.
9. Nature of It is usually executed It is usually an executory
contract contract. contract.
DISTINCTION BETWEEN SALE AND HIRE-PURCHASE AGREEMENT*

A contract of hire-purchase is entered into mainly with the object of
selling goods. It is a development of modern commercial transactions. In the
case of such a contract, the hire-purchaser is given possession of the goods
upon a promise that he pays the price of the goods in a certain number of
fixed instalments. The property in the goods does not pass to the hire-
purchaser until all the agreed instalments are paid.
If the hire-purchaser fails to pay any one of the instalments, the hire-
vendor can seize the goods and the hire-purchaser will not be entitled to any
refund of the instalments already paid by him. The hire-purchaser equally
enjoys the right of terminating the contract at his will and return the goods, if
he does not want to become the owner by paying all the instalments.
Thus, the hire-purchaser remains a bailee until he clears all the
instalments and at the same time, enjoys the option of returning the goods by
discontinuing the payment of further instalments. Thus, a hire-purchase
agreement is bailment coupled with an option to buy.
If the hire purchaser after paying few instalments but not all pledges the
goods (piano) with third person who acts in good faith, the hire-vendor can
sue that person to recover the goods [Helby vs. Mathews, (1895) AC 471].
Sales-tax is not leviable until the hire-purchase eventually ripens into a
sale [K.L. Johar & Co. vs. Depty Commercial Tax Officer, AIR 1965 SC
1082].
It may be noted that Hire Purchase Act, 1972 has not been notified by the
Government yet.
The following are the points of distinction between sale and hire-purchase
agreement:
Points of Difference Sale Hire-Purchase
1. Transfer of In a sale, the property, i.e., In hire-purchase, the property
property, i.e., ownership in the goods is in the goods is transferred to
ownership transferred immediately at the hire purchaser only when
the time of entering into all the instalments are paid
the contract.
2. Transfer of title In a sale, the buyer of goods Hire-purchaser cannot transfer
can transfer a good title to good title to a bonafide
a person who purchases the purchaser. Further hire
goods in good faith and for purchaser cannot pledge the
consideration. goods (Helby vs. Mathews)
3. Position of the In a sale, the position of the The position of the hire-
buyer buyer is that of the owner purchaser is that of a bailee
of the goods purchased. having the option to buy the
goods.
* As per the Guidelines, question may not be asked in the examination on this
topic in D.U.
272 Business Laws
4. Option to In a sale, the buyer cannot In a hire-purchase agreement,

terminate the terminate the contract and the hire-purchaser may
contract is bound to pay the price of terminate the contract at any
the goods. time by returning the goods to
the hire-vendor.
5. Treatment of In a sale, if the price is to In a hire-purchase agreement,

instalments paid be paid in instalments, the the instalments paid are
amount payable by the treated as hire charges and not
buyer is reduced by the as payment towards the price
amount paid. till the option to purchase is
exercised by the hire-
purchaser.
6. Levy of sales- In a sale, value added tax is In case of hire-purchase

tax/VAT/GST levied at the time of agreement, sales-tax/vat is not
contract. leviable until the hire-
purchase agreement ripens
into a sale. (K.L. Johar & Co.
vs. Depty Commercial Tax
Officer)
7. Insolvency of In a sale, if the buyer In a hire-purchase agreement,

purchaser becomes insolvent the the hire vendor csn take his
seller will get rateable goods back from the hire-
dividend. purchaser if he fails to pay the
instalments.
8. Implied There are i m p l i e d Implied conditions and

conditions and conditions and warranties w a r r a n t i e s are not
warranties in a contract of sale incorporated in hire purchase.
DISTINCTION BETWEEN CONTRACT OF SALE AND CONTRACT FOR

WORK OR SERVICE*
In case of contract for work or service, there is in the person performing
works or rendering service no property in the thing produced as a whole.
In case of a contract of sale, the thing produced as a whole has individual
existence as the sale property of the party time before delivery, and the
property therein passes only under the contract relating thereto the other
party for a prices.
The comparative share of the materials and the services in the total
charge is one of the important factor to be taken into consideration for
determing whether the contract is for sale of goods or one for contract for
work or service.
* As per the Guidelines, question may not be asked in the examination on this
topic in D.U.
Basis Contract of Sale Contract for Work or Service

1. Substance The essence of a contract of The essence of contract for work
of the sale is the exchange of or service is rendering of service
contract property for a monetary involving exercise of skill and
consideration. Therefore, labour. Therefore, where the real
where the real substance of substance of the contract is
the contract is the transfer of performance of work involving
property, i.e., ownership in skill and labour, it is contract for
the goods to the buyer for a work and labour, although
price, it is a contract of sale performance of the work necessi-
even though some labour on tates the use of certain materials
the part of the seller of goods and property (ownership) in
may be necessary. those materials passes to the
person who pays the price.
2 Subject Subject-matter of contract of The subject matter of contract
matter of sale is goods which is a for work or labour may be
contract. movable property. movable as well as immovable
property.
3. Object The main object of contract of The main object of contract of
sale is transfer of ownership work or service is performance of
in the chattal as a chattel to work involving skill and labour,
the buyer. and not transfer of a chattal qua
chattel.
CASES : (i) Serving of food in a restaurant has been held to be a contract of sale.
[Locket v. A.M. Charles Ltd., (1938) 4 All ER 170].
(vi ) A contract to make a portrait of a lady has been held to be contract for work
and labour [Robinson v. Graves, (1935) 1 KB 579].
(iii ) The contract for sale of flats where the consideration is to be received in
installments linked to the construction is a works contract. Accordingly, the government
(Karnataka government in this case) has the constitutional right to levy value added tax
(in short, VAT) on such sale of flats in the state. [Larsen and Toubro limited v. State
of Karnatka, (2014) 1 SCC 708]. It may be noted that after implementation of goods
and services tax w.e.f. July 1, 2017, GST can be levied on sale of such flats because
GST has replaced VAT and several other indirect taxes.
Types of Goods
Goods form the subject-matter of contract of sale. Definition of ‘goods’
has already been explained in the essentials of a contract of sale.
Goods may be classified into the following types:
Goods
Existing Goods Future Goods Contingent Goods
Specific Goods Ascertained Goods Unascertained Goods
Figure 16.1: Classification of Goods

274 Business Laws
1. Existing goods. Existing goods are those goods which physically exist
and are owned or possessed by the seller at the time of entering the contract of
sale. Generally the seller is the owner of the goods. The existing goods owned
by the seller includes the goods which have been pledged, or let on hire, or are
in possession of an agent, or bailee. Instances of sale of goods possessed but
not owned by the seller include the sale by a pledge, or by a mercantile agent.
Existing goods may be either (a) specific goods or (b) unascertained goods.
(a) Specific goods [S. 2(14)]. According to Section 2(14) “Specific goods
means goods identified and agreed upon at the time a contract of sale is
made.” For example, if A agrees to sell to B a particular brand of a television
set, bearing a distinctive number, there is a contract for sale of specific
goods.
(b) Ascertained goods. The term ‘ascertained goods’ also appears in
some sections of the Act, but it is not defined by the Act. The meaning of
‘specific goods’ and ‘ascertained goods is not same. In re Wait [(1927 1 Ch
606 page 630], Lord Justice Atkin observed : ‘Ascertained’ probably means
‘identified’ in accordance with the agreement after the time a contract of sale is
made. Thus, ascertained goods means the goods which are identified in
accordance with the agreement after the formation of contract of sale. Thus,
meaning of specific goods and ascertained goods is not same.
(c ) Unascertained goods. Unascertained goods means those goods
which are not identified and agreed upon at the time of contract of sale. They
are defined by description only. For example, sale of certain quantity of
goods out of large quantity by description only. For example, sale of
certain quantity of goods out of large mass is a sale of unascertained
goods. Similarly, sale of one tin of a particular brand of oil out of a number of
tins of that brand without identifying the tin is a sale of unascertained goods.
It may be noted that samsung washing machine, product number AS0987654
is a specific goods, while samsung washing machine, is an unascertained
good.
Significance of distinction between specific goods, ascertained
goods and unascertained goods.
The distinction between specific goods, ascertained is important is respect
of the following :
(i) Transfer of property in the goods to the buyer from the seller; and
(ii) Perishing of goods.
2. Future goods. According to Sec. 6, “future goods means the goods to be
manufactured or produced or acquired by the seller after the making of the
contract of sale”. These goods either do not exist at the time of formation of
contract or exist but not yet acquired by the seller. According to Sec. 6(3), a
present sale of future goods operates only as an ‘agreement to sell’ goods and
does not amount to a ‘sale’ of goods.
Example 1. A agrees to sell to B all the apples which will be produced in his garden
next year. It is an ‘agreement to sell’ future goods.
Example 2. A contracts on 1st July, to sell to B 200 bales of cotton to be delivered
and paid for on 15th November of the same year. At the time of making the contract, A is
neither the owner nor has the possession of cotton bales. This is an ‘agreement to sell’
future goods.
3. Contingent goods. Section 6(2) provides that “there may be a contract
for the sale of goods the acquisition of which by the seller depends upon a
contingency which may not happen.” Such goods are called contingent goods.
Thus, goods, the acquisition of which depends upon an uncertain contingency
are called contingent goods. It is a type of future goods. Therefore,
contract for the sale of contingent goods can only be an ‘agreement to sell’ and
not ‘sale’. A contract for the sale of contingent goods is enforceable only when
the event on the happening of which the performance of the contract is
dependent happens. If the event does not happen, the contract becomes void.
Examples : (i ) A agrees to sell to B a particular diamond provided he is able to
purchase it from its present owner. This is an ‘agreement to sell’ contingent goods.
(ii ) A agrees to sell to B 100 shares of a company at a certain price provided the
shares are allotted by the company to A in a particular public issue of the shares. This is
an ‘agreement to sell’ future goods assuming that it is not in violation of the law for the
time being in force.
Distinction Between Specific Goods and Unascertained Goods

Basis Specific Goods Unascertained Goods
1. Meaning Specific goods means goods Unascertained goods are
identified and agreed upon at the defined by description. These
time a contract of sale is made are not identified or agreed
[Section 2(14)]. upon at the time of formation
of contract of sale.
2. Transfer of Property in the goods is Property in the goods is not
Property transferred to the buyer at such transferred to the buyer unless
time as the parties to the and until the goods are
contract intend it to be ascertained [Section 18].
transferred [Section 19].
3. Perishing Where there is a contract for sale Where there is a contract for
of Goods of specific goods, the contract is sale of unascertained goods,
void if the goods without the the contract is not void if the
knowledge of the seller have, at goods without the knowledge
the time when the contract was of the seller have, at the time
made, perished or become so when the contract was made,
damaged as no longer answer to perished or so damaged as no
their description in the contract longer answer to their
[Section 7]. description in the contract.
4. Specific The court may order specific The court will not order
Performan performance of contract in case specific performance of
ce of specific goods [Section 58]. contract.
276 Business Laws
Distinction Between Future Goods and Contingent Goods

Basis Future goods Contingent goods
1. Meaning Future goods means goods to be Contingent goods means the
manufactured or produced or goods the acquisition of which
acquired by the seller after depends upon a contingency
making the contract of sale is which may or may not happen
made [Section 2(6)]. [Section 6(2)]. It is a type of
future goods.
2. Discharge In case of an agreement to sell If there is an agreement to sell
of parties future goods which are not contingent goods the
contingent goods, the parties are acquisition of which depends
not discharged if the goods on the happening of a
cannot be manufactured or contingency, the parties are
produced or acquired, as the case discharged if the happening of
may be, by the seller. that event becomes impossible.
EFFECT OF PERISHING OF GOODS

Sections 7 and 8 of the Act, deal with perishing goods. Perishing of goods
means physical destruction of the goods. Under Sections 7 and 8, the word
‘perishing’ also includes (i) loss of commercial value of the goods, e.g., where
cement is spoiled by water becomes stone and is not saleable as cement. (ii)
theft of goods and (iii) requisition of goods by the government.
The following two points should be kept in mind in this connection: (a)
General rule is that whosoever is the owner of the goods at the time of
perishing of goods will bear the loss. (b) There is effect on the contract due to
perishing of goods in case of specific goods only. Sections 7 and 8 are not
applicable in case of unascertained goods. Therefore, if there is a contract for
sale of unascertained goods, perishing of the some does not make the contract
void.
Goods may perish (1) at or before making the contract of sale, or (2)
before sale but after agreement to sell.
1. Perishing of specific goods at or before making the contract of
sale (S. 7)
This may be further divided into two sub-heads:
(a) Perishing of whole of the goods
According to section 7, where the subject-matter of sale is specific goods,
the existence of those goods is essential for the validity of the contract.
Therefore, if the specific goods have, at or before making the contract,
perished or become so damaged that they cannot any longer answer to their
description in the contract, and the seller is not aware of the same, the
contract becomes void ab initio, and the buyer can get back the price of the
goods.
Example 1. A agrees to sell a horse to B for a certain price. Subsequently, it was
found that the horse was dead at the time of the formation of contract but both the parties
were unaware of this fact. The agreement is void.
Example 2. A cargo of dates is sold to B for a certain price. Later on it is found that at
the time of entering into the contract the dates were contaminated with sea water so as to
be unsaleable as dates, though they can be used for making spirits. The contract is void
as the dates no longer answer their description in the contract.
(b) Perishing of part of the goods

Where in a contract of sale of specific goods, only a part of the goods are
destroyed, damaged, stolen or lawfully requisitioned by the Government, and
the contract is indivisible, the whole of the contract is void. If the contract is
divisible, whole of the contract will not be void; the part of the goods which
are in good condition must be accepted by the buyer.
CASE : There was a contract for the sale of parcel containing 700 bags of Chinese
groundnuts stored in a warehouse. The bags were of different weights and qualities.
Subsequently, it was discovered that at the time of the contract 109 bags had been
stolen. The seller delivered the remaining 591 bags and the buyer refused to take
delivery. In an action by the seller for the price, it was held that the contract was
indivisible for 700 bags and hence, the buyer was not bound to accept the remaining
bags. [Borrow Lane and Bollard v. Phillips), (1929) 1 KB 574].
Knowledge of perishing of goods by the seller

If the seller enters into a contract of sale knowing that the goods have
perished, the contract does not become void, and the seller will be liable to
pay damages to the buyer, if he cannot fulfil the contract by supplying the
goods contracted for.
2. Perishing of specific goods before sale but after agreement to
sell (S. 8)
According to Section 8 of the Act, “Where there is an agreement to sell
specific goods, and subsequently the goods, without any fault on the part of
the seller or buyer, perish or become so damaged as no longer to answer their
description in the agreement before the risk passes to the buyer, the
agreement is thereby avoided.”
The effect of this section on the rights and obligations of the parties may
be stated as follows:
(a) If the goods perish without any fault on the part of either of the
parties, and risk has not passed to the buyer, the contract becomes
void. The seller is not responsible for non-delivery, but has to bear the
loss occasioned by the destruction of the goods. The buyer need not
pay the price, nor is he is liable for breach of the contract.
(b) If the risk has passed, but neither of them is responsible for the
destruction of goods, the buyer has to pay the price according to
Section 26 of the Act.
(c) If the goods are destroyed because of the fault of either of the parties,
the party in fault is liable for non-delivery, or payment of the price, as
the case may be.
278 Business Laws
CASE : There was an agreement to buy a horse on the condition that the price would
be paid after a week’s trial. The horse died on the third day without the fault of either of
the parties. It was held that the contract to buy the horse and to pay the price had
become void because the property had not passed, and horse died after the contract
was made. The seller had to bear the loss since horse remained his property. [Elphick
v. Barnes), (1880) 5 CPD 321].
Effect of perishing of ‘identyifiable’ future goods. As stated earlier, a

present sale of future goods operates as an agreement to sell the goods. In
Howell vs. Coupland, it was held that if the future goods are ‘identifiable’
within the meaning of S. 2(14), they are to be treated as specific things, the
destruction of which will make the contract void. The facts of this case are as
follows:
CASE : In Howell vs. Coupland, (1876) 1 QBD 258, the seller agreed to sell to the
buyer 200 tons of potatoes to be grown on his land , at a certain price a ton. He sowed
sufficient land to grow more than 200 tons. But, without any fault on his part, the crop
was attacked by a disease, as a result of which he could deliver only 80 tons. The
buyer sued the seller for breach of contract. The contract was held to have become
void.
Mellish, L.J. observed that, “This is not like the case of a contract to deliver so many
goods of a particular kind, where no specific goods are to be sold. Here there was an
agreement to sell and buy 200 tons out of a crop to be grown on specific land, so that it
is an agreement to sell what will be, and may be, called specific things , therefore
neither party is liable if the performance becomes impossible.” [(1876) 1 QBD 258].
THE PRICE
According to Section 2(10) “price” means the money consideration
for a sale of goods. Price is one of the essential elements of contract of sale
as per Section 4. Thus there must be an agreement to pay the price in money
in a contract of sale.
Mode of fixing the price (S. 9). Section 9 provides the following four
modes of fixing the price:
1. Price may be fixed by the contract itself. The price in a contract of
sale may be fixed by the contract itself. This is the usual mode of fixing the
price. The parties are free to fix any price they like. It may not be adequate.
2. Price may be fixed in a manner provided by the contract. The
price may be fixed in accordance with the manner agreed upon, that is, as
provided in the contract. For example, the parties may agree that the buyer
would pay market price on the date of despatch of goods or they may agree
that the price would be fixed by a third party to be appointed by the consent
of the parties.
3. Price may be fixed by course of dealing between the parties. The
price may be determined by the course of dealing between the parties. For
example, the course of dealing may suggest that the price prevailing on the
date of despatch of goods has been previously paid by the buyer, then
subsequently also the price prevailing on the date of despatch would be paid.
4. Reasonable price. If the price cannot be fixed in accordance with any

of the aforesaid modes, the buyer is bound to pay to the seller, a reasonable
price. What is reasonable price is a question of fact to be determined after
taking into consideration the circumstances of each particular case.
5. Agreement to sell at valuation of a third party (S. 10). Section
10(1) provides that where there is an agreement to sell goods on the terms
that the price is to be fixed by the valuation of a third party and such third
party cannot or does not take such valuation, the agreement is thereby
avoided. If the goods or any part thereof have been delivered to, and
appropriated by the buyer he shall pay a reasonable price.
Example. A agrees to sell to B two cars on the terms that price is to be fixed by C. B
takes delivery of one car immediately. C does not fix the price of the cars. B must pay
reasonable price for the car taken away by him and the contract for the other car has
become void.
According to Section 10(2) where such third party is prevented from
making the valuation by the fault of the seller or buyer, the party not in fault
may maintain a suit for damages against the party in fault.
STIPULATIONS AS TO TIME
Section 11 provides that “Unless a different intention appears from
the terms of the contract, stipulation as to time of payment are not
deemed 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 depends
on the terms of the contract.
In a contract of sale, stipulations as to time may be of the following two
types :
1. Stipulations as to Time of Payment
2. Stipulations as to Time of Performance of Other Terms.
1. Stipulations as to time of payment. Different intentions appears

from the terms of the contract, stipulations as to time of payment are not
deemed to be of the essence of a contract of sale.
Therefore, the failure by the buyer to pay on the appointed day does not
as a rule entitle the seller to treat the contract as repudiated [Martindale v.
Smith, 55 RR 285].
Failure to pay the price on the appointed day to withhold delivery until
the price is paid [Section 47]. Further, the seller can re-sell the goods if the
buyer does not pay or tender the price, the seller cannot in the absence of a
stipulation to be contrary, treat the contract as repudiated [Mertinde v .
Smith, 55 RR 285].
2. Stipulation as to time of performance of other terms.
Stipulations as regards performance of other terms are essence of contract or
not depends on the terms of the contract.
280 Business Laws
In mercantile contracts, stipulations as to delivery of goods are usually of

essence of contract. Therefore, if the seller fails to deliver the goods within
the stipulated time, there is beach of contract entitling the buyer to repudiate
the contract. He may not accept the delayed delivery of goods.
DOCUMENT OF TITLE TO GOODS

According to Section 2(4), a document of title is a proof of right to possess
or control of the goods. It entitles the holder to receive the goods mentioned
therein, or to transfer such right to another person by proper indorsement or
delivery. The issuing authority of a document of title is under an obligation to
deliver goods to the holder of the document of title unconditionally. It is a
quasi negotiable instrument. Therefore, the title of the transferee will not be
better than that of the transferor. Bill of lading, railway receipt, dock-
warrant, warehouse keeper’s certificate, wharfinger’s certificate, multimodal
transport document, warrant or order for the delivery of goods are some of the
example of the documents of title to the goods.
REVIEW QUESTIONS
1. Define a contract of sale. Explain its essentials. [B.Com., D.U.]
2. Distinguish between the following :
(a) Sale and Agreement to Sell [B.Com. and B.Com. (H), D.U.]
(b) Sale and Hire-Purchase Agreement
(c) Sale and Contract for Work and Labour
(d) Specific and Unascertained Goods
(e) Existing and Future Goods
3. Define the term ‘Goods’ under the Sale of Goods Act.
4. State the effect of perishing of goods on the rights and obligations of the
parties.
5. Define the term price. Explain the different modes of determination of price.
6. Write notes on: (a) Subject-matter of Contract of Sale and (b) Document of
Title to the Goods.
(a ) The consideration for a contract of sale may be partly in money and
partly in goods.
(b) Old rare coins may be the subject-matter of sale.
(c) Sale of land and buildings for a certain price is a contract of sale under
the Sale of Goods Act, 1930.
(d) Sale of own goods by a partner to the firm is a contract of sale of goods.
(e) A contract for sale of contingent goods operates not as a “sale” but as an
“agreement to sell”.
[Hints: True: : (a), (b), (d), (e),; False: (c).]
8. Select the best answer : ‘Goods’ under the Sale of Goods Act does not include:
(a) goodwill (b) plot of land
(c) stock and shares (d) gas
[Hint: (b)]
9. Select the best answer : A contract for sale of future goods is:
(a) an agreement to sell (b) sale
(c) void agreement (c) none of these
[Hint: (a)]
PRACTICAL PROBLEMS
1. A engaged an artist to paint a portrait of a lady. Canvas, paint and other
necessary materials were supplied by A to the artist. State with reasons
whether it is a sale for contract for work and labour.
[Hint: Contract for work and labour.]
2. A dealer in home appliances gives a pressure cooker to a customer on the
terms that 200 should be paid by him immediately and two more monthly
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instalments of 100 each. It was agreed that if the pressure cooker is found
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defective the customer may return it within a fortnight. The customer does
not pay the last instalment. Can the dealer take back the pressure cooker?
[Hint : No. It is a contract of sale and not of hire purchase.]
3. A entered into a contract for the sale of certain goods, provided the ship
which is bringing them reaches the port safely. State with reasons whether
the contract of sale is a ‘sale’ or an ‘agreement to sell’.
[Hint: It is an agreement to sell because the subject-matter of the contract is
contingent goods.]
4. A agrees to sell to B 100 bags of rice of 50 kgs. each out of the stock of 1,000
bags lying in his godown at 750 per bag. Before the delivery of the rice,
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there is a fire in the godown which completely destroys the stock. Can B
compel A to supply the rice as per the agreement ?
[Hint: Yes. B can compel A to supply the rice as the contract was for the sale
of unascertained goods.]
5. A and B enter into a contract of sale. The price is to be fixed by T. T refuses to
fix the price. The buyer, B, offers to pay a reasonable price that S may fix.
Whether the contract becomes void on T’s refusal to fix the price ?
[Hint: The contract between A and B becomes void on. T’s refusal to fix the
price. However, if A has supplied certain goods to B and they have been
appropriated by B then, B is bound to pay reasonable price for those goods.]
Conditions and
17 Warranties
LEARNING OBJECTIVES
➥ Definition of Condition and Warranty

➥ Difference between Condition and Warranty
➥ Treatment of Breach of Condition as Breach of Warranty
➥ Implied Conditions and Warranties
➥ Doctrine of Caveat Emptor
With a view to effecting a contract of sale, a person is likely to make a

number statements during the stage of negotiation. These may be of several
types giving rise to different legal consequences. According to Section 12(1) of
the Act, stipulation in a contract of sale with reference to goods which are
subject thereof, may be a condition or a warranty. Contractual terms may
thus be conditions or warranties. If the statement is an essential term of the
contract, it is a condition, breach whereof allows the other party to repudiate
the contract. Conditions are major contractual terms as they are of vital
importance and go to the root of the transaction. Some stipulations, though
they must be performed, are not so vital that their failure to perform does not
go to the root or substance of the main purpose of the contract. In other
words, if the statement though forming part of the contract but is merely
collateral to the main purpose of the contract, it will be termed as a warranty.
Warranties are minor contractual terms being auxiliary only.
If the statement or representation does not form part of the contract, that
is, it is neither a condition nor a warranty, it may be an expression of opinion
and its non-fulfilment does not give rise to a legal action. There is a general
tendency of a trader to praise his goods with a view to stimulating sales. If
the statement is a mere puff, or expression of opinion, however extravagant it
may be, not impose any liability. However, if the statement is an integral part
of contract they are known as contractual terms.
DEFINITION OF CONDITION AND WARRANTY

Definition of condition. According to Section 12(2), “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.”
Conditions and Warranties 283
A condition is thus a contractual term so important for the fulfilment of

the main purpose of the contract that on the breach of it, the buyer acquires
the right of rejecting the goods and treat the contract as discharged. In other
words, a condition is a stipulation which goes to the root of the transaction,
and is, in fact, the very basis of the contract. It is so essential to the contract
that its non- performance may be considered by the other party as a
substantial failure to perform the contract.
CASE : B (the plaintiff), who wanted to buy a car for the purpose of touring, went to
M (the defendant), motor car dealer, and told him that he wanted a comfortable car for
touring purpose M recommended ‘Bugatti Car’, which was later bought by B. When it
was found that the car was unsuitable for touring purpose, B sought to reject the car
and recover the price. It was held that he was entitled to do so as the suitability of the
car for touring purposes was a condition. (Baldry v. Marshal (1925) 1 KB 260].
Definition of warranty. Section 12(3) defines a warranty thus: “ 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
a right to reject the goods and treat the contract as repudiated.”
A warranty is a minor term in the contract and is subsidiary to the main
purpose of the contract. Unlike a condition, the breach of which give rise to a
right to repudiate the contract, the breach of a warranty, not going to the root
of the transaction, gives rise only to a claim for damages. It does not go to the
substance of the contract. It is of lesser significance.
The above definitions explain both the meaning and legal consequences of
the breach of a condition and a warranty.
Example. A agrees to sell to B an old car for 2,00,000. He also agrees to get the
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car serviced but does not do so. B can claim the service charges. He is not entitled to
repudiate the contract as there was only a breach of warranty by the seller.
Conditions or warranty depends on the construction of the contract

Apart from the usage of the terms ‘essential’ and ‘collateral’, this section
does not lay down any other test to distinguish between a condition and a
warranty. Therefore, sub-section (4) of Section 12 has laid down that,
“Whether a stipulation in a contract of sale is a condition or a warranty
depends in each case on the construction of the contract. A stipulation may be
a condition, though called a warranty in the contract.”
CASE : A sold note concerning the sale of ‘Common English Sainfoin’ contained the
term; ‘Sellers give no warranty express or implied as to growth, description or any other
matters.’ In fact, the sellers delivered ‘Giant Sainfoin’, a different inferior seed. It was
held that the sellers had broken a condition and not a warranty. It was observed in this
case that “whether any statement is to be regarded as a condition or a warranty must
depend on the intention to be properly inferred from the particular statement made.”
(Wallis, Son & Wells v. Prott & Haynes, (1911) AC 396].
284 Business Laws
DIFFERENCE BETWEEN CONDITION AND WARRANTY

Basis Condition Warranty
1. Nature Condition is a stipulation Warranty is a stipulation,
essential to the main purpose collateral to the main purpose
of the contract. of the contract.
2. Significance Condition is a stipulation Warranty is a stipulation
which goes to the root of the which does not go to the root of
transaction, and is, in fact, the the transaction. It is of lesser
very basis of the contract. significance.
3. Effect of Breach of condition gives rise Breach of warranty gives rise
breach to a right to treat the contract to a right to claim damages.
as repudiated.
4. Treatment Breach of condition may be Breach of warranty cannot be
treated as a breach of treated as a breach of
warranty. warranty.
WHEN BREACH OF CONDITION IS TO BE TREATED AS A BREACH OF

WARRANTY
According to Section 13 of the Act, the buyer may treat the breach of a
condition as a breach of warranty. Thus, he loses his right to repudiate the
contract and but he can make a claim for damages only. These cases are as
follows (It must be noted that in these cases condition remains a condition but
only the remedy changes.):
1. Voluntary waiver [S. 13(1)]. According to Section 13(1) of the Act,
when the seller commits a breach of any condition, the buyer may waive the
condition or elect to treat the breach of condition as breach of warranty. If the
buyer does not repudiate the contract on breach of condition by the seller, it is
presumed that he has waived his right to repudiate the contract. By treating
a breach of condition as a breach warranty, the buyer accepts a lesser
remedy, viz. damages for the loss suffered.
Example. A agrees to supply B 10 bales of long staple cotton at 20,000 per bale,
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but supplies short staple cotton. The price of the short staple cotton is 15,000 per bale.
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This is a breach of condition and, therefore, B can refuse to take delivery of the short
staple cotton. But he may elect to waive the condition or treat the breach of condition as a
breach of warranty and accept the goods and claim damages at the rate of 5,000 per
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bale.
2. Acceptance of goods by the buyer [S. 13(2)]. According to S.13 (2)
of the Act, where a contract of sale is not severable and the buyer has
accepted the goods or any part thereof, he must, treat the breach of a
condition as a breach of warranty and accept the remaining part also. A
contract is not severable where price for a lot, consisting goods of different
qualities is fixed, i.e., when price per unit etc. is not fixed.
This compulsory treatment of a breach of a condition as a breach of
warranty is not applicable if the contract itself provides otherwise.
Meaning of acceptance (S. 42). Acceptance means the taking of goods

by the buyer with the intention of becoming the owner of the goods. Mere
receipt of goods is not acceptance. According to Section 42, the buyer is
deemed to have accepted the goods in any of the following cases:
(a) When the buyer intimates that he has accepted the goods.
(b) When the goods have been delivered to the buyer and he does any act
in relation to them which is inconsistent with the ownership of the
seller, e.g., when the buyer consumes, uses, pledges or re-sells the
goods.
(c) When the buyer, after a lapse of a reasonable time, retains the goods
without intimating to the seller that he has rejected them.
EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES

Conditions and warranties may, either be express or implied. They are
said to be express when the parties to the contract have themselves
incorporated them in the contract, and they are said to be implied when they
are presumed by law to have been incorporated in the contract, although they
are not expressed in words by the parties. It is, however, open to the parties,
by virtue of Section 62 of the Act, to vary the implied conditions and
warranties, expressly agreeing to the contrary. The parties may exclude the
implied terms (i) by express agreement; (ii) by course of dealing, and (iii) by
usage.
IMPLIED CONDITIONS
The following are the implied conditions presumed by law to have been
incorporated into the contract:
1. Condition as to title [Section 14(a)]
2. Condition in a sale by description [Section 15]
3. Condition in a sale by sample [Section 17]
4. Condition in a sale by sample as well as description (Section 15]
5. Condition as to quality or fitness [Section 16(1)]
6. `Condition as to merchantability [Section 16(2)]
7. Condition as to wholesomeness.
1. Condition as to title [S. 14(a)]. Section 14(a) of the Act declares that
in a contract of sale there is “an implied condition on the part of the seller
that, 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.”
The condition as to title includes the following:
(a) The seller is the owner of the goods and he has title to the goods
which he can transfer.
(b) The seller has the right to sell the goods under the brand name under
which he is selling the goods.
286 Business Laws
CASES : (i ) In Rowland vs. Divall, [(1920) 3 KB 387], A (the plaintiff) bought a

second-hand motor car from B (the defendant), and used it for four months. He then
discovered that the car had been stolen, and B has no title to it. On being compelled to
restore the car to the true owner, A sued B to recover the purchase price. The Court of
Appeal held that the buyer was entitled to recover the whole of the purchase price, and
that the seller was not entitled to set-off anything for the four months use of the car
which the buyer had enjoyed.
(ii ) In Niblett vs. Confectioners’ Materials Co. [(1921) 3 KB 387], A (the defendants)s
sold to B (the plaintiff) 3,000 tins of condensed milk. On their arrival in London from
New York, it was found that 1,000 tins were labelled ‘Nissly brand’. Another
manufacturer of condensed milk under the name of ‘Nestle brand’, claimed that it was
an infringement of his trade mark. B, the buyer, had to remove all the labels and sell
the tins at a loss. He sued A for breach of the condition as to title. It was held that A
had no right to sell these goods at the time when the property was to pass and B had
the right to reject the goods or to recover compensation for the loss suffered by him.
2. Condition in a sale by description. (S. 15). Section 15 of the Act,
states that “where there is a contract for the sale of goods by description, there
is an implied condition that the goods shall correspond with the description.”
Accordingly, if the seller delivers goods which do not correspond with the
description, he commits a breach of this implied condition. Goods are sold by
description when the contract describes them, and the buyer contracts in
reliance of that description. A sale by description includes any sale in which
the subject-matter is identified by words, symbols, number, grade, brand, etc.
For example, long staple cotton, Lal Kila brand basmati rice, MP wheat,
Voltas split airconditioner, Apple iPhone 11, etc.
If there is stipulation that goods manufactured by a particular company
are to be supplied, and the goods manufactured by its sister concern are
supplied, it will amount to breach of condition as to description.
Goods manufactured by a particular company does not mean goods
manufactured by its sister concern.
Lord Blackburn observed in Bowes vs. Shand [(1877) 2 AC 455 (HL)],
that “if you contract to sell peas, you cannot oblige a party to take beans. If the
description of the article tendered is different in any respect, it is not the
article bargained for and the other party is not bound to take it.”
Sale of goods by description includes the following situations:
(a) Where the seller has not seen the goods. It was held in Varleys
vs. Whipp, that the expression ‘must apply to all cases where the purchaser
has not seen the goods, but is relying on the description alone.
CASES : (i ) In the leading case Varley v. Whipp [(1900) 1 QB 513], A (the plaintiff)
agreed to sell to B (the defendant) a self-binder reaping machine. B had never seen the
machine. A described the machine as new the previous year, and used only for
harvesting 50 or 60 acres. In fact, it was an old one and had been mended. Finding that
the machine was unsuitable for his purpose, B returned it to A who sued for the price.
A’s action failed.
(ii ) There was a contract for he supply of ‘new singer cars’. The seller supplied the cars
but one of them has already run a cosiderable mileage and was not new. It was held
that there was a breach of condition as to description on the part of the seller. Thus, the
buyer was held entitled to reject the car. [Andrew Brothers v. Singer & Co., (1934) 1
KB 17].
(b ) Where the seller has seen the goods, but relies on the
description. The expression ‘sale by description’ is applicable even where the
buyer has seen the goods and relies not what he has seen but on the
description given by the seller, and the deviation of the goods from the
description is not apparent.
CASE : In Nicholson & Venn v. Smith Marriott [(1947) 177 LT 189], there was an
auction sale of a set of linen napkins and table clothes, described as “dating from the
17th century”. The plaintiff who were dealers in antiquities, saw the set and bought it.
They later found it to be an 18th century set and sought to reject it. They had relied on
the description and discrepancy could not have been discovered by the casual
examination. It was held that there was breach of condition as to description.
(c) Applicability to packing. The expression ‘sale of goods by

description’ may, besides the physical state of goods, apply to the mode of
packing also.
CASE : In the leading case Moore & Co. vs. Landauer & Co. [(1921) 2 KB 519], A
(the plaintiffs) sold to B (the defendants) 3,000 cases of Australian canned fruit, each
case to contain 30 tins. When the cases were delivered, it was discovered that about
half the cases contained only 24 tins. Although the total number of tins was the same,
and the arbitrator had found that there was no difference in value between the tins as
they were packed and as they should have been packed, it was held by the Court of
Appeal that the B was entitled to reject the whole consignment on the ground that the
goods delivered did not correspond with the description of those ordered.
3. Condition in a sale by sample (S. 17). Section 17 of the Act not only
defines a sale by sample but also lays down three requirements or conditions
implied therein. According to sub-section (1) of this section, “A contract of sale
is contract for sale by sample where there is a term in the contract, express or
implied, to that effect.”
The following are the three requirements of sale by sample :

(a) Correspondence of bulk with sample. In the case of a sale by
sample there is an implied condition that the bulk should correspond with the
sample in quality.
(b) Reasonable opportunity. The buyer should be given a reasonable
opportunity of comparing the bulk with the sample. If the seller fails in his
duty to afford a reasonable opportunity or refuses to give the buyer such
opportunity, the buyer can reject the goods.
CASE : In Lorymer vs. Smith [(1822) 1 B & C 1], two parcels of wheat were sold by
sample. The buyer went to examine the bulk a week later. The seller showed him one
parcel lying in his warehouse, but refused to show the other which was not in the
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warehouse. It was held that the buyer has a right to inspect the whole in bulk at any
proper and convenient time, and that if the seller refuses to show it, the buyer may
rescind the entire contract.
(c) No latent defects. The goods shall be free from latent defects, i.e.,
defects which would not be apparent on reasonable examination of the
sample.
CASE : In the leading case Drummond & Sons vs. Van Ingen [(1887) 12 App. Cas
284], A placed an order with B to supply worsted coatings which were to be in quality
and weight equal to samples previously shown. A’s purpose was to sell the worsted
coatings to clothiers and tailors. The cloth supplied matched with the sample, but owing
to a latent defect in the cloth, coats made out of it would not stand ordinary wear and
were therefore unmerchantable. The same defect existed in the sample but could not
be detected on reasonable examination. It was held that the buyer was entitled to reject
the goods.
4. Condition in a sale by sample as well as by description (S. 15).

Section 15 has further laid down that when the goods are sold on the basis of
sample as well as description, the implied condition is that the goods should
correspond not only with the sample but also with the description.
CASES : (i ) In Azemar vs. Casella [(1867) 2 CP 431], “Long Staple Salem Cotton”
was sold as equal to sample. It was also provided in the contract that if the goods
proved inferior in quality, a reasonable allowance would be made to the buyer. The
goods supplied turned out to be only ‘Western Madras cotton’. The buyer was held not
bound to accept the goods.
(ii ) In the leading case Wallis vs. Pratt [(1911) AC 394], there was a contract of
sale of seeds by sample. The seeds were described as ‘common English sanfoin’. The
contract contained a clause excluding all warranties, express or implied. The seeds
were sown and when the crop was ready it was discovered that the seeds supplied
were of different and inferior quality called ‘giant sanfoin’. It was held that here was a
breach of condition and not a breach of warranty. The buyer was held entitled to
recover damages.
In the Wallis case the exemption clause could not protect the seller.
Thus, “Once a condition always a condition .... whether or not the remedies
remained the same.”
CASE : In Nichol vs. Godts [(1854) 10 Ex. 191], A (the plaintiff) sold to B (the
defendant) some oil described as ‘foreign refined rapeseed oil, warranted only equal to
sample’. The oil delivered was equal to sample but contained a mixture of hemp oil. It
was held that B was entitled to reject, because the goods, though corresponded with
sample, did not correspond with the description.
5. Condition as to quality or fitness [S. 16(1)]. Ordinarily there is no

implied condition or warranty as to quality or fitness for any particular
purpose of goods supplied (S. 16). Thus, the general rule is that of caveat
emptor or let the buyer beware, i.e., the buyer must take care while selecting
the goods. But there are certain exceptions to this rule. Condition as to
quality or fitness for buyer’s purpose is one of them.
According to Section 16(1) there is an implied condition on the part of the

seller that the goods shall be reasonable fit for buyer’s particular purpose.
To hold the seller liable for breach of the implied condition as to

quality or fitness of the goods for buyer’s purpose, the following
conditions must be fulfiled:
(a) The buyer, expressly or impliedly, makes known to the seller the
particular purpose for which goods are required.
(b) The buyer relies on the seller’s skill and judgement.
(c) The goods are of a description which it is in the course of the seller’s
business to supply whether he is the manufacturer or producer or not.
In other words, the business of the seller is to sell such goods in the
ordinary course of his business.
The following points should be noted in respect of this condition:

(a) Goods suitable for several purposes. If the goods can be used for
several purposes, the buyer should indicate the particular purpose for which
he requires them. Otherwise, the condition as to fitness will not be implied.
CASE : In the leading case Re Andrew Yule & Co. [AIR 1932 Cal 879], a buyer
placed an order for purchase of hessian cloth, which is generally used for packing
purposes, without specifying the purpose for which he wanted the same. The seller
supplied the hessian cloth. On receiving the hessian cloth the buyer found it unfit for
packing food products as it had an unusual smell. However, it was good for packing
cloth. The buyer could not reject it, because he had not disclosed the purpose for which
goods were required.
(b) Goods suitable for one purpose only. The purpose for which the
goods are required need not be expressly made known to the seller if the
goods are suitable for a particular purpose only or their nature itself indicates
the purpose for which they could be used.
CASE : In the leading case Priest va. Last [(1903) 2 KB 148], B (the plaintiff) went to
A (the defendant), a retail chemist, and asked for a ‘hot water bottle’. Having no
knowledge of hot water bottles, he enquired before buying, whether the bottle exhibited
would stand boiling water. In reply, he was told that it was meant for hot but not boiling
water. He thereupon bought it. After only five days it burst while being used and infjured
his wife. In an action against the seller it was held that there was an implied condition
that the bottle was fit for holding hot water and since the bottle, when sold, was not fit
for use as a hot water bottle, the seller was liable in damages to the buyer.
(c) Condition as to quality or fitness of garments for buyer’s

purpose is applicable in case of a person having normal skin. The
condition as to quality or fitness applies only in case of a sale to a person
having normal skin. If the problem is caused to buyer due to his/her peculiar
skin sensitivity and the same is not made to the seller, while the goods are fit
for a person having normal skin, there is no breach of implied condition as to
quality or fitness of goods for buyer’s purpose.
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CASES : (i ) In the leading case Grant va. Australian Knotting Mills [AIR 1936 PC
34], B (the plaintiff), a doctor, bought from A (the defendant) two undergarments. After
wearing one of them he contracted skin disease which was due to a chemical irritant.
The chemical had been left unremoved by the manufacturer’s negligence. In a suit by
B, it was held that he was entitled to sue the retailer.
(ii ) In the leading case Griffiths v. Peter Conway Ltd. [(1939) 1 All ER 685], the
plaintiff, Mrs. Griffiths, bought a Harris tweed coat from the defendants, Peter Conway
Ltd. Her skin was abnormally sensitive, but she did not make this fact known to the
sellers. She contracted dermatitis after wearing the coat. Consequently, she sued the
sellers claiming damages for breach of the implied condition. It was argued on her
behalf that the coat was not fit for the purpose for which it was bought. It was, however,
proved that no ingredient was used in the manufacture of the coat which would have
been harmful to the skin of a normal person. hence, the Court of Appeal held that the
sellers were not liable.
(d) Sale under a patent name [S. 16(1)]. “In case of a contract of the
sale of specific article under its patent or other trade name, there is no implied
condition as to its fitness for any particular purpose” [Proviso to Section
16(1)]. Thus if the buyer relies on the brand or trade name and not on the
skill and judgement of the seller, the implied condition as to its fitness for
any particular purpose is not applicable. It is so because in such a case the
buyer is not relying on the skill and judgement of the seller, but only upon
the reputation the goods enjoy on the basis of their trade name.
CASE : The buyer wrote to the seller (patentee): “Send me your patented smoke
consuming furnace for fitting up in my brewery.” Accordingly, the seller supplied the
furnace. After buying, it was found the apparatus was not fit for the buyer’s brewery. it
was held that the sale being on the basis of seller’s patent, there was no implied
condition as to the fitness of the goods for a particular purpose and the seller was
entitled to recover the price [Chanter vs. Hopkins, (1838) 4 M & W 399].
Where the buyer buys an article under its trade name or patent and yet
relies on the skill and judgment of the seller, condition as to fitness is
implied.
CASE : In the leading case Baldry vs. Marshall [(1925) 1 KB 260], B (the plaintiff),
who wanted to buy a car for the purpose of touring, went to A (the defendants), motor
car dealers, and told them that he wanted a comfortable car for touring purpose. A
recommended a ‘Bugatti Car’, which was later bought by B. When it was found that car
was unsuitable for touring purpose, B sought to reject the car and recover the price. It
was held that he was entitled to do so.
6. Condition as to merchantability (S. 16(2)]. Condition as to

merchantability is implied only where the sale is by description. Sub-section
(2) of Section 16 lays down that in case of sale by description, the goods must
be of merchantable quality.
The following are the requirements for application of this implied
condition:
(i) The sale must be by description.
(ii) The seller must be dealer in goods of that description.
(iii) The buyer has not been given any opportunity to examine the goods
or there is some latent defect which would not be noticeable on
reasonable examination of the goods.
The following points should be noted in respect of this condition:

(a) Meaning of merchantable quality. The expression ‘merchantable
quality’ means that “the article is of such quality and in such condition that a
reasonable man acting reasonably would after a full examination accept it
under the circumstances of the case in performance of his offer to that article
whether he buys for his own use or to sell it again.” [Bristol Tramways v.
Fiat Motors Ltd., (1910) 2 KB 931 (CA)]
For the purposes of this condition, merchantable quality means the
following two things:
Firstly, merchantable quality means that if the goods are
purchased for re-sale they must be capable of passing in the market
under the name or description by which they are sold.
CASE : 1. (Goods purchased for re-sale). In the leading case Jones vs. Just [(1868)
LR 3 QB 197], a London merchant sold to a firm of Liverpool merchants, a certain
number of bales of Manilla hemp to arrive from Singapore. The goods had been
damaged by sea-water in the course of transit. Consequently, they could not be sold in
the market in their original condition as Manilla hemp, but only at 5% of the original
price. In a suit by the buyers for damage, it was held that they were entitled to recover
the loss as the goods were not merchantable.
CASE : 2. (Goods purchased for re-sale). A (the plaintiff), who was manufacturer of
motor horns, sold 609 horns to B (the defendant). Of these, 364, were defective for
various reasons. Some were dented, but could have been made merchantable at a
very low cost. The buyer rejected them on the ground that they were not of
merchantable quality. In a suit by A (the seller in this case) for the price, the Court of
Appeal held that B (the buyer in this case) was entitled to reject the whole consignment
as there was a substantial failure on the part of the seller to deliver goods of
merchantable quality. The buyer was held entitled to treat this as one contract and to
reject the goods. The buyer was not bound to go on picking and choosing [Jackson v.
Rotax and Cycle Co. Ltd., (1910) 2 KB 937].
S e c o n d l y , merchantable quality means that if goods are

purchased for self-use, they must be reasonably fit for the purpose
for which they are generally used. For example, a pen that does not write
is not merchantable. Similarly, a watch that does not keep time is not
merchantable. Again, tobacco that does not smoke is not merchantable.
Example. A visited an e-shop and bought an alarm clock of ‘Earlyrise’ brand model
number 21A, and paid for them with his credit card. The goods were delivered to him a
week later. The clock indeed was 21A model of ‘Earlyrise’ brand, but it was not working.
There is breach of implied condition as to merchantable quality.
CASE : Underpants were held not merchantable as they contained certain chemical
irritant which caused skin disease to a person wearing them next to skin [Grant v.
Australian Knitting Mills Ltd. (1936) AC 85].
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Packing of goods is also important in judging their merchantability. For

the purposes of the Act ‘good’ mean not just the goods themselves but include
the container and packaging for the goods.
CASE : (Defective packing). There was a contract for the sale of mineral-water
contained in a bottle. The bottle was not actually sold but was given on refundable
deposit. The bottle burst in the buyer’s hand and injured her. She filed a suit for
claiming damages for breach of condition as to merchantability. She was held entitled
to claim damages for the loss suffered. Thus it was held that not only the contents but
the bottle should be reasonably fit for the purpose for which they were required
[Gedding v. Marsh, (1920) 1 KB 668].
Further the goods should not violate any applicable statutes of the
country where the goods are made.
(b) Examination of goods by the buyer. If the buyer has examined the
goods, there shall be no implied condition as regards defects which such
examination ought to have revealed. [Proviso to S. 16(2)]. This proviso
applies only to patent defects, i.e., defects which the examination
should reveal or those that are apparently noticeable. It does not
apply to latent defects which are not noticeable even by examination,
and in such cases, there is the implied condition that the goods are
merchantable. For example, in the sale of a motor car the defects of the
engine are latent and the proviso will not apply for such defects.
CASES : (i ) B (the defendant), who wanted to buy glue, went to A’s (the plaintiff’s)
warehouse where the glue was stored in barrels. Even though opportunity was given to
B to inspect the contents, he did not have them opened but only felt satisfied by
inspecting the outside of the barrels. After buying the glue, he found that it was
defective. His contention that he had not actually examined the goods was rejected,
and it was held that he had examined the goods within the meaning of the proviso and
consequently, there was no implied condition that the glue was of merchantable quality,
in as much as the defects were such that they would have been apparent the moment
the barrels were opened [Thornett & Fehr v. Beers & Sons, (1919) 1 KB 486]
(ii ) A boy aged six, bought a plastic catapult which was displayed in the seller’s shop
window. When he used it, it broke almost at once and a piece of the same entered his
left eye. Consequently, the ruptured eye had to be removed. An examination of the
catapult revealed that it was made of cheap brittle materials and was not properly
moulded. The shopkeeper who had bought it from a wholesaler by sample, had
inspected the sample by putting the elastic. But yet, the faulty construction was not
apparent. Edmund Davies, J. held that (i) the boy succeeded against the shopkeeper
and (ii) the retailer succeeded against the wholesaler because the defect would not
have been revealed by a ‘reasonable examination [Godley v. Perry, (1960) 1 ALL ER
36].
7. Condition as to wholesomeness. This condition applies in case of

eatables and provisions. According to this condition, the eatables and
provisions must be wholesome, i.e., they must be fit for human consumption.
This condition is actually a part of the condition as to merchantability.
CASES : (i ) A person bought milk from a dairy owner. The milk was contaminated
with germs of typhoid fever. The buyer’s wife took the milk and got infection of typhoid
and died of it. It was held that the buyer was entitled to claim damages [Frost v.
Aylesbury Dairy Co. Ltd., (1905) 1 KB 608].
(ii ) A person purchased a bun at a baker’s shop. The bun contained a stone which
broke one of the buyer’s teeth. It was held that he was entitled to claim damages from
the seller [Chapronfere v. Mason, (1905) 21 TLR 633].
8. Condition implied by usage of trade [S. 16(3)]. According to sub-

section (3) of S. 16, “An implied warranty or condition as to quality or fitness
for a particular purpose may be annexed by usage of trade.” The custom must
be reasonable.
CASE : It was usual in the sale by auction of drugs if they were sea-damaged. The
seller in this case did not disclose that they were sea-damanged. It was held that the
buyer was entitled to repudiate the contract. [Jones v. Bowden), (1813) 4 Taunt 847].
IMPLIED WARRANTIES
Implied warranties are those which are presumed to have been
incorporated in the contract by the law. Subject to contract to the contrary,
the following are the implied conditions:
1. Warranty of quiet possession [Section 14(b)].
2. Warranty of freedom from encumbrances [Section 14(c)].
3. Warranty of disclosing dangerous nature of goods.
1. Warranty of quiet possession [S. 14(b). In a contract of sale there is
an implied warranty that “the buyer shall have and enjoy quiet possession of
the goods”.
The object of this warranty is to protect the buyer against a wrongful
disturbance of his possession by a third party. It may happen that the
possession of the buyer is disturbed by a third party having a right superior
to that of the buyer. Such a situation arises when the seller’s title to the
goods is defective or the seller does not have the right to sell the goods. This
warranty is, therefore, an implied assurance given by the seller that
the buyer shall have and enjoy quiet possession of the goods without
any disturbance from anybody, including the seller himself. If this
warranty is broken, the buyer can hold the seller liable in damages.
Since quiet possession of the buyer is likely to be disturbed by a person
proving his title superior to that of the buyer, the implied condition as to title
and implied warranty as to quiet possession go together.
CASE : B a lady, (the plaintiff) purchased from A (the defendant) a second-hand

typewriter, used it for some time, and also spend some money on its repairs.
Subsequently, she had to restore the typewriter to the true owner as it happened to be
a stolen one. In a suit by her against A who sold the typewriter, it was held that she was
entitled to recover by way of damages, not only the price paid by her but also the cost
of repairs [Mason v. Burnigham, (1949) 2 KB 545].
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2. Warranty of freedom from encumbrance [S. 14(c)]. In a contract

of sale, there is an implied warranty that “the goods shall be free from any
charge or encumbrance in favour of any third party not declared or known to
the buyer, before or at the time when the contract is made.” Encumbrance
means burden.
Breach of this warranty usually arises where a person who has pledged
his goods, receives delivery of the same with the consent of the pledgee even
before discharging the debt, and sells the goods warranting to the buyer that
they are free from any charge or encumbrance.
Example. A is the owner of the goods. He pledges the goods with P. A regains the
possession of the goods with consent of P even before discharging the debt, and sells
them to B. B does not have any knowledge about the pledge at the time of making of the
contract. B discharges the debt to P. He is entitled to damages from A.
3. Warranty of disclosing dangerous nature of goods. In the case of

a sale of goods which are dangerous or likely to be dangerous, and the buyer
is ignorant of the same, there is an implied warranty that the seller, who
knows about the dangerous nature of goods, shall warn the buyer of the
probable danger. If he fails to do so, and the buyer suffers injury consequent
upon the seller’s failure, the buyer becomes entitled to recover damages from
the seller.
CASE : B, (the plaintiff) bought from A (the defendant), a tin of disinfectant powder. A
knew that the powder would be dangerous if the lid of the tin were opened without
special care. Yet, he did not warn B. The wife opened the tin in the usual way,
whereupon the powder flew into her eyes, causing injury. In a suit by B, it was held that
he was entitled to compensation as A should have warned B of the probable danger
[Clark & Wife vs. Army and Navy Co-operative Society Ltd., (1903) 1 KB 155].
4. Warranty implied by usage of trade [S. 16(3)]. Section 16(3)

provides that an implied warranty or condition as to quality or fitness for a
particular purpose may be annexed by the usage of trade.
DOCTRINE OF CAVEAT EMPTOR

Generale Rule [S. 16(1)]
‘Caveat emptor’ is a Latin word. Caveat emptor means ‘let the buyer
beware’. According to the doctrine of caveat emptor it is the duty of
the buyer to satisfy himself, relying upon his own skill and judgment,
that the goods which he contemplates buying are of a particular
quality, and suitable for the purpose for which he wants them. Since
the buyer buys the goods of his choice, he has to take care and cannot hold
the seller liable, if after buying, he finds that he bought goods of a different
quality than what was in his mind, or that the goods do not suit his purpose.
Caveat emptor means that the buyer must ‘take care’ while
selecting the goods. It does not mean that he ‘take chance’. It applies
in the following cases:
(i) It applies to the purchase of specific things, e.g., a horse upon which
the buyer can and usually does, exercise his own judgement.
(ii) it applies also where by usage or otherwise it is a term of the contract,
express or implied, that buyer shall not rely on the skill or judgement
of the seller. But it has no application to any case in which the seller
has undertaken, and the buyer has left it to the seller, to supply goods
to be used for a purpose known to both parties at the time of sale.
The common law rule of Caveat emptor has been recognised by Section 16
of the Sale of Goods Act, 1930.
According to Section 16 of the Act, “Subject to the provisions of this Act
and of any other law for the time being in force, there is no implied warranty
or condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale, .......”
CASE : 1. In the leading case Ward vs. Hobbs [(1878) 4 App Cas 13], B (the
plaintiff) bought some pigs from A (the defendant) who knew that the pigs were
suffering from swine fever. He did not disclose this fact to B, and the pigs were sold
‘with all faults’. Subsequent to the purchase, all the pigs except one died of fever. In a
suit be B for breach of warranty, it was held that A was not liable in damages.
CASE : 2. In Jones vs. Padgett [(1890) 24 QBD 650], a dealer in woollen goods
who was also a tailor, bought some indigo cloth from a manufacturer of woollen cloth.
The fact that the indigo cloth was required for making uniforms was not made known to
the seller. Owing to a latent defect in the cloth, uniforms could not be made out of it.
However, the cloth was fit for other purposes to which it might have been used. In a suit
by the buyer, it was held that he could neither refuse to take the cloth nor hold the
seller liable in damages due to the non-communication of the purpose for which the
cloth was required.
Exceptions to the Doctrine of Caveat Emptor

The doctrine of caveat emptor was vigorously applied in the olden days
when most of the sales used to take place in the open market and fairs
(periodic markets). But as trade grew and assumed global dimensions, it
became difficult for buyers to examine the goods before hand as most
transactions are concluded by correspondence. Now-a-days, contracts are
concluded through internet also. The nature of many goods has also
become technical and complex. In late 20th century, the Government has
enacted laws to protect the buyer. Due to the above reasons the doctrine of
caveat emptor (let the buyer beware) has been replaced by the doctrine of
caveat venditor (let the seller beware) to a large extent. Therefore, the
exceptions to the rule of caveat emptor have become more important than the
rule itself.
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The essence of these exceptions is to prevent fraud, to protect persons

who are necessarily ignorant of the qualities of a commodity they purchase.
The exceptions to the rule of caveat emptor are briefly explained
below:
1. Condition as to quality or fitness for buyer’s purpose. According
to this exception to hold the seller liable for breach of the implied condition as
to quality or fitness of the goods for any particular purpose, the following
conditions as prescribed in S. 16(1) must be satisfied:
(i) The buyer has made known to the seller expressly or by implication
the purpose for which the goods are required.
(ii) The buyer has relied on the skill and judgement of the seller.
(iii) The business of the seller is to sell such goods in the ordinary course
of business whether he is the manufacturer or producer or not.
If the aforesaid conditions are satisfied, the doctrine of caveat emptor does
not apply.
CASE : 1. See Re Andrew Yule & Co., case discussed earlier.

CASE : 2. See Priest vs. Last case discussed earlier.
2. Condition as to merchantability. The second exception to the
doctrine of caveat emptor is stated in S. 16(2). According to S. 16(2), the
following conditions must be satisfied for the exception to operate:
(i) The sale should be by description.
(ii) The seller should be a dealer in goods of that description.
(iii) There is some latent defect which would not be noticeable on
reasonable examination of the goods.
If these conditions are satisfied, the law implies a condition as to
merchantability and the doctrine of caveat emptor does not apply.
The word merchantable means broadly and basically two things. Firstly,
it means that if the goods are purchased for re-sale they must be capable of
passing in the market under the name or description by which they are sold.
Secondly, it means that if the goods are purchased for self-use, they must be
reasonably fit for the purpose for which they are generally used.
CASE : See Jones vs. Just case discussed earlier.
3. Usage of trade. Section 16(3) provides that an implied warranty or

condition as to quality or fitness for a particular purpose may be annexed by
usage of trade.
Thus, where the implied warranty or condition as to quality or fitness for
a particular purpose is annexed by usage of trade and there is deviation by
the seller from that, the doctrine of caveat emptor does not apply.
4. Condition as to description. Where the goods are sold by description,

there is an implied condition that the goods shall correspond with the
description (S. 15).
CASE : See Varley v. Whipp case discussed earlier.
Example: A wanted to purchase a shirt through e-marking. The webpage of an e-

shop described a shirt as a ‘best white, 100% cotton shirt’. He bought this shirt and paid
for it with his credit card. The shirt was delivered to him a week later. There was a label
inside the shirt which read, ‘cotton 67% and polyster 33%’. He wanted to return the shirt to
the seller as it was not a 100% cotton shirt. There is a breach of condition as to
description. The buyer must get what has been described. He is entitled to repudiate the
contract and claim the price paid for the shirt.
5. Condition as to sample. Where the goods are bought by sample, the

rule of caveat emptor does not apply if the bulk does not correspond with the
sample (S. 17). (See implied condition ‘in a sale by sample’ discussed earlier)
6. Sale by sample as well as description. Where the goods are bought
by sample as well as description, the rule of caveat emptor is not applicable in
case the goods do not correspond with both sample and description (S. 15).
(See implied condition ‘in a sale by sample as well as by description’ discussed
earlier).
7. Misrepresentation by seller. Where the seller sells the goods by
making misrepresentation and the buyer relies on it, then the rule of caveat
emptor is not applicable. In such a case, the buyer has a right to avoid the
contract and claim damages as per the provisions of Indian Contract Act,
1872.
8. Fraud by seller. Where the seller makes a false representation
amounting to fraud and the buyer relies on it or where the seller deliberately
conceals a defect in the goods which is not apparent on a reasonable
examination of the goods, then the rule of caveat emptor does not apply. In
such a case the buyer can avoid the contract and claim damages as per the
provisions of the Indian Contract Act, 1872.
9. Defect in the goods. As per the Consumer Protection Act, 1986, if
there is a defect in the goods, the consumer can claim damages in accordance
with the provisions of that Act.
EXCLUSION OF IMPLIED TERMS AND CONDITIONS

Section 62 of the Act provides that, “where any right, duty or liability
would arise under a contract of sale by implication of law, it may be negatived
or varied by express agreement or by course of dealing between the parties,
or by usage, if the usage is such as to bind both parties to the contract.
Thus the section recognise three modes of excluding the liability for implied
terms. They are: (1) by express contract; (2) by course of dealing, and (3) by
usage.
298 Business Laws
REVIEW QUESTIONS
1. Define and distinguish between a condition and a warranty. Discuss the
implied conditions and warranties in a contract of sale of goods.
[B.Com. (H), D.U.]
2. When can a breach of ‘condition’ be treated as breach of ‘warranty’?
[B.Com. (H), D.U.]
3. “Once a condition always a condition, whether the remedy remains the same
or not.” Comment.
4. What are the implied conditions under the Sale of Goods Act, as applicable in
a contract of sale with regard (a) merchantability; (b) Quality or fitness; and
(c) Sale by sample?
5. “If you contract to sell peas, you cannot oblige a party to take beans. If the
description of the article tendered is different in any respect, it is not the
article bargained for, and the other party is not bound to take it.”
6. “If a person sells an article he thereby warrants that it is fit for some
purpose, but he does not warrant that it is a fit for any particular purpose.”
Comment.
7. In a contract for the sale of goods, there is no implied condition or warranty
as to the quality of the goods or their fitness for any purpose. Comment.
8. “The seller is under no obligation to disclose defects of his goods.” Comment.
9. What is meant by ‘Caveat Emptor’, as applicable to the sale of goods ? Explain
the exceptions to the above maxim.
10. When the doctrine of “Caveat Emptor” does not apply to the sale of goods ?
11. “In the case of a contract for the sale of a specified article under its patent or
other trade name, there is no implied condition as to its fitness for any
particular purpose.” Comment.
12. “Packing of goods is an important consideration in judging the
merchantability of the goods.” Comment.
13. “If the buyer has examined the goods, there is no implied condition as regards
defects which the examination ought to have revealed.” Comment.
14. The general rule of ‘Caveat Emptor’ i.e. buyer beware has its many exceptions
provided in the Sale of Goods Act, 1930 and has become virtually a rule of
‘Caveat Vendor’ i.e. ‘Seller beware’. Do you agree with this statement ?
Explain and give reasons.
15. ‘There is no implied condition as to fitness or quality of the goods sold.’
Critically examine this statement.
16. Distinguish between a condition and a warranty. When can a breach of
condition be treated as a breach of warranty ? [B.Com., D.U.
17. Explain the implied conditions in a contract of sale.
[B.Com. and B.Com. (Hons.), D.U.]
18. How does a condition differ from a warranty ? Explain with examples.
19. Write a short note on: Exclusion of implied terms and conditions in a contract
of sale.
20. State with reasons whether each of the following statements are true or false:
(a) A breach of condition cannot be treated as a breach of a warranty.
(b) In a contract of sale of goods by sample as well as by description, the bulk

of the goods must correspond with either sample or description.
(c) A seller is not bound to disclosed the defects of his goods to the buyer
before sale.
(d) Merchantability means that the goods must be of top quality.
(e) Caveat emptor means that the vendor must be careful.
[Hints: True: (c); False: (a), (b), (d), (e).]
21. (A) A stipulation in a contract of sale of goods the breach of which gives rise
to a right to treat the contract as repudiated is called:
(a) warranty (b) guarantee (c) condition (d) none of these
[Hint: (c)]
(B) A stipulation in a contract of sale of goods the breach of which gives rise
to a right to claim damages only is called:
(a) warranty (b) guarantee (c) condition (d) none of these
[Hint: (a)]
PRACTICAL PROBLEMS
1. A hire purchaser, who obtains possession of a car from its owner under a hire
purchase agreement, sells the car to buyer who buys in good faith and
without notice of the right of the owner. Does the buyer get a good title to the
car ?
[Hint: No. The hirer has obtained possession under a contract of hire
purchase and not a contract of sale.]
2. Pioneer Timber Store entered into a contract with A for the sale of timber 1/2
inch thick. The timber supplied varied in thickness from 1/2 inch to 2/3 inch.
A’s purpose in buying timber was to make cement barrels and timber as
supplied were fit for that purpose. A rejected the goods. Can A succeed ?
[Hint: Yes, it is a sale by description. Goods should correspond with the
description (S. 15). The facts of this case are similar to that of Arcos Ltd. vs.
E.A. Ronaasen & Sons, 1933 AC 470.]
3. A seller undertakes to supply 1,000 tons of ‘Java sugar’ warranted equal only
the sample. The sugar when supplied corresponds to the sample but is not
‘Java sugar’. Has the buyer any remedy against the seller ?
[Hints: Buyer can reject the goods. It is a sale by description as well as by
sample. Hence, goods should correspond with both (S. 15).]
4. R bought a radio set from B, the local distributor of HGE Ltd., for 675 with
R
one year guarantee of satisfactory service. The radio set proved defective and
has to be repaired by the local distributor twice and once by the
manufacturers. But it was not found satisfactory. R claims refund of its price.
Is his claim maintainable ?
[Hints: Yes. R.S. Thakur vs. H.G.E. Corporation, AIR 1971 Bom 36.]
5. There is a contract between A and B for the supply of 100 articles to be
packed in 20 containers each containing 6 pieces. The seller sends 56
containers each containing 4 pieces. What are the rights of the buyer in the
above case ?
[Hint: Buyer can reject the goods as packing is not according to the
description given [Moore & Co. vs. Landauer & Co., (1921) 2 KB 519 CA].]
300 Business Laws
6. A shows sample to B saying that it is Chinese silk. B approves of the sample

and places an order for the supply of Chinese silk. The goods are supplied and
they are according to the sample but it turns out that the sample as well as
the bulk were Japanese silk. Discuss the rights of buyer B against A.
[Hint: B can reject the goods. Bulk must correspond with both sample as well
as description (S. 15).]
7. Certain goods were sold by sample by A to B, who in turn sold them by
sample to C. The goods were not according to sample. Therefore, C rejected
the goods and gave notice to B. B sued A. Advise B.
[Hint: B can repudiate the contract if he has not accepted the goods;
otherwise he can claim only damages.]
8. A purchases a nylon underwear from a hosiery shop for his own use. On
account of negligence in the manufacturing process, the underwear contained
some chemical which caused a skin disease to A. Has A any cause of action
against the owner of the shop or manufacturer of the goods ?
[Hint: A has a cause of action provided he is not allergic to nylon.]
9. X purchased a hot water bottle from a chemist. The bottle burst, when the hot
water was poured into it, and injured his wife. What are the rights of X
against the chemist ?
[Hint: There is a breach of condition as to quality or fitness of goods Priest v
Last, (1903) 2 KB 148]
10. A demands from a seller B a certain appliance which he knows will not serve
A’s purpose. B does not disclose his opinion. A without any discussion with B
purchases the particular appliance. Later, A finds it does not serve his
purpose. Is B liable to take the item back ?
[Hint: No, doctrine of caveat emptor is applicable.]
11. X and Y on 19th March, entered into a contract of ‘Sale by Sample’ of two
parcels of wheat containing 100 and 150 respectively. X went to examine the
bulk on 30th March. The parcel containing 100 bags which were lying in Y’s
warehouse was shown to him, but Y refused to show him the other parcel. X
want to rescind the contract. Advise X.
[Hint: The buyer has a right to repudiate the contract as the seller does not
afford an opportunity to compare the bulk with the sample [Lorymer vs.
Smith, (1822) 1 B & C1].
12. R brought a second hand motor car from D and used it four months. It was
discovered that D had no title to the car since it was stolen one. On being
compelled to return the car to the true owner, R sued D to to recover the
purchase price. Was R entitled to do so ? [B.Com. (Hons.) D.U.]
[ Hints : See Rowland v. Diwal, (1920) 3KB 387]
13. The buyer took delivery of 10 computers from the seller without examining
them. Subsequently, he sold 5 computers to his customer. The customer
lodged a complaint of some defects in the computers. The buyer sought to
return computers to the seller. Was he entitled to return the computers to the
seller ? [B.Com (Hons.), D.U.]
[Hint : No. He has accepted the goods by re-selling the computers].
14. X shows a sample to Y describing it as ‘Chinese silk’. Y approves the sample
and places an order for the supply of ‘Chinese Silk’. The goods delivered are
according to the sample but it turns out that the sample as well as the bulk is
‘Japanese Silk’. Discuss the rights of the buyer against seller X.
[B.Com (Hons.), D.U.]
[Hint : There is breach of condition as to sample as well as description

(section 15). The bulk must correspond not only with the sample, but also
with the description.[Nichol v. Godts, (1854)10 Ex. 191].
15. Ashok sold wheat to Babu by showing a sample, the wheat was contained in
two parcels. Babu was given opportunity to inspect the bulk of one parcel only
with the sample. Babu refused to accept the delivery of the goods. Can Babu
be held liable for breach of contract ? Explain. [B.Com. (Hons), D.U.]
[Hint : No. The buyer has the right to repudiate the contract as the seller has
not given the opportunity to compare the bulk with sample [Lorymer v.
Smith, (1822) 1 B & C 1].
18 Transfer of Property
LEARNING OBJECTIVES
➥ Meaning of Property and Importance of Time of passing Property
➥ Risk prima facie passes with property
➥ Rules regarding Transfer of Property
➥ Sale or Transfer of Title by Non-owners
An important feature of a contract of sale is the transfer of property in

the goods from the seller to the buyer. In fact, the main object of a contract of
sale is the transfer of property to the buyer.
MEANING OF ‘PROPERTY’
According to Section 2(11) of the Act, the term ‘property’ means the
general property in goods, and not merely a special property.” Accordingly,
special or limited property or interest acquired by the bailee or the pledgee is
not property within the meaning of this sub-section. In simple words,
property means ownership.
Property in the goods is different from possession. As such, transfer of
property does not mean transfer of possession or delivery of the goods. While
it is quite possible to transfer property in the goods without transferring
possession, it is equally possible to transfer possession without transfer of
property.
The expression ‘transfer of property’ means the transfer of ownership of
the goods from the seller to the buyer so as to constitute the buyer the owner
thereof.
IMPORTANCE OF TIME OF PASSING PROPERTY

The rights and obligations of the parties to a contract of sale being
dependent upon transfer of property, the time of passing property is of
paramount importance with regard to the following:
1. Risk prima facie passes with property (S. 26). As a general rule
whosoever is the owner of the goods at the time of loss or destruction of the
goods bears the loss. Thus, risk passes to the buyer as soon as property in the
goods passes to him. Accordingly, the buyer becomes responsible for the loss
Transfer of Property 303
or destruction of the goods, if the property is transferred though possession is

not transferred.
2. Suit for price (S. 55). Section 55(1) provides that where under a
contract of the 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. As an
exception to this general rule. S. 55(2) provides that where under a contract
of sale the price is payable on a certain day 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.
3. Suit for delivery of goods. In case the property in goods has passed
to the buyer and goods are still in the possession of the seller, the buyer can
sue the seller to obtain their delivery. If the property in goods has not passed
to the buyer and there is breach of contract by the seller, he can sue the seller
for damages.
4. Action against third parties. The right to proceed against a third
party for damage or destruction to the goods depends, not on possession but
on the property in the goods. It is only the person who is the owner of the
goods who can take action against the wrongdoer.
5. Insolvency of either the seller or the buyer. The right of the
Official Receiver or Assignee to take over the goods in the event of insolvency
of either the buyer or seller depends upon whether property in the goods has
been transferred. For example, if the seller becomes insolvent before
delivering the goods in which the property has already passed to the buyer,
the Official Receiver or Assignee of the seller can have no claim against those
goods.
RISK PRIMA FACIE PASSES WITH PROPERTY

General Rule
The general rule is that whosoever is the owner of the goods at the time of
loss or destruction of the goods bears the loss. According to Section 26,
“Unless otherwise agreed, the goods remain at the seller’s risk until the
property therein is transferred to the buyer, but when the property therein is
transferred to the buyer, the goods are at the buyer’s risk whether delivery has
been made or not.”
Thus, risk passes to the buyer as soon as property in the goods passes to
him. Accordingly, the buyer becomes responsible for the loss or destruction of
the goods if the property is transferred though possession is not transferred.
Example. A buys certain specific goods from B and property in the goods passes to
A. The possession of the goods remains with B. But before the delivery of goods to A, they
are accidently destroyed by fire. A is to bear the loss of destruction of goods and B is
entitled to recover the price of the goods.
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Exceptions
Risk passes with property is merely a prima facie rule. Section 26
provides that the parties may agree that the risk shall pass at some other
time or on fulfilment of some condition which is not necessarily simultaneous
with the passing of the property. Thus ownership may, in particular cases, be
separated from risk.
The following are the exceptions to the rule “risk prima facie passes with
property”
(a) Agreement. Section 26 provides that the rule is not applicable if
there is an agreement to the contrary. the parties may provide in the contract
that risk will pass even before passing of property or vice versa.
CASE : In Consolidated Coffee Ltd. vs. Coffee Board [AIR 1981 SC 162], it was
one of the terms of the auction sale that the property in the coffee knocked down to a
bidder would not pass until the payment of the full price, and, in the meantime the
goods would remain with the seller and at the risk of the buyer. The Supreme Court
held that the terms of the auction sale were valid.
(b) Delay in delivery of goods. Section 26 further provides that where

delivery has been delayed through the fault of either buyer or seller, the
goods are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault.
CASE : In Demby Hamilton & Co. Ltd. vs. Barden (Endeavour Wines) Ltd.
[(1949) 1 All ER 435], A (the defendant) contracted to buy 30 tons of apple juice from B
(the plaintiff). Delivery was to be made in weekly truckloads. B crushed the apples juice
in casks for delivery. Deliveries would have been completed by February, 1946, but at
the request of A (the buyer) they were held up. He took some deliveries subsequently
and then stopped altogether. As a result juice deteriorated. It was held that the loss
was to be borne by A (the buyer) although the property in goods was still with B.
(c) Trade customs. If there is a custom in a particular trade that risk

will not pass with property, the risk will pass as per the custom.
CASE : In Bevington vs. Dale [(1902) 7 Comp. Cas 112], certain furs were
delivered to a buyer “on approval”. By a custom of fur trade at the place of agreement,
the goods were at the risk of the person ordering them on approval. They were stolen
before the time of approval expired. The loss fell upon the buyer although the property
had not passed to him.
(d) Loss caused by a buyer or seller as bailee. The second proviso to

Section 26 provides that the rule does not affect the duties or liabilities of
either seller or buyer as a bailee of the goods of the other party. This means
that the possessor of the goods who may not himself be the owner, has the
duties of bailee. If the goods are damaged due to his fault, he will have to
bear the loss.
RULES REGARDING TRANSFER OF PROPERTY

Basic factors affecting the transfer of property
The point of time when the property is transferred depends, inter alia, on
the following:
(1) Identification of the goods
(2) Intention of the parties
The rules regarding the transfer of property, i.e., the point of time at
which the property passes to the buyer will be discussed under the following
heads:
I. Transfer of property in specific or ascertained goods.
II. Transfer of property in case of unascertained goods.
I. TRANSFER OF PROPERTY IN SPECIFIC OR ASCERTAINED GOODS

According to Section 2(14) of the Act “specific goods” means the goods
identified and agreed upon at the time a contract of sale is made. The term
‘ascertained goods’ is not defined by the Act. However, this term has been
used in the Act. ‘“Ascertained goods” means the goods ‘identified in
accordance with the agreement after the time a contract of sale is made’
[Atkin LJ in RE Wait (1927) 1 Ch 606] “Unascertained goods” include
goods yet to be made, goods with general descriptions and unseparated goods
from a bulk. For example, ‘Voltas split airconditioner, product number –
ST0987654321’ is an example of specific goods, while ‘voltas split
airconditioner’ is that of unascertained goods.
1. Rules for transfer of property when intention of the parties

can be ascertained
As per S. 19, in case of specific or ascertained goods, the property passes
to the buyer when it so intended by the parties. The intention of the parties
can be ascertained from (i) terms of the contract, (ii) conduct of the parties
and (iii) circumstances of the case. The parties may intend to transfer the
property immediately at the time of formation of contract or at the time of
delivery of goods to the buyer or at the time payment for the goods is made.
CASE : There was a sale of a jeep for 10,000 out of which 2,000 was paid by the
R R
buyer immediately, and the balance 8,000 was to be paid at the time of registration of
R
the vehicle. It was also agreed that the property in the vehicle would pass to the buyer
after payment of the entire price. Before the payment of the balance of the price there
was an accident. The seller was held to be the owner at the time of the accident.
[United India insurance Co. v. O. Jameela Beevi, AIR 1991 Ker 380].
The intention of the parties with regard to transfer of property in

the goods must be clearly expressed in the contract itself.
Subsequent specification of the intention will have no effect.
306 Business Laws
CASE : A (the plaintiff), an auctioneer, knocked down a van to the highest bidder, B,
a fraudulent person, who said his name was King. Before allowing him to take away the
vehicle in return for a cheque, A made him sign a document which stated that the
property was not to pass until the cheque was paid. The cheque was dishonoured, but
in the meantime, the vehicle had been sold by B to C who in turn sold it to D (the
defendant). The auctioneer sued D for the return of the vehicle. It was held that the
action failed. There being no mistake as to the identity of the contracting parties when
the sale took place, the property in the van passed to King on the fall of the hammer.
The intention of the parties as expressed in the document was too late to prevent the
property from passing. [Dennant v. Skinner), (1948) 2 KB 164].
2. Rules for transfer of property when intention of the parties

cannot be ascertained
As pointed out above, if the contract contains an express provision as to
when property is to pass, the matter gets settled and property passes as per
the contract. In case, the contract is silent on this point and the intention of
the parties cannot be ascertained from their conduct or circumstances of the
case, the relevant provisions of the Act governing transfer of property apply.
These provisions, as regards specific or unascertained, are contained in
Sections 20, 21, 22 and 24.
As per these provisions, transfer of property depends on whether
(1) goods are in a deliverable state, (2) goods are to be put in a
deliverable state, (3) goods are to be measured, weighed, counted or
tested and (4) goods are delivered on approval basis.
The provisions are explained below :
(a) When goods are in a deliverable state (S. 20). According to
Section 20 of the Act, in the case of specific or ascertained goods, property in
the same passes to the buyer at the time of making the contract, if (a)
the goods are in a deliverable state, and (b) the contract is unconditional. The
fact that the time of delivery or the time of payment, or both, is posponed
does not prevent the property from passing at once.
Example. A buys a particular chair for 5,000 and pays the price to the seller
R
promising to take the delivery the next day. A fire breaks out in the shop of the seller in the
evening and the chair is destroyed. The property in the goods has passed to the buyer
and thus he has to bear the loss.
Goods are said to be in a deliverable state when they are in such state that
the buyer would under the contract be bound to take delivery of them [S. 2(3)].
For instance, in the above example if the seller has to polish the chair to
make the buyer bound to take delivery, it is not in a deliverable state until it
is polished and the property does not pass to the buyer at the time of entering
the contract.
(b) When goods have to be put in a deliverable state (S. 21). Section
21 of the Act states that, if the goods are not in a deliverable state and the
seller is required to do something to put the goods in a deliverable state, the
property does not pass until such thing is done and the buyer has notice of it.
Something to be done on the goods may involve painting, polishing, loading,
packing, filling in containers, etc. Thus , in this case property passes to
the buyer when the goods are put in a deliverable state and the
buyer has notice thereof.
CASE : The contract was for the sale of whole of turpentine oil lying in a cistern. It
was further agreed that the oil is to be filled into casks and then delivered to the buyer.
Some casks were filled in the presence of the buyer . Even before the remaining casks
could be filled, and the casks filled with the oil could be delivered, a fire broke out and
the entire quantity of oil was destroyed. When the question, who should bear the loss
and in whom property vested arose, it was held that the buyer should bear the loss with
respect to the casks already filled in and the loss in respect of the oil not filled in,
should be borne the seller. [Rugg v. Minett, (1809) 11 East 210].
(c) When the goods have to be weighed, measured etc., to

ascertain the price (S. 22). Section 22 of the Act lays down that “Where
there is a contract for the sale of specific goods in a deliverable state, but the
seller is bound to weigh, measure, test or do some other act or thing with
reference to the goods for the purpose of ascertaining the price, the property
does not pass until such act or thing is done and the buyer has notice thereof.”
Section 22 is applicable when the following conditions are satisfied:
(i) There is contract for sale of specific goods.
(ii) Goods are in a deliverable state.
(iii) The seller is bound to weigh the goods (as in case of heap of
foodgrains and vegetables), measure (as in case of a roll of fabric),
count (as in case of motor car horns) or test (as in case of certain
chemicals) the goods for the purpose of ascertaining the price. In
such cases, the rate may have been fixed but the total quantity of the
goods may not be known which is necessary to ascertain the price.
Similarly, certain types of goods may be tested where the price
depends on the quality of the goods.
When the goods are to be weighed, measured etc. to ascertain the
price property passes to the buyer when goods are weighed,
measured, etc; as the case may be, and the buyer has notice thereof.
The rule will not apply where goods are sold for a lump sum, since in such
cases there is no need to ascertain the price.
CASE : The contract was for the sale of 289 bales of goat skin at a certain rate per
dozen. Each bale was described as containing five dozen skins. It was the duty of the
seller to count the skins to see how many each bale actually contained. Before he
could count, the bales were destroyed by fire. It was held that the property had not
passed since something had to be done to ascertain the price. [Zagury v. Furnell,
(1809) 2 Comp. 240].
If the seller has done what he is required to do under the

contract, the property passes to the buyer even if the buyer has to do
something for his own satisfaction.
308 Business Laws
CASE : A (the plaintiff) sold to B (the deffendant), a certain quantity of fire clay at a
certain price per ton. It was agreed that B (buyer) himself had to load the clay on his
own cars and take it to the weighing machine to ascertain the weight. It was held that A
(the selller) could recover the price since property in the clay passed to B even though
the clay was never weighed. [Turley v. Bates, (1863) 2 H & C 174].
(d) Transfer of Property in case of Sale on Approval. The Sale of

Goods Act, 1930 separately provides for transfer of property in case of ‘Sale
on approval’ or ‘sale or return’ transactions.
Section 24 provides that when goods are delivered to a buyer on ‘sale on
approval’ or ‘sale or return’ or other similar terms, the property therein
passes to the buyer in the following cases:
(i) When the person to whom the goods are sent, either accepts
them or does an act which implies adopting the transaction.
Acceptance or approval of the goods need not be express. It may be implied by
the conduct of the person to whom goods are sent, e.g., when he uses the
goods, pledges the goods, re-sells them, or delivers the goods on approval.
CASE : 1. A (the plaintiff-appellant), a jeweller, delivered some jewellery to B on sale

or return. Shortly afterwards, B pledged the jewellery with C (the defendant-
respondent), a pawnbroker. On B’s failure to pay the price, A sued C for the recovery of
the goods. It was held that B has adopted the transaction by his act of pledging, and
hence, the property in the jejwellery had passed to him. A’s remedy was only against B
for the price and not against C who had acquired good title to the goods. [Kirkham v.
Attenborough, (1897) 1 QB 201 (CA)].
CASE : 2. On 10th Jan. 1910, A (the plaintiff) delivered some diamonds to B (the
defendant) on sale or return. On the same day, B delivered them to a third party on the
same term. On 16th Jan., the third party delivered them on the same terms to a fourth
party. The diamonds were lost while in possession of the fourth party. In a suit by A for
the price, it was held by the Court of Appeal, that since B was unable to return the
goods to A, the transaction had been adopted, and he was unable to return the goods
to A, the transaction had been adopted, and he was responsible for the loss. [Genn v.
Winkel, (1911) 28 TLR 483].
(ii) When the person to whom goods are sent retains the goods
without signifying his approval or giving notice of rejection beyond
the time fixed for the return, and if no time is fixed, after the lapse of
reasonable time. In other words, if the person to whom the goods are sent,
fails to return them either within the stipulated time, or within a reasonable
time, the property in goods is transferred to the buyer.
If the goods are delivered on ‘sale or return’ basis and the goods
perishes by accident before passing of property, the loss will be
borne by the owner.
CASE : A (the plaintiff) delivered a horse to B (the defendant) on sale or return. The
horse was delivered to be tried for 8 days. It was to be returned, if B (the provisional
buyer) did not like it. The horse died before the expiry of 8 days without B’s fault. In a
suit by A for the price of the horse, it was held that he could not recover the price since
the property still vested with him. [Elphick v. Barness, (1880) 5 CPD 321].
Intentions of the parties must prevail. Aforesaid rules are subject to

the intention of the parties, who may vary the usual terms of sale or return.
If the parties express their intention as to when the property is to pass, the
court will interpret the contract according to such intention.
CASE : A delivered some jewellery to B on ‘sale or return’ basis. The contract

expressly provided that goods to remain the property of A until paid for or charged.
Thus payment was a condition percent for transfer of property. B, without making
payment to A, pledged the goods to C. It was held that the pledge was not valid as the
property did not pass. A (the plaintiff) was held entitled to recover the goods from C
(the defendant). [Weiner v. Smith, (1905) 2 KB 172].
II. TRANSFER OF PROPERTY IN UNASCERTAINED AND FUTURE

GOODS
Unascertained goods are defined by description. Unascertained
goods are those goods which are not identified and agreed upon at
the time contract of sale is made. Future goods means goods to be
manufactured or produced or acquired by the seller after the making
of contract of sale.
The rules regarding the transfer of property in unascertained goods is
contained in Section 18 and 23. They are discussed below:
1. Property does not pass unless and until goods are ascertained
(S. 18). According to Section 18 of the Act, “Where there is a contract of the
sale of unascertained goods, no property in the goods is transferred to the
buyer unless and until the goods are ascertained.”
Ascertainment of goods is thus a condition precedent to transfer
of property in case of a contract for sale of unascertained. Therefore,
until the goods are ascertained, the contract is an agreement to sell and not
one of sale. Ascertainment of the goods means establishing the individuality
of the thing to be delivered under the contract.
Example. A agrees to sell to B 100 quintals of rice out of larger quantity lying in his
granary. A receives the price and gives B a delivery order but the goods are not
ascertained yet. In such is case the property in the goods cannot pass to B since the
goods have not been ascertained.
2. Property passes when goods in a deliverable state are
unconditionally appropriated [S. 23(1)]. In addition to ascertainment,
there must be some act, subsequent to ascertainment in order to transfer
property. This ‘some act’ is known as appropriation.
According to Section 23(1) of the Act, in the case of a contract of sale
of unascertained goods or future goods by description, property does
not pass to the buyer unless the goods of that description and in a
deliverable state are unconditionally appropriated to the contract.
This section does not define the term ‘appropriation’.
Ascertainment of goods means establishing the identity of the goods to be
delivered under the contract of sale.
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Appropriation of goods to the contract means selection, setting

apart, weighing, measuring, counting or any other act by mutual
consent with the intention of delivering the goods for the
performance of the contract. Ascertainment can be a unilateral act of
the seller; while appropriation is an act performed by mutual
consent. Even though appropriation may be done by the seller or the
buyer, the same should be with consent of the other party, if not
jointly.
Thus, when the goods to be delivered under the contract have been
identified, in a manner binding on the parties, and noting further remains to
be done to pass the property the property will pass to the buyer, in the
absence of a contrary intention. The selection of goods by one party and
adoption of that act by the other party converts that which before was a mere
agreement to sell into an actual sale, and the property thereby passes to the
buyer.
Essentials of a valid appropriation. The following are the essentials of a
valid appropriation as per S. 23(1) :
(a) The appropriation must be of the goods answering the description
given in the contract.
(b) It must be made with the intention to appropriate the goods to
specific contract.
(c) The appropriation must be made by mutual consent. It may be made
either by the seller with the assent of the buyer or by the buyer with
the assent of the seller. Such assent may be express or implied. It
may be given either before or after the appropriation.
(d) The appropriation must be unconditional.
CASES : ( i ) There was a contract for the sale of 20 hogsheads of sugar out of a
larger quantity. Four hogsheads which were filled in were taken away by the buyer.
After some time, the seller filled 16 more hogsheads and informed the buyer asking him
to take them away. Although the buyer promised to take them away, he did not do so
immediately. In the meanwhile the goods were lost. it was held that the seller’s overt
act of filling 16 hogsheads amounted to unconditional appropriation of the same to the
contract, and the buyer’s promise to take them away was his assent to the
appropriation. Hence, the property in the goods had passed to the buyer and he should
himself bear the loss. [Rhode v. Thwaites, (1827) 6 B & C 388].
Note: Hogshead means a large cask of liquid and dry measure. It is equal to a certain
number of gallons.
(ii ) A contracted with B to sell him all the oil to be produced from the year’s crop of
peppermint of A’s farm. When the crop was ready the was oil made. A filled the oil into
bottles supplied by B. Filling the oil by A in the bottles supplied by B amounted to
appropriation of oil and it became the property of B. [Langton v. Higgins, (1859) 4 H &
N 402].
Delivery to a carrier deemed to be delivery to the buyer if right of

disposal is not reserved by the seller [S. 23(2)]. Sub-section (2) of section
23 of the Act recognises one method of appropriation. According to this

sub-section if the seller delivers the goods to a carrier for the
purpose of transmission to the buyer without the seller reserving the
right of disposal, he is deemed to have unconditionally appropriated
the goods to the contracts.
The following are the essential requirements for delivery to a carrier:
(a) The goods must be of the description and quality as mentioned in the
contract.
(b) The seller should deliver the goods to the buyer or to a carrier or
other bailee for the purpose of transmission to the buyer in pursuance
of the contract.
(c) The seller should not reserve the right of disposal of the goods.
(d) The delivery to the carrier must show the particular buyer for whom
the goods are appropriated.
If goods are ordered by a person, although they are to be selected by the
seller, and to be delivered to a common carrier for the purpose of
transmission to the buyer, the moment the goods which have been selected in
pursuance of the contract are delivered to the carrier without reserving any
right of disposal of the goods, the career becomes the agent of the buyer and
such a delivery to the carrier amounts to a delivery to the buyer. The
property in the goods passes to the buyer by such delivery to the carrier.
In Mahabir Commercial Co. Ltd. v. CIT [AIR, 1973 S (430], it was
held by the Supreme that the buyer’s assent to the passing of property is
implied in the circumstance mentioned in S. 23 (1) of the Sale of Goods Act,
1930. It was further held in this case that when the seller dispatches the goods
and delivers them to a common carrier for purposes of transmission to the
buyer, the common carrier not only receives goods as an agent of the buyer but
also assents to the appropriation made by the seller.
RESERVATION OF THE RIGHT OF DISPOSAL

Reservation of the right of disposal means reserving the right to dispose
of the goods until certain conditions, such as payment of the price, are not
fulfilled. Section 25 (1) gives this right to the seller. It states that where
there is a contract for the sale of specific goods or where goods are
subsequently appropriated to the contract, the seller may by the
terms of the contract or by appropriation reserve the right of
disposal of the goods until certain conditions are satisfied. In such a
case, notwithstanding the delivery of goods to a buyer, or to a carrier
or other bailee for the purpose of transmission to the buyer, the
property in the goods does not pass to the buyer until the conditions
imposed by the seller are fulfilled.
Thus, property in the goods does not pass to the buyer in case the
seller reserves the right of disposal. The mere fact that the seller delivers
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the goods to a common carrier for the purpose of transmission to the buyer is
not sufficient as the seller does not intend to part with ownership. In
Mahabir Commercial Co. Ltd. v. C.I.T. [AIR 1973 SC 430], the Supreme
Court held that in such a case the carrier is seller’s agent and delivery to the
common carrier is not a final appropriation.
CASE : There was a contract of sale of 100 bags of coffee. The seller drew a bill of
exchange upon the buyer to be accepted and paid by him before receiving delivery of
the goods. The buyer accepted the bill of exchange and detached it from the bill of
lading which he endorsed for value to the defendant, but did not pay the bill of
exchange. It was held that the property did not pass to the buyer and therefore the
defendant has to return the goods. [Barrow v. Coles, (1811) 3 Comp. 92].
Besides an express right of disposal, the seller is deemed to reserve the

right of disposal in the following cases referred to in sub-sections (2) and (3) of
Section 25 of the Act:
(i) Where goods are shipped or delivered to a carrier, and by the bill of
lading or the railway receipt, the goods are to be delivered to the
order of the seller or his agent; and
(ii) Where the seller draws on the buyer a bill for the price, and sends the
same to him together with the bill of lading or the railway receipt to
secure acceptance or payment, the property in the goods does not pass
to the buyer if he does not honour the bill.
“SALE” OR “TRANFER OF TITLE” BY NON-OWNERS

The different rules governing transfer of property discussed above are
based on the assumption that the seller is the owner of goods and as such, he
is competent to transfer property in the same to the buyer. However, in case
the seller is not the owner of goods and does not have either property or the
right to sell, the question arises whether the buyer can acquire a good title to
the goods. In this respect eminent jurist Denning L.J. stated the following in
Bishopsgate Motor Finance Corp. Ltd. v. Transport Brakes Ltd.
[(1949) 1 KB 322, 336].
“In the development of our law, two principles have striven for mastery.
The first is the protection of property: no one can give a better title than
he himself possess.
The second is the protection of commercial transaction: The
person who takes in good faith and for value without notice should get a title”
The first principle, namely, protection of property, is recognised as the
general rule by S. 27 of the Act and the second principle, namely, protection
of commercial transaction, is recognised in the form of exceptions to the
general rule.
General Rule (Nemo dat quod non habet) (S. 27)

The principle of protection of property states that sale of goods by non-
owner is not valid and therefore, the buyer acquires no title over the goods.
Therefore, the general rule relating to transfer of title on sale is that if the
seller has no title or a defective title, the title of the buyer would be no better
than that of the seller. This rule is expressed by the maxim “nemo dat quod
non habet”, which means “no one can give what he himself does not have” or
“no one can transfer a bettle title than he himself has”. According to this
maxim if a non-owner with no title or defective title to the goods sells, he
cannot convey a bettle title to the buyer although he may be a bonafide buyer
for value.
The genera rule expressed in the above legal maxim is laid down in S. 27
which states that if a person, not being the owner, or not acting under the
authority or with the consent of the owner, sells goods, the buyer cannot
acquire a better title to the goods than the seller had. Therefore, the true
owner can follow the goods in the hands of any person and get the goods
restored. If the buyer has bought the goods in good faith, not knowing the
defective title of the seller, his only remedy is a suit against the immediate
transferor for damages for breach of the implied condition as to title. For
example, a thief sells stolen goods, the buyer acquires no title although he may
have purchased the goods in good faith and for value. Similarly, a finder of
lost goods cannot sell those goods as his own goods. (However, a finder is
entitled to sell them as finder under certain circumstances as per S. 169 of
the Indian Contract Act, 1872.)
CASES : ( i ) A horse was sold at a public auction. The horse was stolen one, but the
auctioneer had no knowledge of that fact. The buyer bought it in good faith. Held, the
buyer had obtained no title against the true owner [Lee v. Bayes, (1856) 18 CB 599].
(ii ) A found a ring. He made reasonable efforts to discover the true owner. He sold it to
B, who bought it without knowledge that A was merely a finder. The true owner was
held entitled to recover the ring from B [Farquaharson Bros. & Co. v. King & Co.),
(1902) AC 325].
(iii ) A hire purchaser of goods sold the goods. The buyer from him, purchased the
goods in good faith and for value. It was held that the buyer did not acquire the property
in the goods as against the owner [Helby v. Methews, (1895) AC 471].
(iv ) A sold goods on ‘sale or return’ to B, upon the condition that they were to remain
the property of A until paid for. B sold them to C, without paying A for them. C Bought
the goods in good faith and without notice of A’s title. It was held that A could recover
the goods or their value from C. [Edwards v. Vaughan, (1910) 26 TLR 545 (CA)].
Exceptions to the maxim “ Nemo dat quod non-habet”

Law seeks to protect the true owner by formulating the general rule
embodied in the legal maxim: ‘namo dat quod non habet’, i.e., no one can
transfer a better title than what he has. however, certain exceptions to this
general rule were slowly evolved and these exceptions afford protection to the
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bonafide purchaser also. The general rule is that of protection of property and
the exceptions embody the principle of protection of commercial transactions.
The exceptions are as follows:
1. Estoppel (S. 27). According to Halsbury: “Estoppel arises when you
are precluded from denying the truth of anything, which you have
represented as a fact, although it is not a fact.” If the owner of the goods
by his words or conduct or act or omission, leads the buyer to believe
that the person who sells is the real owner, or has his authority to
sell, he will not be permitted later to deny the seller’s authority to
sell. In other words, the owner of the goods is estopped from denying the
authority of the seller to sell the goods. This is in accordance with the rule of
evidence laid down in Section 115 of the Indian Evidence Act.
In order to give rise to an estoppel, it is necessary to establish:
(a) that the party liable for estoppel made a representation by words or
conduct, and
(b) that the party claiming the benefit of estoppel acted on the faith of
this representation.
Example. A tells B within the hearing of C that he (A) is the owner of certain goods
although C is the real owner of the goods. C remains silent and does not contradict A’s
statement. Relying on the statement of A, B buys the good from A. The title of B will be
better than that of A, and C will be estopped from denying A’s authority to sell.
CASES : ( i ) A, the owner of a car, handed over sale papers duly signed by him to B.
B pretended that he has the authority to sell the car although he was in fact not entitled
to sell. B sold the car to C, a bonafide purchaser for value. A was estopped from
challenging C’s title. [Eastern Distributors Ltd. v. Goldring, (1957) 2 QB 600].
(ii ) A allowed his friend, B, to use his car for two days. B kept the car for some weeks
and then sold it to C, a bonafide purchaser for value. It was held that A was entitled to
take the car back from C as his (A’s conduct did not suggest that he had given authority
to B to sell the car. [Heap v. Motorists Advisory Agency Ltd., (1923) 1 KB 577].
2. Sale by a mercantile agent (Proviso to S. 27). According to S. 27,

an unauthorised sale by a mercantile agent is valid if the following conditions
are satisfied:
(a) The person selling should be a mercantile agent;
(b) He should be in possession of the goods or of the documents of title to
the goods;
(c) He should be in possession with the consent of the owner;
(d) The sale should be in ordinary course of business;
(e) The buyer should act in good faith; and
(f) The buyer should not have, at the time of the contract, notice that the
seller had no authority to sell.
Section 2(9) if the Act defines a mercantile agent thus: “Mercantile agent
means a mercantile agent having in the customary course of business as such
agent’s authority either to sell goods, or to consign goods for the purpose of
sale, or to buy goods, or to raise money on the security of goods.” According to
this definition, factor, broker, auctioneer and commission agent are
mercantile agents. But, a servant, bailee for carriage or safe custody,
caretaker and friend are not mercantile agents.
CASE : P (the plaintiff) delivered his motor car to A, a mercantile agent for sale. The
agent was told by P not to sell the car below specified price. Howeever, the agent sold
the car below the specified price and misappropriated the proceeds. P sued B (the
defendant), the buyer, for recovery of the car. It was held that the agent acted without
authority. But he was in possession of the car with the consent of P. Therefore, he
could pass a good title to B who acted in good faith. [Folkes v. King, (1923) 1 KB 282].
3. Sale by a joint owner (S. 28). As per S. 28, sale by one of the several
joint-owners is valid if the following conditions are satisfied:
(a) One of the several joint owners has the sole possession of them.
(b) Possession of the goods is by permission of the co-owners.
(c) The buyer buys them in good faith and has not at the time of contract
of sale knowledge that seller has no authority to sell.
It is necessary to point out in this context that a co-owner can sell his own
share even without the application of the provisions of this section. If he does
so, the buyer acquires only the title of the co-owner, and thus becomes a co-
owner alongwith the other co-owners. But, when this section is applied, the
buyer becomes the owner of the whole of the goods and not merely to the
extent of the share of the co-owner selling the goods.
Example. A and B jointly purchased a cycle for 1,500. It was agreed that each of
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them would keep the cycle in his possession for a period of one week by rotation. While
the cycle was in possession of A, he, without the consent of B, sold it is C who bought it in
good faith. C gets a good title.
4. Sale by a person in possession of goods under a voidable

contract (S. 29). Section 29 of the Act lays down that, “When the seller of
goods has obtained possession thereof under a contract voidable under
Sections 19 or 19 A of the Indian Contract Act, 1872, but the contract has not
been rescinded at the time of the sale, the buyer acquires a good title to the
goods, provided he buys them in good faith and without notice of the seller’s
defect of title.”
Thus, a sale by a person in possession of goods is valid if the following
(a) The contract is voidable under S. 19 or 19A of the Indian Contract
Act, 1872, i.e., voidable on the ground of coercion, undue influence,
fraud or misrepresentation.
(b) The contract has not been resciended at the time of sale.
(c) The buyer buys the goods in good faith and without notice of seller’s
defect of title.
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CASE : A purchases a ring from B by fraud. A has a voidable title to the goods.
Before rescinding the contract by B, A sells the ring to C, who buys in good faith and
without notice of the A’s defect of title. C gets a good title. [Phillips v. Brooks Ltd.,
(1919) 2 KB 243].
5. Sale of a seller in possession after sale [S. 30(1)]. It may happen

sometimes that a seller, even after selling the goods, continues to be in
possession of the goods or documents of title to the goods. Any sale, pledge or
other disposition the goods or transfer of documents by the seller is valid if
the following conditions are satisfied:
(a) The seller continues to be in possession of the goods or documents of
title as seller and not as hirer or bailee.
(b) There must be delivery or transfer by the seller or by a mercantile
agent acting for him, of the goods or documents of title under any
sale, pledges or other disposition thereof.
(c) The buyer or pledgee must receive the goods or documents of title in
good faith and without notice of the previous sale.
Section 30(1) does not apply to cases where after the sale has been
completed the goods are bailed or leased back to the seller. It is
confined to cases where the contract of sale has not been completed
by delivery.
The word ‘possession’ includes possession by another person on behalf of
the seller. It is enough that the goods are at the disposal of the seller even if
they are in the custody of a warehousekeeper.
CASE : S was the owner of certain furs which he kept in warehouse of W. A was
required to pay £ 178 as warehouse charges. S sold the furs to B who paid S the price
on the understanding that S would pay off the warehouse charges to W. S did not do so
and pledged the furs to P for £ 178. W was paid off by P. Furs were delivered to P. It
was held that A was seller in possession through warehousekeeper W and the pledge
was valid. [City Fur Manufacturing Co. Ltd. v. Fureenbond (Brokers) London Ltd.,
(1937) 1 All ER 799].
6. Sale by a Buyer in Possession [S. 30(2)]. A person, having bought

or agreed to buy the goods, may obtain with the consent of the seller,
possession of the goods or documents of title to the goods. The delivery or
transfer by such a person or by a mercantile agent acting for him, of the
goods, or the documents of title under any sale, pledge or other disposition
thereof to any other person will be valid if that other person receives the
same in good faith and without notice of any lien or other right of the original
seller in respect of the goods.
Section 30(2) would apply in the following three cases:
(i) Where the buyer has obtained possession of the goods before the
property has passed to him.
(ii) Where the buyer has obtained possession of the documents of
documents of title before the property in the goods has passed to him.
(iii) Where the buyer has obtained possession of the documents of title
after the property in the goods has passed to him but the goods are
still subject to the seller’s lien or right of stoppage in transit.
It is necessary that the person must have obtained the possession of the
goods or documents of title under the agreement to sell. It should be noted
that a person who is in possession of the goods under a hire-
purchase agreement cannot convey a good title to the second buyer
as he has only an option to buy. However, if such a person is under
an obligation to buy, he transfers a good title to the buyer even
before he pays up all the instalments, since in such a case, the
transaction would be of the nature of a credit sale.
CASE : (1) S sold a piano to P on hire-purchase. P had an option to buy. Before

exercising the option to buy, P pledged it to C. It was held that C could not obtain a
good title to the piano since there was no obligation on part of P to buy it, but only an
option to do so. Therefore, A was entitled to recover the piano from C [Helby v.
Mathews, (1895) AC 471].
CASE : (2) S delivered furniture to P under an agreement whereby P was to pay for
the hire of the furniture a certain sum by two instalments. The contract provided that the
furniture was to become the property of P on payment of the last instalment but P was
bound to pay the purchase price. P sold the furniture to C before paying all the
instalments. It was held that the sale and delivery to C was valid and the original seller
could not recover possession of furniture. [Lee v. Butler, (1914) 1 KB 244].
7. Sale by an unpaid seller (S. 54). An unpaid seller who has exercised
his right of lien or stoppage in transit can effect resale of the goods; the buyer
in such a case acquires a good title to the goods. There is no requirement of
good faith in this exception. But the seller must have possession of the goods
as seller and not as hirer or bailee. For details see the heading “Right of Sale”
in Chapter 21.
8. Exceptions under other Acts. Besides the above exceptions, mention

may be made of the following cases also in which a non-owner may pass a
good title to the goods sold by him. These cases cover the phrases ‘subject to
the provisions of this Act and of any other law for the time being in force’
used in Section 27 of the Act. These cases are:
(a) Sale by the finder of lost goods, Section 169 of the Contract Act;
(b) Sale by a pawnee, Section 176 of the Contract Act;
(c) Sale by an Official Receiver or Assignee, according to the Code of Civil
Procedure; and
(d) The legal maxim nemo dat quod non habet is not applicable in case of
negotiable instruments.
REVIEW QUESTIONS
1. Define ‘goods’. State the rules that goven the passing of property from the
seller to the buyer.
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2. “In the sale of goods, transfer of property is not the something as the transfer
of possession” Comment.
3. ‘Risk prima facie passes with property.’ Comment on the statement and
explain the exceptions to the rule. [B.Com. and B.Com. (Hons.), D.U.]
4. Explain what is meant by the expression ‘the property in the goods’.
5. Why is it important to know the exact time when the property in the goods
passes from a seller to buyer ? Explain with examples the rules governing the
transfer of ownership of goods from seller to buyer.
6. Discuss the rules as to passing of property in case of specific goods.
[B.Com. (H), D.U.]
7. When does the property in goods pass on from the seller to the buyer under
the Sale of Goods Act? What are the consequences of transfer of such property
in goods?
8. “Risk as a rule follows property and conversely the incidence of risk is an
indication where property lies; but risk and property may be separated.”
Comment.
9. Explain the rules regarding transfer of property in case of unascertained and
future goods. [B.Com. (H), D.U.]
10. When does the property in goods pass, if the goods are sent to a customer on
sale or return basis ?
11. ‘Nemo dat quod non habet’. (No one can give what he does not possess).
Explain this maxim and state the exceptions to it. [B.Com. (H), D.U.]
12. Explain the exceptions to the rule that “a person cannot give a title better
than what he himself has.” [B.Com. & B.Com. (H), D.U.]
13. “A seller cannot transfer to the buyer of goods a title better than what he
himself has.” Comment, giving exceptions to the rule.
14. “No seller of goods can convey to the buyer of goods a bettle title than what he
himself possess.” Examine this statement and explain exceptions to this rule,
as per Sale of Goods.
15. ‘No one can convey a better title than what he has.” Comment.
[B.Com. & B.Com. (H), D.U.]
16. State and explain the cases in which a buyer acquires a better title over the
goods purchased, than that of the seller when the goods are sold by a ‘non-
owner’.
17. State whether each of the following statements is true or false:
(a) The property in the goods passes to buyer only when the possession is
transferred.
(b) When there is an unconditional contract for sale of specific goods in a
deliverable state, the property passes when the contract is made.
[Hints: True: (b); False: (a).]
PRACTICAL PROBLEMS
1. A agreed to purchase 200 tons of wheat from B out of a larger stock. A sent
his men with sacks and 150 tons were put into the sacks. Then there was a
sudden fire and the entire stock was gutted. Who will bear the loss and why?
[Hint: Buyer has to bear the loss of 150 tons and the seller that of 50 tons.
The seller had done an act necessary to put the goods in a deliverable state.
Hence property had passed. [Rugg vs. Minnet, (1809) 11 East 210]
2. There is a contract for the sale of timber standing at B’s land. It is the duty of
the buyer A to cut the timber and take it away in his own transport. After
making the contract, the standing timber is destroyed by sudden fire. Who
will suffer the loss and why?
[Hint: The property in the goods had not passed as the goods were not
identified. hence, loss is to be borne by the seller [Kursell vs. Timber
Operators & Contractors Ltd., (1927) 1 KB 298].
3. Goods were delivered by B to C on ‘sale or return’ basis. They are further
delivered by B to C and then by C to D on similar terms. The goods are stolen
while in the custody of D. Who is to bear the loss of goods and why?
[Hint: C in whom the property in goods rests at the time of loss is to bear the
loss of the goods (S. 24).]
4. Sharmeela took some ornaments from Matchless Jewellers, Mumbai, on
23.5.20X5 on approval. She “specifically promised to return the said
ornaments in the evening, if not approved.” But she retained these ornaments
without signifying her approval or acceptance and without giving notice of
rejection. On 15.6.20X5 the ornaments in question were stolen from
Sharmeela’s house.
Can Matchless Jewellers, Mumbai, recover the price from Sharmeela ? Would
it make any difference in the situation if Sharmeela had not “specifically
promised to return the ornaments in the evening of 23.5.20X5, if not
approved ?
[Hint: The jewellers are entitled to recover the price of the ornaments (S.
24).]
5. On 29th April, A entered into a contract for the sale of 1,000 bags of basmati
rice to B and received 10,000 in part payment of the price. The goods were
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with the seller at that time but had been despatched from Ludhiana on 25th
April. A had received the Railway Receipt which he indorsed in favour of B on
29th April. The goods never reached the destination as they were destroyed
on 30th April, while intrasit. Decide who shall bear the loss.
[Hint: B will bear the loss [S. 23(2).]
6. Jewellery was sent by A to B on sale or return basis. B pledged the jewellery
with C. Discuss the rights and liabilities of the parties.
[Hint: In pledging with C, B has adopted the transaction. Hence, C gets a
good title. A’s remedy is only against B for the price.[S. 24; London
Jewellers Ltd. vs. Attenborough, (1934) 2 KB 206 (CA).]
7. A delivered a car to B, a mercantile agents to sell it for a price above 60,000.
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B sold it to C for 50,000. Can A take back the car from C who has no
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knowledge to the instructions by A. Explain with reasons.

[Hint: No. A cannot take back the car from C. See S. 27]
8. A and B jointly purchased a cow for 4,000. While the cow was in possession
R
of A, he, without the consent of B, sold it to C who bought in good faith. Does
C get a good title ? Give reasons for your answer.
[Hint: Yes. Sale by a joint owner (S. 28).]
9. A hirer, who obtains possessions of a car from its owner under a hire-
purchase agreement, sells the car to a buyer who buys in good faith and
without notice of the right of the owner. Does the buyer get a good title to the
car?
[Hint: No. Hire purchase transaction is not a contract of sale. [Belsize
Motor Supply Co. vs. Cox, (1914) 1 KB 244].]
320 Business Laws
10. While travelling in a bus Ashish finds a VCR. After making reasonable efforts
to discover the owner, sells, the VCR to Deepika, who buys the VCR with the
knowledge that Ashish was merely a finder. On coming to know about the
deal, M, the owner of the VCR files a suit against Deepika for the recovery of
VCR from her. Decide giving reasons.
[Hint: M is entitled to get the VCR back (Section 169 of the Indian Contract
Act, 1872).]
11. X, the owner of a car, hands over the car to Y, a mercantile agent and gives
him instruction to sell the car subject to a reserve price of 6 lakh. Y sells the
R
car to Z for 5 lakh and misappropiater money. Z buys the car in good faith.
R
Will Z get good title to the car? [B.Com. (Hons), D.U.]

[Hint : Yes Section 27 and Folks v. King, 91923) 12 KB 282]
12. A delivered a horse to B on ‘Sale pr Return basis’. The agreement provided
that B should try the horse for 8 days and the return, if he did not like the
horse. On the third day the horse died without the fault of B.A files a suit
against B for the recovery of price. Can he recover ? [B.Com. (Hons), D.U]
[Hint : No. Section 24 and Elphick v. Barness, (1880) 5 CPD 321]
13. A purchased a ring from B by fraud. Before rescinding the contradict by B, A
sells the ring to C, who buys in good faith and without notice of the A’s defect
of title. Will C get a good title ? Explain with reasons.
[B.Com. (Hons.), D.U.]
[Hint : Yes. Section 29 and Philips v. Brooks Ltd.]
14. There was a sale of jeep for 10,000 out of which 2,000 was paid by the
R R
buyer immediately, and the balance 8,000 was to be paid at the time of
R
registration of the vehicle. It was also agreed that the property in the vehicle
would pass to the buyer after the payment of entire amount. Before the
payment of the balance price, there was an accident. Who will bear the loss ?
Explain with reasons. [B.Com. (Hons.), D.U.]
[Hint : The seller]
Performance of
19 Contract of Sale
LEARNING OBJECTIVES
➥ Meaning and Modes of Delivery of Goods
➥ Rules as to Delivery of Goods.
In the case of a contract of sale’ performance’ means the delivery of goods

by the seller and acceptance of goods and payment for the same by the buyer.
Section 31 of the Act states that “It is the duty of the seller to deliver the
goods and of the buyer to accept and pay for them in accordance with the
terms of the contract of sale.”
Section 32 of the Act provides that, “Unless otherwise agreed, delivery
and payment of the price are concurrent conditions, that is to say, the seller
should be ready and willing to give possession of the goods to the buyer in
exchange for the price, and the buyer shall be ready and willing to pay the
price in exchange for the possession of the goods. However, the parties are left
free to agree otherwise. Thus, the parties have the freedom to provide any
terms they like regarding the time, place and manner of delivery of goods,
acceptance of the delivery of goods and payment of the price. But if the
parties do not make a provision regarding these matters in the contract of
sale then the rules as laid down in the Sale of Goods Act apply.
MEANING AND MODES DELIVERY OF GOODS

‘Delivery’, as per Section 2(2) of the Act, “means voluntary transfer
possession from one person to another.”
The following are the modes of delivery:
Section 33 states that delivery of goods may be made by doing anything
which the parties agree shall be treated as delivery or which has the effect of
putting the goods in the possession of the buyer or of any person authorised
to hold them on his behalf.
1. Actual delivery. This is the most common method of delivery. Actual
delivery takes place when the seller transfers the physical possession of the
goods to the buyer or to a person authorised to hold them on his behalf.
322 Business Laws
2. Symbolic delivery. Where actual delivery is not possible, there may

be delivery of the means of getting possession of the goods. For instance, in
the case of goods stored in a warehouse handing over the keys of the ware-
house or of the documents to title to the goods constitutes symbolic delivery.
3. Constructive delivery. Constructive delivery takes place when a
person in possession of goods of the seller acknowledges to the buyer that he
holds the goods on his (buyer’s) behalf. For example, if A sells to B a crate of
wine stored at C’s warehouse, property in the goods, may pass to B as soon as
the contract is made but delivery will not take place until C acknowledges to
B that he holds the goods on his behalf. Similarly, if the buyer is already in
possession of the goods at the time of sale, he would be a bailee, but the
character of possession changes from that of a bailee to that of a buyer when
once the sale is effected. Again, if the seller after sale of goods agrees to hold
them on behalf of the buyer as a bailee the goods are deemed to be delivered.
RULES AS TO DELIVERY OF GOODS

The following are the rules regarding the delivery of goods:
1. Delivery and payment are concurrent conditions (S. 32). Section
32 of the Act provides that “Unless otherwise agreed, delivery of goods and
payment of the price are concurrent conditions, that is to say, the seller should
be ready and willing to give possession of the goods to the buyer in exchange
for the price and the buyer should be ready and willing to pay the price in
exchange for possession of the goods.”
Example. A enters into a contract to sell to B 10 bags of rice of 50 kgs. each for 20
R
per kg. A need not deliver the goods unless B is ready and willing to pay for the goods on
delivery, and B need not pay the price if A is not ready and willing to deliver the goods.
2. Delivery may be either actual or symbolic or constructive (S.

33). Section 33 provides that, “Delivery of goods sold may be made by doing
anything which the parties agree shall be treated as delivery or which has the
effect of putting the goods in the possession of buyer or any person authorised
to hold them on his behalf.” Thus the delivery of goods may be either actual or
symbolic or constructive. These terms have been explained above.
3. Effect of part delivery (S. 34). Section 34 provides that, “A delivery
of part of the goods in progress of the delivery of the whole, has the same effect,
for the purpose of passing the property in such goods, as a delivery of the
whole....” It is further stated that part delivery, with the intention of
separating the same from the rest, does not amount to delivery of the whole.
CASES : ( i ) A sold certain goods lying at a wharf to B and directed the wharfinger to
deliver the goods to B. B weighed the goods and took away a part of them. It was held
that in this case the delivery of a part of the goods had the same effect as the delivery
of the whole [Hammond v. Anderson, (1803) 8 RR 763].
(ii ) A sold a stock of hay to B. The buyer was allowed to take away only a part of it. It
was held that the part-delivery in the instant case did not amount to delivery of the
Performance of Contract of Sale 323
whole as it showed an intention to separate the part delivered from the rest of hay
[Bunnery v. Poyntz, (1833) 4 B & Ad 568].
4. Buyer to apply for delivery (S. 35). Although it is the duty of the
seller to deliver to the buyer goods contracted for, Section 35 of the Act states
that in the absence of a contract to the contrary, the seller is not bound to
make delivery until the buyer applies for delivery. As such, if no demand is
made by the buyer he cannot hold the seller liable in damages for his failure
to deliver.
5. Place of delivery [S. 36(1)]. Section 36(1) states that, “whether it is
for the buyer to take possession of the goods or for the seller to send them to the
buyer is a question depending in each case on the contract, express or implied,
between the parties.” Thus the terms of the contract determine whether the
seller is to send the goods to the buyer or the buyer to take possession of
them. In other words, if the place of delivery is stated in the contract of sale,
the goods must be delivered at that place.
Section 36(1) further states that in the absence of any such provision in
the contract the goods sold are to be delivered at the place at which they are
at the time of ‘sale’. In case of an “agreement to sell”, the goods are to be
delivered at the place at which the goods are at the time of the agreement to
sell. In case of ‘future goods’, however, the place of delivery is the place at
which they are manufactured or produced.
6. Time of delivery [S. 36(2)]. Section 36(2) states that, “Where under
the contract of sale the seller is bound to send the goods to the buyer, but no
time for sending them is fixed, the seller is bound to send them within a
reasonable time.” Section 36(4) provides that, “Demand or tender of delivery
may be treated as ineffectual unless made at a reasonable hour is a question of
fact.” Thus the demand for delivery should be made at a reasonable hour.
What is reasonable hour is a question of fact dependent upon the
circumstances of each case. Similarly, the seller must tender the delivery at a
reasonable hour.
7. Delivery of goods where they are in the possession of a third
party [S. 36(3)]. Section 36(3) provides that where the goods at the time of
sale are in the possession of a third person there is no delivery by seller to
buyer unless and until such third person acknowledges to the buyer that he
holds the goods on his behalf. However, where the goods have been sold by
the issue of documents of title to goods like a railway receipt or bill of lading,
then such consent is not needed.
8. Expenses of delivery [S. 36(5). According to Section 36(5), the
expenses of and incidental to putting the goods into a deliverable state should
be borne by the seller. This rule operates only in the absence of a contract to
the country.
9. Delivery of wrong quantity (S. 37). It is the duty of the seller to
deliver the quantity of goods contracted for, and the buyer has the right to
324 Business Laws
insist that the proper quantity of goods be delivered. Section 37 provides that
delivery of a quantity less than contracted for or more than contracted for or
delivery of goods mixed with goods of different description not included in the
contract gives the buyer the right to (a) reject the whole of the goods, or (b)
accept the whole of the goods, or (c) to accept the quantity and description of
goods he ordered and reject the rest of the goods. It is elaborated as follows:
(i) Short or excess delivery. If the seller delivers a smaller quantity than
contracted, the buyer may refuse to accept them. If short delivery is accepted
by the buyer, he has to pay for the quantity delivered at the contract price.
He is also entitled to claim damages for short delivery.
If the seller delivers a larger quantity of goods than he contracted to sell,
the buyer has the option of accepting the quantity as per the contract and
reject the rest, or he may reject the whole. If he accepts the entire entity, he
has to pay for the excess at the contract price.
The right to reject the goods is not equivalent to the right to
cancel the contract. In the case of short or excess delivery, if the buyer
rejects the goods, the seller has the right to deliver the right quantity as per
the terms of the contract once again and the buyer is bound to accept them.
CASE : A agreed to deliver 1230 barrels of groundnut oil to B. A despatched 20

barrels in excess. B refused to take delivery and pay the price on the ground that the
goods despatched were in excess of the contract quantity. The contention of B was
upheld. It was further held that the buyer cannot prevent the seller from tendering the
contract quantity. Buyer has only a right to reject the goods in case of short or excess
delivery but not to cancel or repudiate the contract [Vilas Udyog Ltd. v. Prag
Vanaspati Product, AIR 1975 Guj. 112].
It has been held that a trivial difference in quantity delivered and

contract quantity must be overlooked on the principle of de minimis.
Example. A contract to supply 4950 tons of wheat to B at a certain rate per ton. A
supplies 25 kgs. of wheat in excess and does not bill for the excess. The buyer cannot
reject the whole quantity.
(ii) Delivery of goods mixed with goods of different description. It is the

duty of the seller to deliver goods of the quality or description mentioned in
the contract. If he delivers goods mixed with goods of a different description
not included in the contract, the buyer may accept the goods which are in
accordance with the contract and reject the rest, or he may reject the whole.
CASE : The sellers contracted to sell 50 tons of galvanised steel sheets “assorted
over 6, 7, 8, 9 and 10 feet long”. The buyers paid the whole of the purchase price in
advance. The sellers, however, delivered the entire quantity in 6 feet lenghs. The
buyers accdepted only one-fifth of the consignment and sought to recover four-fifth of
the purchase price in respect of the balance. It was held that they were entitled to do so
[Ebrahim Dawood Ltd. v. health (Estd. 1927) Ltd., (1961) Lloyd’s Report 512].
Buyer not bound to return rejected goods (S. 43). According to S. 43, the
buyer, who has rejected the goods delivered to him having a right to do so, is
not bound to return them to the seller. It is sufficient if he intimates to the

seller that he refuses to accept them. This rule is subject to an agreement to
the contrary.
10. Instalment delivery (S. 38). Section 38(1) provides that unless the
contract contemplates delivery by instalments, the buyer is under no
obligation deliver by instalments. He may insist on full delivery in accordance
with the terms of the contract:
If the parties have agreed that the subject-matter of the contract shall be
delivered in instalments, and that the price shall be paid in the same
manner, the problem arises where the seller fails to make proper delivery,
i.e., no delivery or defective delivery in respect one or more instalments, or
the buyer neglects or refuses to take delivery of, or pay for one or more
instalements.
In such a case, as Section 38(2) states, it is a question in each case,
depending on the terms of the contract and the circumstances of the case
whether the breach of contract is a repudiation of the whole contract, or
whether it is a severable breach giving rise to a claim for compensation but
not to a right to treat the whole contract as repudiated. Thus, the matter is
left to the court to be determined on the basis of the facts of the case.
In Maple Flock Co. Ltd. vs. Universal Furniture Products
(Wembley) Ltd. [(1934) 1 KB 148], the Court felt that the following two
tests are necessary to be applied in a situation such as the one
contemplated in S. 38(2):
“The first is the ratio quantitatively which the breach bears to
the contract as a whole and secondly, the degree of probability or
improbability that such a breach will be repeated.”
Thus, if the ratio of the quantity involved in the breach to the total
contract quantity is small and the probability of occurrence of the breach is
low, the breach of contract will not amount to repudiation of the whole
contract.
CASE : The sellers contracted to sell 100 tons of rag flock by instalments, at the rate
of three weekly instalments of one and a half tons each. The first fifteen deliveries of
one and a half tons each were satisfactory. However, when the sample was analysed,
the sixteenth delivery was found to contain more chlorine than was allowed under the
contract. In the meantime, the buyers had taken delivery of four more instalments and
all of them were satisfactory. The buyers sought to repudiate the contract. It was held
that they were not entitled to do so since the defective delivery was no justification to
avoid the contract and “the deciding factor here is the extreme improbability of the
breach being repeated .......” [Maple Flock Co. Ltd. v. Universal Furniture Products
(Wembley), (1934) 1 KB 148].
11. Delivery to a carrier or wharfinger (S. 39). Section 39(1) provides

that where the seller is authorised or is required as per the terms of the
326 Business Laws
contract, to send the goods to the buyer, delivery of goods to a carrier for the
purpose of transmission to the buyer, or to a wharfinger for safe custody, is
prima facie deemed to be a delivery to the buyer.
Seller’s duty. According to Section 39(2) it is the duty of the seller, unless
otherwise agreed, to enter into suitable agreement with the career or
wharfinger on behalf of the buyer considering the nature of the goods and the
other circumstances of the case. If the seller fails to make such a contract,
and the goods are lost or damaged in the course of transit or while in the
custody of the wharfinger, the buyer may refuse to treat the delivery to the
carrier or the wharfinger as delivery to himself, or may hold the seller
responsible in damages.
CASE : The carrier to whom the goods were delivered required a notice that the
goods were of more than £ 5, otherwise he would not be liable for any loss. The seller
did not give any such notice. It was held that the seller failed in his duty of making a
reasonable contract. [Clark v. Hutchins, (1811) 14 East 475].
Sea transit. section 39(3) lays down that, if the goods are to be sent by a
route involving sea transit, and it is usual in such cases to insure the goods, it
is the duty of the seller to inform the buyer in time to enable him to insure
the goods. If the seller fails to do so, the goods are deemed to be at his risk
during the sea transit.
12. Risk where goods delivered at distant place (Deterioration
during transit) (S. 40). According to section 40 of the act, where the seller
agrees to deliver the goods at this own risk at a different place than the one
at which they were at the time of sale, the buyer himself is responsible for
deterioration in the goods incidental to transit. This rule is, however, subject
to an agreement to the contrary.
13. Right to examine the goods (S. 41). On delivery of the goods which
the buyer has not previously examined, he is considered not to have accepted
them until he had a reasonable opportunity to examine them for the purpose
of determining whether they are in conformity with the contract [S. 41(1)]. It
is also the duty of the seller, unless otherwise agreed, to give the buyer, on
request, a reasonable opportunity of examining the goods for the purpose of
determining whether they meet the requirements of the contract [Section
41(2)].
14. Liability of buyer for neglecting or refusing delivery of goods
(S. 44). Section 44 of the Act lays down that if the buyer, when requested by
the seller who is ready and willing to deliver the goods, does not, within a
reasonable time after such request, take delivery of the goods, he becomes
liable to the seller for any loss occasioned by his neglect or refusal to take
delivery. He also becomes liable for the reasonable expenses incurred by the
seller of taking care of the goods. But the seller’s rights are not affected where
the neglect or refusal the buyer to take delivery amounts to a repudiation of
the contract. Thus the seller can sue for breach of contract.
ACCEPTANCE OF DELIVERY BY BUYER

According to S. 42 the buyer is deemed to have accepted the goods in the
following circumstance:
1. When he intimates to the seller that he has accepted the goods.
As pointed out above, the buyer is entitled under S. 41 to examine the goods
for the purpose of ascertaining whether they are in conformity with the
contract.
2. When the goods have been delivered to the buyer and he does
any act in relation to them which is inconsistent with the ownership
of the seller. If the buyer consumes, uses, pledges or resells the goods, it
amounts to an act inconsistent with the ownership of the seller.
CASE : 1. A sold certain goods to B by sample. B sold them to C. When goods were
delivered to B, he examined a sample of it and delivered them to C. C rejected the
goods as not being according to the sample. It was held that B’s act of examining the
sample and then delivering the goods to C amounted to acceptance. Thus B could not
reject the goods [Perkins v. Bell, (1873) QB 193].
CASE : 2. There was a contract for sale of a certain quantity of wheat on C.I.F.
terms, The buyers took delivery, and next day, without making a proper inspection, they
resold and despatched part of the wheat to sub-buyers. Two days later, having
discovered on further examination that the wheat was not in accordance with the
contract and not of right quality, the buyers gave notice to the sellers that they rejected
it. The notice was given within reasonable time. The buyers, however, were held to
have accepted the wheat and lost their right of rejection. [Harley & Co. v. Hillerns &
Flower, (1923) 2 KB 490 (CA)].
3. When, after the lapse of reasonable time, the buyer retains the
goods without intimating to the seller that he has rejected them.
What is reasonable time is a question of fact. As pointed out above, the buyer,
as per Section 43, who has rejected the goods delivered to him, having a right
to do so, is not bound to return them to the seller, unless there is a contract to
the contrary. It is sufficient if he intimates to the seller that he refuses to
accept them.
REVIEW QUESTIONS
1. State the provisions of the Sale of Goods Act with regard to delivery of goods.
2. Enumerate the rights and liabilities of the parties to a contract of sale when a
part delivery or wrong delivery of goods is made by the seller.
3. ‘Delivery does not amount to acceptance of goods’. Discuss.
4. What do you mean by delivery of goods ? Discuss the various kids of delivery
under performance of contract.
5. What are the effects of delivery of wrong quantity ?
6. Define the term ‘delivery’ as used in the Sale of Goods Act and discuss the
rules relating to delivery of goods.
7. “It is the duty of the seller to deliver the goods and of the buyer to accept and
pay for them in accordance with the terms of the contract.” Comment.
328 Business Laws
8. Write a short note on: Acceptance of Goods by the Buyer.

9. State with reasons whether each of the following statements is true or false:
(a) Delivery means compulsory transfer of possession of goods from one
person to another.
(b) Unless otherwise agreed, delivery of goods and payment of the price are
concurrent conditions.
(c) A delivery of part of the goods with an intention of separating it from the
whole lot does not amount to delivery of the whole of the goods.
(d) In case of delivery of excess quantity, the buyer may reject the whole lot.
(e) When the goods are rejected by the buyer, having the right to do so, he
must return them to the seller.
[Hint: True: (b), (c), (d); False: (a), (e)].
PRACTICAL PROBLEMS
1. A of Delhi writes to B of Bangalore to send her a saree by parcel post. B
accordingly sends the sarees by parcel post. The parcel is lost in transit. Can
A recover the price from B.
[Hint: Yes, A can recover the price of the saree from B as the delivery to a
carrier (post office in this case) is a delivery to the buyer (S. 29). The buyer
becomes the owner of the goods thereafter and, therefore, has to bear the loss
of goods in transit unless there is a contract to the contrary.]
2. ‘B’ agrees to sell and deliver to ‘A’ 300 quintals of rice. Only 200 quintals are
delivered. ‘A’ gets the rice weighed and accepts the quintals sent. ‘A’
afterwards, object that the whole of the 300 quintals was not delivered and
refused to pay for 200 quintals . Can ‘A’ be compelled to pay the price of 200
quintals ?
[Hint: A can be compelled to compensate B for the price of 200 quintals
(S. 37).]
3. A sold basmati rice to B by sample, delivery to be made at Mumbai Central
Railway Station. B, after inspecting a sample of it at the station, sent a part
of it to C. C rejected it as not being according to the sample. B want to reject
the rice. Will he succeed ?
[Hint: B cannot reject the rice as by reselling a part of the goods to C, he had
‘accepted’ the goods as per section 42.]
4. A contracted to supply to B 6,000 units of certain commodity in 15 equal
instalments. Each instalment was to be separately paid for. B finds, when
400 units of 11th instalment are received, that they are not of proper quality.
B wants to cancel the entire contract. A wants to supply the remaining
quantity of goods on per the terms of contract. Decide.
[Hint: B is not entitled to cancel the entire contract. He can claim damages
for improper goods supplied.]
5. X contracts with Y to buy 100 bags of rice of particular quality. Y delivers 50
bags of rice of right type agreed upon and 50 bags of some other quality. What
are the rights of X ?
[Hint: See S. 37 (3)]
Remedies for Breach of
20 Contract of Sale
LEARNING OBJECTIVES
➥ Definition of Unpaid Seller
➥ Rights of Unpaid Seller against the Goods
➥ Rights of Unpaid Seller against the Buyer personally
➥ Right of Buyer against the Seller
DEFINITION OF UNPAID SELLER

Section 45(1) of the Act defines an unpaid seller thus : “The seller of goods
is deemed to be an unpaid seller within the meaning of this Act : (a) when the
whole of the price has not been paid or tendered; (b) when a bill of exchange or
other negotiable instrument has been received as conditional payment, and the
condition on which it was received has not been fulfilled by reason of the
dishonour of the instrument or otherwise.”
Section 45(1) has laid down following two circumstances in which
a seller could be called an unpaid seller :
(1) One of them is that the seller should not have been paid the whole of
the price. Accordingly, even if the buyer has paid a substantial portion of the
price, the seller nevertheless becomes an unpaid seller within the meaning of
this section. It is necessary that payment of price must have become due. But,
if the buyer has tendered the price and the seller wrongfully refuses to accept
the tender, he cannot be called an unpaid seller.
(2) When conditional payment is effected by giving a negotiable
instrument for the price, the dishonour of the instrument will also make the
seller an unpaid seller.
The term “seller” includes any person who is in the position of a seller, as,
for instance, an agent of the seller to whom the bill of lading has been
endorsed, or a consignor or agent who has himself paid, or is directly
responsible for, the price [S. 45(2)].
RIGHTS OF AN UNPAID SELLER

An unpaid seller has the following two broad categories of rights :
I. Rights of unpaid seller against the goods.
II. Rights of unpaid seller against the buyer personally.
330 Business Laws
RIGHTS OF UNPAID SELLER AGAINST THE GOODS

In order to protect the interests of the unpaid seller and to enable him to
look to the goods as kind of security for payment of the price the law has
developed certain rights.
According to Section 46(1) of the Act, the unpaid seller has three distinct
rights even though property in the goods may have passed to the buyer.
These rights are :
1. Right of lien on the goods for the price,
2. Right of stoppage of goods in transit, and
3. Right of re-sale.
The above rights do not depend upon any agreement, express or implied,
between the parties. They arise by implication of law. However, they are
subject to the provisions of the Sale of Goods Act and of any law for the time
being in force.
Section 46(1) presumes that property in the goods has been transferred.
Section 46(2) extends similar protection to an unpaid seller if the property in
the goods has not been transferred to the buyer. It declares that “Where the
property in the goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and
co-extensive with his rights of lien, and stoppage in transit where the property
has passed to the buyer.”
Rights of Unpaid Seller against the Goods
Where property in goods Where property in goods has

has passed to the buyer not passed to the buyer
Right of Right of Right of Right of Right of Right of Right of

Lien Stoppage Resale Withholding Lien Stoppage Resale
in Transit Delivery in Transit
Fig. 20.1
1. RIGHT OF LIEN (SECTION 47, 48 AND 49)

‘Lien’ is the right of a person to retain the possession of the goods
belonging to another until claim of the person in possession are
satisfied. The unpaid seller has right of lien over the goods for the
price of the goods sold.
According to Section 47(1) of the Act the unpaid seller who is in
possession of the goods is entitled to exercise this right in the following cases :
(a) where the goods have been sold without any stipulation as to credit;
Remedies for Breach of Contract of Sale 331
(b) where the goods have been sold on credit but the term of credit has
expired;
(c) where the buyer has become insolvent, even though the period of
credit may not have yet expired.
It may be noted that as per clause (8) of S. 2, a person is said to be
insolvent who has ceased 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.
Conditions necessary for exercise of this right. The following
conditions are necessary for exercising the right of lien :
1. The unpaid seller has continued to keeps the possession of the goods.
2. The buyer has not paid or tendered the whole of the price of the
goods.
3. The goods have not been sold on credit; or the goods have been sold on
credit and the period of credit has expired; or the buyer has become
insolvent whether period of credit, if any, has expired or not.
4. There is no term in the contract to the contrary.
The following points should be noted regarding the right of lien :
(i) Possessory lien (S. 47). Since the right of lien depends upon
possession of the goods, it is a possessory lien. It is lost when possession is
given up. However, his right is not defeated merely because he has
transferred the documents of title to the goods to the buyer. Thus the transfer
of property in the goods or transfer of documents of title to the goods does not
affect the exercise of this right, provided the goods are in the actual possession
of the seller. However, if the buyer has transferred the documents of title to a
bonafide purchaser, then as per S. 53 the seller losses his right of lien. The
seller’s lien if the property in the goods has not passed is termed as ‘a right of
withholding delivery’ as per S. 46(2).
Further the seller, as per S. 47(2) may exercise his right of lien even
though he is in possession of goods as agent or bailee for the buyer. This is
applicable only when the seller has assumed the position of an agent or bailee
for the buyer only by attornment and there has been no change in the
possession.
(ii) Lien only for price. The right of lien is only for the price of the
goods sold. Therefore, the unpaid seller cannot claim a lien for storage
charges or any other expenses incurred by him while exercising his right of
lien for the price. The seller can exercise the right of lien on whole of the
goods even through he has received part payment for those goods.
(iii) Part delivery (S. 48). Section 48 of the Act states that “Where an
unpaid seller has made part delivery of the goods, he may exercise his right of
lien on the remainder, unless such part delivery has been made under such
circumstances as to show an agreement to waive the lien.” Thus, the part
delivery should not be in progress of the delivery of the whole.
332 Business Laws
Loss of lien. In the following circumstances the right of lien is lost.

These are :
(a) By delivery to a carrier (S. 49). The unpaid seller of goods loses his
lien thereon when he delivers the goods to a carrier or other bailee for the
purpose of transmission to the buyer without reserving the right of disposal of
goods.
(b) By delivery to buyer (S. 49). The right of lien is also lost when the
buyer or his agent lawfully obtains possession of the goods. The term
‘lawful’ in this context means ‘with the consent of the seller’.
(c) By waiver (S. 49). The seller may waive his right of lien. Since the
right of lien is for the benefit of the seller, if he so chooses, he may waive his
right. For example, if the seller originally refused to sell the goods on credit,
but later allows the buyer to take possession before payment of the price, he
is presumed to have waived his right. Similarly, when the seller parts with
the documents of title and they are transferred to a third party who receives
the same in good faith and without notice of the lien, the lien is waived.
(d) By tender of price. Where the seller tenders the price, the right of
lien is lost.
2. RIGHT OF STOPPAGE OF GOODS IN TRANSIT (SECTIONS 50, 51

AND 52)
The right of stoppage of goods in transit means the right of
stopping the goods in transit after the seller has parted with the
possession of them. Thereafter the seller regains the possession of
the goods and retains it until payment or tender of the price.
“It is a right founded upon the plain reason that one man’s goods shall
not be applied to the payment of another man’s debt.” [Booth Steamship
Co. Ltd. vs. Cargo Fleet Iron Co. Ltd., (1916) 2 KB 570 (CA)].
Conditions necessary for the exercise of the right. According to S.
50, an unpaid seller can exercise the right of stoppage of goods in transit if
the following conditions are satisfied :
(a) The buyer must have become insolvent.
(b) The property must have passed to the buyer.
(c) The unpaid seller must have parted with the possession of the goods
and the buyer must not have acquired it, that is, goods must be in
transit. In other words, the goods must be in the possession of a
carrier who holds the goods as an independent contractor.
(d) The unpaid seller must not have been prevented by any other
provision of the Act from exercising the right.
The unpaid seller can exercise this right only where the goods have
become the property of the buyer. If the property in goods has not passed to
the buyer, the seller may withhold them by virtue of his ownership.
Duration of transit. One of the conditions subject to which the right of

stoppage in transit can be exercised is that the goods should be in the course
of transit. This implies that the goods should not be in the possession of
either the seller or the buyer, or even their respective agents.
Section 51(1) of the Act has laid down that “Goods are deemed to be in
course of transit from the time when they are delivered to a carrier or other
bailee for the purpose of transmission to the buyer, until the buyer or his agent
in that behalf takes delivery of them from such carrier or the baillee.”
Section 51(4) provides that if the goods are rejected by the buyer and the
carrier or other baillee continues in possession of them, the transit is not
deemed to be at an end even if the seller has refused to receive them back.
Termination of Transit and Loss of Right of Stoppage in Transit.
Section 51 of the Act has laid down the following circumstances in which
transit comes to an end and the seller loses his right of stoppage in transit :
(a) Delivery to buyer at the appointed destination [S. 51(1)]. Transit
comes to an end when the goods reach their destination, and the buyer or his
agent obtains delivery thereof.
CASE : In the leading case GIP Rly. Co. vs Hanumandas [ILR (1989) 14 Bom. 57],
the seller sent the goods to the GIP Rly. Co. for transportation to the buyer. When the
goods arrived at the destination the Rly. Co. delivered the goods to the buyer who
loaded them on his cart. Before the cart had left the railway compound, the Rly. Co.
received a telegram to stop the goods. The Rly. Co. did not stop the goods and it was
sued by the seller. It was held that the transit had ended as soon as the goods were
handed over to the buyer. The Rly. Co. was, therefore, not entitled to stop the goods.
But where the buyer does not accept the goods because of his insolvency,
even after arriving at the port of destination, the transit does not terminate.
CASE : In James vs. Griffin [(1837) 2 MSW 623], the buyer refused to accept the
goods on their arrival at the port of destination on account of his insolvency. When the
goods were so lying at the port of destination, the seller’s instruction to stop them was
received. The trustee of the insolvent buyer filed a suit against the seller for the goods.
It was held that the goods were effectively stopped by the seller. The goods were in
transit at that time as the buyer had refused to accept the goods.
(b) Interception by buyer [S. 51(2)]. If the buyer or his agent in that
behalf obtains delivery of the goods before their arrival at the appointed
destination the transit is at an end. But the mere fact that the buyer takes
his seat as a passenger in the ship which is carrying the goods does not
amount to delivery to the buyer.
(c) Acknowledgment to the buyer [S. 51(3)]. If, after the arrival of the
goods at the appointed destination, the carrier or other bailee acknowledges
to the buyer or his agent that he holds the goods on his behalf and continues
in possession of them as a bailee for the buyer or his agent, the transit is at
an end. It is immaterial that a further destination for the goods may have
been indicated by the buyer.
334 Business Laws
(d) Delivery on ship chartered by buyer [S. 51(5)]. When goods are
delivered to a ship chartered by the buyer it is a question depending upon the
circumstances of the particular case, whether they are in the possession of the
master as a carrier or as agent of the buyer. The answer to the question
depends on the nature of the charter party. In case, it amounts to a demise of
the ship and buyer has employed the captain, so that the captain is his
servant, then a delivery on board such a ship is a delivery to the buyer. But, if
the owner of the ship retains his own captain and men on board, so that they
are his servants and not of the buyer, the charter of the ship merely secures
to the charterer the exclusive use and employment of the vessel. In the latter
case, a delivery by the seller on board is not a delivery to the buyer, but to a
carrier as an independent contractor.
(e) Wrongful refusal to delivery [S. 51(6)]. Where the carrier or other
bailee wrongfully refuses to deliver the goods to the buyer or his agent in that
behalf, the transit is deemed to be at an end. A wrongful refusal implies that
the buyer is entitled to demand delivery.
CASE : In Bird vs. Brown [(1850) 4 Ex. 786], the buyer was insolvent when the
goods arrived at their destination. An unauthorised person, acting for the seller, gave
stop notice to the carrier. Subsequently the trustee of the insolvent buyer demanded
the goods but the carrier refused to delivery the goods to the buyer,. The carrier
handed them to the unauthorised person. Thereafter the seller ratified the unauthorised
stop notice. It was held that the carrier wrongfully refused to deliver the goods.
(f) Part delivery in progress of the delivery of the whole [S. 51(7].
When part delivery of the goods has been made to the buyer or his agent with
the intention of delivering the whole of the goods, transit is at an end for the
remainder of the goods also even if they are in transit. But where the goods
have been delivered in part and the part delivery does not show an agreement
to give up the possession of the whole of the goods, the seller may stop the
remainder of the goods.
Example. A sells to B 100 bags of 50 kgs. of rice to B at a certain price. A delivers to
B 80 bags and the 20 bags are in transit. B becomes insolvent. A, being unpaid, stops the
20 bags in transit. A is entitled to hold 20 bags until he gets the payment of 100 bags.
Mode of exercising the right of stoppage in transit (S. 52). The

unpaid seller may exercise his right of stoppage in transit either (a) by taking
actual possession of the goods or (b) by giving notice to the carrier or other
bailee in whose possession the goods are.
Such notice may be given either to the person in actual possession of the
goods or to his principal. In case the notice is given to the principal, the notice
to be effectual, must be given at such time and in such circumstances that the
principal, by the exercise of reasonable diligence, may communicate it to his
servant or agent in time to prevent a delivery to the buyer.
When notice of stoppage is given by the seller to the carrier or other
bailee in possession of the goods, it is the duty of such a person to re-deliver
the goods to, or according to the directions of the seller, and all expenses
occasioned by such re-delivery should be borne by the seller himself.
Right of stoppage in transit as an extension of right of lien. The
unpaid seller’s right of lien is the right to retain the possession of the goods
for the price of the goods. The right of stoppage of goods in transit is the
seller’s right to resume possession of the goods as long as they are in the
custody of a carrier for the purpose of transmission to the buyer. It only arises
when the buyer is insolvent, while the lien for the price may be exercised
where the price is due, whether the buyer is solvent or insolvent. Thus, the
right of stoppage of goods in transit is an extension of the right of lien
because it entitles the seller to regain possession of the goods when the seller
has parted with the possession of the goods.
DISTINCTION BETWEEN RIGHT OF LIEN AND RIGHT OF STOPPAGE

IN TRANSIT
Both the rights are designed for the protection of the unpaid seller and
are against the goods. The effect of exercising the right of lien and right of
stoppage in transit is same, because when the seller stops the goods in transit
he resumes the possession of the goods once again and thus reviveshis right
of lien until the price is paid.
The following are the points of difference between the two :
Basis of Distinction Right of Lien Right of Stoppage in
Transit
1. When arises The right of lien arises not The right of stoppage in
only in case of insolvency of transit arises only in case of
the buyer but also in certain insolvency of the buyer.
other cases.
2. Possession of the Unpaid seller can exercise The right of stoppage in
goods the right of lien if he has transit can be exercised by
the possession of the goods. the unpaid seller if he has
Thus it is a possessory lien. parted with the goods.
3. Termination of The right of lien comes to an The right of stoppage in
right end when the seller gives transit can be exercised only
the possession of the goods so long as the goods are in
to an independent carrier transit and it comes to an
for the purpose of end when the buyer acquires
transmission to the buyer. the possession of the goods.
4. Purpose The right of lien is exercised The right of stoppage in
to retain the possession of transit is exercised to a
the goods. regain possession of the
goods.
5. Revival After losing the right of lien, If the goods have been
it may be revived by the delivered to the buyer, the
exercise of right of stoppage right of stoppage in transit is
in transit. lost.
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EFFECT OF SUB-SALE OR PLEDGE BY BUYER ON THE UNPAID

SELLER’S RIGHT OF LIEN AND RIGHT OF STOPPAGE IN TRANSIT
General Rule. According to S. 53 of the Act, the general rule is that the
unpaid seller’s right of lien or stoppage in transit is not affected by any sale
or other disposition of the goods by the buyer.
Example. A sells certain goods to B at a certain price. A delivers the goods to a
carrier for transmission to B. When the goods are in transit B becomes insolvent and A
comes to know of this fact. In the meanwhile B sells the goods to C. The sale of the goods
by B to C will not affect A’s right to stop the goods in transit.
Exceptions. There are two exceptions to the above general rule. They
are as follows :
1. Seller’s consent. A sub-sale by the buyer with the assent of the seller
will defeat the seller’s right of lien and the right of stoppage in transit.
CASE : A sold 80 mounds of barley out of a large stock lying in his granary, to B. Out
of this purchase B sold 60 mounds to C, before the goods have been ascertained. C
obtained delivery order and presented it to A, who informed C that the barley would be
forwarded to him in due course. Thereafter, B became insolvent and A wanted to
exercise the right of lien over the barley which he had sold to B. It was held that A had
assented to the sub-sale of 60 mounds of barley by B to C and therefore cannot
exercise the right of lien over 60 mounds of barley [Knight vs. Wiffin, (1870) 5 QB
660].
2. Transfer of documents of title by seller to the buyer and by the

buyer to sub-buyer. Where a document of title to goods (e.g., bill of lading
and railway receipt), has been issued or lawfully transferred to a buyer, and
the buyer transfers the same to another by way of sale or pledge, then in the
case of a sale, the unpaid seller’s rights are defeated and, in the case of a
pledge, the rights of the unpaid seller can only be exercised subject to the
right of the transferee. It is, however, necessary that the transferee should
take the document of title in good faith and for consideration.
CASE : A (the defendant) sold to B 2,640 bags of mowra seed, from out of a
consignment of 6,400 bags and gave him the delivery orders. B paid A by cheque. B
sold the goods to C (the plaintiff) who got the delivery orders indorsed. The cheque
given by B to A was dishonoured. On dishonour of the cheque, A refused to make
delivery to C. In an action by C, it was held that the delivery order was a document of
title which had been transferred to C, and C, having taken by delivery order in good
faith and for valuable consideration, A’s right of lien as unpaid seller was defeated [Ant
Jurgens Margarine Fabrieken vs. Louis Dreyfus & Co., (1914) 3 KB 40].
3. RIGHT OF RE-SALE (SECTION 54)

An unpaid seller who has exercised his right of lien or stoppage in transit
is also empowered to effect re-sale of the goods. This is known as ‘right of
resale’ since the subject-matter has already been sold and property in it has
already passed to the buyer.
A contract of sale is not rescinded by the mere exercise by an unpaid

seller, of his right of lien or stoppage in transit [S. 54(1)].
This obviously means that the contract still remains in force, and it is
open to the buyer to pay or tender the price and take delivery of the goods at
any time. In other words, although the unpaid seller has exercised the right
of lien or stoppage in transit, the rights and obligations created by the
contract still continue.
When the unpaid seller re-sells the goods, he sells them as an unpaid
seller and not as an agent of the buyer.
The Supreme Court has held that the statutory power of resale
under Section 54(2) arises if the property in goods has passed to the
buyer subject to the lien of the unpaid seller. Where the property in
goods has not passed to the buyer, the seller has no right of re-sale; and in
such a case the seller can claim as damages the difference between the
contract price and the amount realised on re-sale of the goods [P S N S
Ambalavana Chettiar & Co. Ltd. vs. Express Newspapers Ltd., AIR
1968 SC 741].
Having sold the goods, the property in which has passed to the buyer, the
unpaid seller cannot re-sell the goods without becoming liable to the buyer.
Further, merely because the buyer did not pay or tender the price, property in
the goods cannot revest with the unpaid seller. On the other hand, he cannot
also wait until such a time as the buyer pays or tenders the price. Obviously
the law cannot allow the things to stand in that position indefinitely.
Therefore, Section 54 of the Act has given the right of re-sale to
an unpaid seller in certain specific circumstances. These
circumstances are as follows :
(a) Where goods are of a perishable nature. The unpaid seller who
has exercised the right of lien or stoppage in transit, can re-sell the goods if
they are perishable in nature. There is no definition of ‘perishable goods’. The
phrase would include goods which have tendency to deteriorate in a
mercantile sense as well as those, such as fruits, vegetable and fish, which
cannot be kept for long. In the case of re-sale of perishable goods it is not
necessary for the unpaid seller to give notice to the buyer, of his intention to re-
sell the goods [S. 54(2)].
(b) Where the right of resale is expressly reserved. Where the seller
expressly reserves a right of re-sale in case the buyer should make default,
and, on the buyer making default, re-sells the goods, the original contract of
sale is thereby rescinded. The seller can claim damages, if any, suffered by
him. In this case, the seller can sell the goods even without giving notice to the
buyer of his intention to re-sell.
(c) Where unpaid seller who has exercised the right of lien or
stoppage in transit gives notice to the buyer. Where the unpaid seller,
who has exercised his right of lien or stoppage in transit, gives notice to the
buyer of his intention to re-sell the goods, he may, if the buyer does not
338 Business Laws
within reasonable time pay or tender the price, re-sell the goods within
reasonable time and recover damages for any loss occasioned by buyer’s
breach of contract.
It is necessary that goods must be re-sold by the unpaid seller within
reasonable time. It has been held that if there is unreasonable delay in
making the re-sale after notice to the buyer and due to such delay,
particularly in the falling market, the value realised on re-sale does not
afford a good ground to fix the damages [Mysore Sugar Co. Ltd. vs.
Manohar Metal Industries, AIR 1982 Kant 283].
Consequences of re-sale
(1) Treatment of loss suffered by re-sale and that of surplus or
profit on sale. The unpaid seller, in the above three cases, i.e., when there is
a proper sale, can recover from the original buyer any loss suffered by him as a
result of re-sale. In case the re-sale results in a surplus or profit, it accrues
only to the unpaid seller and not to the original buyer. However, when neither
the goods are of perishable nature nor the seller reserves the right of sale,
then notice should be given by him of his intention to re-sell the goods. If
notice of re-sell is not given to the buyer where it is required, as in case (c )
above, position is reversed. In such a case, the unpaid seller will not be able to
recover from the original buyer, and loss occasioned by the re-sale; and if there
is any surplus or profit on re-sale, the unpaid seller will not be entitled to it,
and the same will be handed over to the original buyer. Thus, giving of notice
by the unpaid seller to the buyer when it is so required is necessary making
for the buyer liable for loss occasioned by his breach of contract.
Examples : (i ) A sold non-perishable goods to B for 50,000. B has not paid any
R
part of the price to A. The amount became due. A gave to B the notice of his intention to
resell the goods. B did not make any payment to A even after the notice within reasonable
time. A sold the goods to C for 54,000. A can keep the surplus of 4,000 also.
R R
(ii ) If in the Example 1 good are sold for R 48,000, other things remaining the same, A
can recover the loss of 2,000 from B.
R
(iii ) If in the Example 2, B had already made part payment of R 10,000, other things
remaining the same, A will return to B 8,000.
R
(2) Re-sale does not affect the title of the new buyer. Where an
unpaid seller who has exercised his right of lien or stoppage in transit, re-
sells the goods, the buyer acquires a good title as against the original buyer,
even when no notice of re-sale has been given to the original buyer [S. 54(3)].
Thus, Section 54(3) is an exception to the general rule contained in Section 27
that a seller cannot convey a better title to his buyer than that of his own.
RIGHTS OF UNPAID SELLER AGAINST THE BUYER PERSONALLY*

So far, we have discussed the rights of an unpaid seller against the goods.
Besides these rights, which are also known as ‘real remedies’, the unpaid
* This topic is not in the syllabus of B.Com. and B.Com. (Hons.), Delhi University.
seller, has his personal action for breach of the contract. The rights which he
can enforce against the buyer personally are known as ‘personal remedies’.
The following are the remedies of the seller against the buyer personally :
1. Suit for price (S. 55). (a) When the property in the goods has passed to
the buyer, the seller may maintain an action for the price against the buyer if
the buyer neglects or refuses to pay for the goods [S. 55(1)].
(b) Where under a contract the price is payable on a certain day,
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 [S. 55(2)].
2. Suit for damages for non-acceptance (S. 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. Section 56 deals with general
.damages. General or ordinary damages are assessed in accordance with
Section 73 of the Indian Contract Act, 1872.
3. Suit for damages for repudiation of contract before due date (S.
60). If the buyer repudiates the contract of sale before the date of delivery,
the seller may (a) treat the contract as subsisting and wait till the date of
delivery, or (b) treat the contract as rescinded and sue the buyer for damages
for the breach. This is the principle of anticipatory breach of contact laid
down in Section 39 of the Indian Contract Act.
Example. On 1st March, 2002 A agrees to sell to B 100 bags of rice at 2,000 per
R
bag, the rice to be delivered on 20th March, 2002. On 10th March, 2002 B informs A that
he will not accept the goods. Afterwrds, A, on the same date, sold the rice at the rate of
R1,800 per bag. A is entitled to claim from B damages at the rate of 200 per bag.
R
4. Suit for interest and special damages (S. 61). The seller has the
right to recover interest or special damages in any case where by law interest
or special damages may be recoverable. In the absence of a contract to the
contrary, the court may award interest as such rates as it thinks fit. Interest
may be calculated from the date of tender of goods or from the date, if any, on
which price was payable.
CASE : In M.K.M. Moosa Bhai Amin vs. Rajasthan Textile Mills [AIR 1974 Raj.
194], there was delay in payment of price by one year. Even though there was no
provision in the contract for payment of interest, the buyer was held liable to pay
interest @ 6% p.a. for the period of delay.
BUYER’S RIGHTS AGAINST SELLER*

The buyer’s remedies or rights against the seller for breach of contract
are as follows :
1. Suit for damages for non-delivery (Sections 57 and 61). According
* This topic is not in the syllabus of B.Com. and B.Com. (Hons.) of Delhi University.
340 Business Laws
to Section 57 of the Act, “Where the seller wrongfully neglects or refuses to

delivery the goods to the buyer, the buyer may sue the seller for damages for
non-delivery.” Thus, the buyer may bring an action against the seller for non-
delivery of the goods contracted for and recover damages from him.
The damages are assessed in accordance with S. 73 of the Indian Contract
Act, that is, the measure of damages will be the estimated loss directly and
naturally arising, in the ordinary course of events, from the seller’s breach of
contract. If the goods have a ready market the measure of damages is the
difference between the contract price and the market price as at the date of
breach contract. But where the goods do not have a ready market, the
amount of damages depends upon the facts of each case. The buyer is under a
duty to mitigate his loss by taking reasonable steps. According to S. 61, the
buyer can sue the seller for ‘special damages’ also which were in the
contemplation of the parties when they entered into the contract.
2. Suit for specific performance (S. 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 thinks 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
payment of damages.” (S. 58).
Thus, where there is a breach of contract for the sale of specific or
ascertained goods, the buyer may file a suit for specific performance of the
contract.
CASE : In Re Wait [(1927) 1 Ch 606], out of consignment of 1,000 tons of wheat

which belonged to A, he sold 500 tons to B, who paid for it. A then became insolvent.
On arrival of the ship, the 500 tons were not separated from the rest and trustee of A
refused to deliver the goods to B. It was held that B was not entitled to recover the
goods by a decree of specific performance as the goods were neither “specific” at the
time of contract nor subsequently ascertained.
3. Suit for rescission of contract and for damages for breach of

condition [S. 12(2)]. In case of breach of condition by the seller the buyer is
entitled to repudiate the contract.
4. Remedy for breach of warranty (S. 59). Where there is a breach
of warranty by the seller, or where the buyer elects or is compelled to treat
breach of 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 breach of warranty in diminution of the
price, or
(b) sue the seller for damages for breach of warranty.
The fact that a buyer has set up a breach of warranty in diminution or
extinction of the price does not prevent him from issuing the same breach of
warranty if he has suffered further damage.
5. Repudiation of contract before the due date (S. 60). Repudiation

of the contract of sale by the seller before the date of delivery entitles the
buyer either to treat the contract as subsisting and wait till the date of
delivery, or to treat the contract as rescinded and sue the seller for damages
for the breach. [For details see Anticipatory Breach of Contract, i.e. S. 39 of
the Indian Contract Act.]
6. Suit for recovery of the price paid together with interest (S. 61).
Where the buyer repudiates the contract having a right to do so, he is entitled
to get back the purchase money paid under the contract and in a suit by him
for the refund of the price, he may also get interest. Section 61 provides that
in the absence of a contract to the contrary the court may award interest on
the amount of the price at such rates as it thinks fit to the buyer from the
date on which payment was made to the date of refund. Generally an interest
@ 6% is allowed in such a case.
REVIEW QUESTIONS
1. Who is an unpaid seller ? Discuss briefly, his rights under the Sale of Goods
Act.
2. Who is an unpaid seller ? Compare his rights of lien and stoppage in transit.
[B.Com. (H), D.U.]
3. When can a seller of goods be deemed to be an unpaid seller ? What
conditions must be fulfilled before the right of lien over the goods sold may be
exercised by the seller ?
4. What is meant by ‘stoppage in transit’ ?
5. Who is an unpaid seller ? What are his rights against the buyer personally
and against the goods ?
6. Describe the rights of an unpaid seller against the goods.
7. Distinguish between right of lien and right of stoppage in hansitt.
[B.Com D.U.]
8. A seller becomes an unpaid seller when the price has not been paid.
Comment. [B.Com. (Hons), D.U]
9. Write a note on : Right of unpaid seller to resell the goods.
10. Describe the rights of an unpaid seller against the buyer personally.
11. Rights of stoppage of goods in transit is an extension of unpaid seller’s right
of lien.” Comment. [B.Com. (H), D.U.]
12. When and in what circumstances can a seller exercise the right of resale ?
13. Describe the right of lien and right of stoppage of goods in transit of an
unpaid seller. How are these rights affected by sub-sale or pledge by the
buyer ? [B.Com. (H), D.U.]
14. Who is an unpaid seller ? Explain the concept of transit for the purpose of
exercising the ‘right of stoppage’ in transit by the unpaid seller.
15. Explain the necessary conditions for exercising the right of lien and right of
stoppage in transit.
16. Discuss the remedies available to the seller buyer against the
personally for breach of contract of sale.
17. Discuss remedies available to the buyer for breach of contract of sale by the
seller.
342 Business Laws
(a) Right of stoppage in transit can be exercised by an unpaid seller only
when the buyer has become insolvent.
(b) Right of lien is lost when the unpaid seller transfers the documents of
title to the buyer.
(c) The unpaid seller must give a notice of resale irrespective of the nature of
goods.
(d) Transit comes to an end where the carrier wrongfully refuses to deliver
the goods to the buyer.
(e) ‘Right of lien’ and ‘right to stoppage the goods in transit’ may be
exercised simultaneously by an unpaid seller.
[Hints : True : (a), (d); False : (b), (c), (e)].
PRACTICAL PROBLEMS
1. A, an unpaid seller, sends goods to B by railway. B becomes insolvent and A
sends a telegram to railway authorities not to deliver goods to B. B goes to
the railway yard, presents the Railway receipt and takes delivery of the goods
and starts putting them on his cart. Meanwhile the Station Master comes
running with the telegram in hand and takes possession of the goods from D.
Discuss the rights of A and B to the goods in possession of Railway
authorities.
[Hint: A cannot exercise the right of stoppage in transit [GIP Railway Co.
vs. Hanumandas, ILR (1889) 14 Bom 57].
2. A sells goods to B and transfers him the document of title to the goods. B
makes the payment to A through a cheque. B sells the goods to C and
transfers the documents of little to C. Before C could obtain the delivery of
goods, B’s cheque has been dishonoured by the-bank. A does not deliver the
goods to C on the plea that B’s cheque has been dishonoured. Is A’s action
justified ?
[Hint: No, A’s action is not justified. The unpaid seller’s right of lien or
stoppage in transit is defeated if the seller has issued to the buyer documents
of title to the goods and the buyer has sold the goods by transferring the
documents of title to a sub-buyer (S. 53).]
3. A sells and consigns to B goods of the value of 50,000 on credit. B assigns
R
the railway receipt as security to C for taking a loan of 20,000. Before the
R
goods reach the destination B becomes insolvent. Can A give notice to stop
the goods in transit ?
[Hint : Yes, A can stop the goods in transit but his right of stoppage in transit
can be exercised subject to the rights of C. Thus A can stop the goods in
transit when he pays 20,000 to C.]
R
4. A sells certain goods to B, the delivery of goods to take place on 1st

November, 20x2 and the payment to be made by B on 1st October, 20x2. B
refuses to pay the price on the due date on the plea that the property in the
goods has not passed to him. Can A sue for the price before the delivery of
goods takes place?
[Hint : Yes, A can sue B for the price. Where the sale price is payable on ‘a
certain day 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. (S. 55).]
5. A sold 50 bags of rice on credit to B lying in his godown. The goods continues
to be kept in the godown on rent charged to the buyer. Before the period of
credit expired B became insolvent. A seeks to exercise the right of lien on the
goods. Can he do so ?
[Hint : Yes, A is entitled to exercise the right of lien for the price of the goods
(S. 47).]
6. A sold 80 maunds of barley, out of a large stock lying in his granary, to B. Out
of this purchase B sold 60 maunds to C, before the goods have been
ascertained. C obtained delivery order and presented it to A, who informed C
that the barley would be forwarded to him in due course. Thereafter, B
became insolvent and A wanted to exercise the right of lien over the barley
which he had sold to B. Decide.
[Hint : A had assented to the sub-sale of 60 maunds of barley by B to C and
therefore cannot exercise the right of lien over 60 mounds of barley. He can
exercise this right in respect of the remainder 20 maunds. [Knight vs.
Wiffin, (1870) 5 QB 660]
7. A agrees to sell certain goods to B on a certain date on seven days credit. The
period of seven days expired and goods were still in the possession of A. B has
not paid the price of the goods. B becomes insolvent. A refuses to delivery the
goods in exercise of the right of lien. Decide.
[Hint : A can exercise the right of lien.]
8. There was a contract for sale of a car for 4,00,000, the buyer deposited
R
R10,000. But afterwards, despite reasonable notice did not pay the price. The
seller then sold the car for 3,75,000. Whether the seller is entitled to recover
R
the shortfall in the price of the car from the buyer ?

[Hint : The seller is entitled to recover the shortfall in the price of the car
from the buyer. The buyer is entitled to claim the refund of the deposit but
subject to seller’s claim for damages.]
9. A delivered goods to carrier to be taken to buyer B. B sent the documents of
title to B. On the basis of documents of title, B sold the goods to a sub-buyer
C. In the meantime B became insolvent. A sought the goods in transit. Can be
do so ?
[Hint : A cannot stop the goods in transit in this case because on the basis of
documents of title B has sold the goods to C.]
10. Y who lives in Pune, orders bales of cotton from X at Mangalore, the bales to
be delivered to him at Pune. X sends the goods to Mumbai where they are
handed over to Z, a wharfinger, for onwards transmission to Pune. Can the
goods be said to be ‘in transit’ while they are in the possession of Z ?
[Hint. Yes, the transit is not over.]
11. X sells certain bales of cotton to Y, and sends him the railway receipt,. When
X is still unpaid, he comes to know that Y has become insolvent. While the
goods are still in transit Y assigns the railways receipt for cash to Z, who is
not aware of Y’s insolvency. Can X stop the goods in transit ?
[Hint. No. See Sec. 53.]
12. In Problem 11 given above, if Z knows that B is insolvent, can X stop the
goods in transit ?
[Hint. Yes See S. 53.]
21 Auction Sale*
LEARNING OBJECTIVES
After studying this chapter, you will understand legal provisions regarding auction
sale.
An auction sale is a sale where the auctioneer invites bids from

prospective buyers who assemble at a particular place and goods are
usually sold to the highest bidder. The auctioneer who sells the goods by
auction is either the seller himself or an agent of the seller. An advertisement
to sell the goods by auction is a mere invitation to the public to make offers
and not an offer to sell.
LEGAL PROVISIONS AS REGARDS AUCTION SALE

The following are the provisions regarding auction sale as per Section 64 :
1. Goods put up for sale in lots. Where goods are put up for sale in
lots, each lot is prima facie deemed to be the subject of a separate contract of
sale. [S. 64(1)].
2. Completion of sale. The sale is complete when the auctioneer
announces completion by the fall of the hammer or in any other customary
manner, and until such announcement is made any bidder may retract his
bid. [S. 64(2)].
As pointed out in the legal rules regarding offer, an advertisement for
holding an auction sale, is ‘an invitation to offer’. The ‘bid’ given at the time of
auction sale is ‘offer’ and the fall of hammer or other customary method of
accepting the bid is ‘acceptance’. It should be noted that S. 64 does not deal
with the question of passing of property. It merely deals with the completion
of sale. If conditions of S. 20 are not satisfied, property will not pass even if
the goods have been knocked down to a bidder. Further S. 64 is subject to S.
62. Thus, an auctioneer can modify the terms and conditions implied by S. 64
in respect of auction sale.
In Coffee Board vs. Famous Coffee and Tea Works [AIR 1965 Mad
14], it was held that the auctioneer has the right to make the auction subject
to any conditions he likes. In this case one of the conditions for the auction
sale of coffee was: “The seller does not bind himself to accept the highest bid;
he is not bound to assign any reason for his decision and his decision shall be
* Auction Sale is not in the syllabus of B.Com. and B.Com. (Hons.), Delhi Univ.
AUCTION SALE ■ 345
final and conclusive.” This was held to be a valid term of the auction sale.
This principle has been approved by the Supreme Court in M. Lachia Setty
vs. Coffee Board [(1980) 4 SCC 636].
Where the goods are destroyed or damaged before the completion of sale,
the seller will bear the loss.
3. Right of seller to bid. A right to bid may be reserved expressly by or
on of the seller and, where such right is expressly so reserved, but not
otherwise, the seller or any one person on his behalf may bid at the auction.
[S. 64(3)].
4. Sale not notified to be subject to a right to bid. Where the sale is
not notified to be the subject to a right to bid on behalf of the seller, it is not
lawful for the seller to bid himself or to employ any person to bid at such sale,
or for the auctioneer knowingly to take any bid from the seller or any such
person. Any sale contravening this rule may be treated as fraudulent by the
buyer [S. 64(4)].
If the seller makes a pretended bid to raise the price without expressly
notifying, the sale is voidable at the option of the buyer. [S. 64(6)].
5. Reserve price. The sale may be notified to be subject to a reserve or
upset price - a price below which the auctioneer will not sell. [S. 64(5)].
Where the sale is notified to be subject to a reserve price and the goods
are knocked down below the reserve price without the concurrence of the
seller, no enforceable contract comes into existence.
REVIEW QUESTIONS
1. Write a short note on ‘Auction Sale’.
2. What is an auction sale? State the legal rules regarding auction sale.
(a) In an auction sale, a bid once given cannot be withdrawn.
(b) An auctioneer can modify the terms and conditions implied by S. 64 in
respect of an auction sale.
[Hints: True: (a), (b)]
PRACTICAL PROBLEMS
1. At an auction sale, A makes the highest bid for a flower vase. Purporting to
accept bid, the auctioneer strikes the vase and breaks it. Who is to bear the
loss?
Would your answer be different if the auctioneer had struck the table on
which vase was kept with the hammer and vase fell down and broke to
pieces.
[Hint: The loss in both cases is to be borne by the owner of the vase (S. 64).]
2. At a sale by auction without reserve, the auctioneer is instructed not to sell
the goods for less than a certain price. The auctioneer accepts the highest bid
which, however, is less than the price told by the auctioneer’s principal. Is the
sale valid?
[Hint: The sale is valid. (S. 64).l
Objectives, Scope and

22 Definitions
LEARNING OBJECTIVES
➥ Rationale or Objectives of passing the Information Technology Act, 2000
➥ Features of Information Technology Act, 2000
➥ Scope of the Act
➥ Definitions
➥ Difference between Paper based and Electronic Documents
Digital technology and new communication system have made dramatic

changes in our lives. Business transactions are being made with the help of
computers. Business community as well as individuals are increasingly using
computers to create, transmit and store information in the electronic form
instead of traditional paper documents.
Information stored in electronic form is cheaper. It is easier to store,
retrieve and speedier to communicate. People were aware of these advantages
but they were reluctant to conduct business or conclude transactions in the
electronic form due to lack of legal framework.
The term ‘information technology’ includes hardware, databases,
programs and other internet related equipment used for storage, processing
and transmission of information across computer network [Encyclopedia on
Information Technology Law, Vol. II Sweet and Maxwell (2001), Page
201]. Information technology has improved efficiency, cost- effectiveness and
productivity at the individual as well as business or government level. Now-a-
days people communicate through their social networking sites such as
Facebook, Twitter, etc. and also transact business through the use of
internet.
At present many legal provisions recognise paper based records and
documents which should bear signatures. Electronic commerce (in short, e-
commerce) eliminates the need for paper based transactions. Therefore, to
facilitate e-commerce there was need for legal changes.
Objectives, Scope and Definitions 347
The United Nations Commission on International Trade Law.

(UNCITRAL) adopted the Model Law on Electronic Commerce in 1996. India
being a signatory to it had to revise its laws as per the said Model Law. The
Act is based on the Resolution A/RES/51/162 adopted by the General
Assembly of the United Nations on 30th January, 1997 regarding the Model
Law on Electronic Commerce. The Act facilitates international trade. Keeping
in view the urgent need to bring suitable amendments in the existing laws to
facilitate e-commerce and with a view to facilitate electronic commerce and
electronic governance, the Information Technology Bill, 1999 was introduced
in the Parliament. The Information Technology Bill was passed by both the
Houses of the Parliament and it received the assent of the President on 9th
June, 2000 and became the Information Technology Act, 2000 (21 of 2000).
RATIONAL OR OBJECTIVES OF PASSING THE INFORMATION

TECHNOLOGY ACT, 2000
1. Information stored in electronic medium is cheaper, easier to
store and retrieve, and speedier to communicate.—In the modern time,
communication systems and digital technology have made dramatic changes
in the way we live. A revolution is occurring in the way, people transact
business. Business enterprises and consumers are using computers to create,
transmit and store information in the electronic form instead of traditional
paper documents. This is so because the information stored in electronic form
has many advantages. It is cheaper, easier to store and retrieve, and speedier
to communicate.
2. Legal recognition of electronic records and digital electronic
signature.—It was enacted by the Indian Parliament to provide legal
recognition for transactions carried out by means of electronic data
interchange and other means of electronic communication, commonly referred
to as “electronic commerce”. To facilitate e-commerce, the Information
Technology Act was passed to give legal recognition to the digital signature to
enable the conclusion of contracts and to provide for a regulatory regime to
supervise Certifying Authorities issuing Digital/Electronic Signature
Certificates.
3. Civil and criminal liabilities.—To prevent the possible misuse
arising out of transactions and other dealings over the electronic medium the
Act provides for civil and criminal liabilities for contravention of the
provisions of the Act.
4. Electronic governance.—With a view to facilitate e-governance, the
Act provides for use and acceptance of electronic records and digital
signatures in the government offices and its agencies.
5. Consequential amendment in other Acts.—There was need for
bringing in suitable amendments in the existing laws in the country to
facilitate e-commerce and e-governance. Therefore, consequential
amendments have been made in the Reserve Bank of India Act, 1934 to
348 Business Laws
facilitate electronic fund transfers between financial institutions and banks.

Similarly, amendments were made in the Indian Penal Code and the
Evidence Act, 1872, Banker’s Books Evidence Act, 1891 to provide for
necessary changes in the various provisions which deal with offences relating
to documents and paper based transactions.
FEATURES OF INFORMATION TECHNOLOGY ACT, 2000

The following are the main features of the Act:
(a) Legal recognition to electronic commerce.—The Act provides
legal recognition for transactions carried out by means of electronic data
interchange and other means of electronic communication, commonly referred
as “electronic commerce”, which involve the use of alternatives to paper-based
method of communication and storage information.
IT Act creates conducive environment for promoting e-commerce in the
country.
(b) Legal recognition to electronic records and digital/electronic
signature.—The Act has granted legal recognition to electronic records and
digital signatures. The Act provides for use and acceptance of electronic
records and digital signatures in the government offices and its agencies. It
provides for acceptance of electronic documents as evidence in a court of law.
It provides for acceptance of digital/electronic signatures at par with
handwritten signatures.
(c) Regulatory regime to supervise Certifying Authorities.—The
Act provides a regulatory regime to supervise Certifying Authorities issuing
Digital Signature Certificates.
(d) Electronic Governance.—With a view to facilitate Electronic
Governance, the Act provides for use and acceptance of electronic records and
digital signatures in the government offices and its agencies. This has been
provided to make the citizens interaction with the Government offices hassle
free.
(e) Civil and criminal liabilities.—The Act provides for civil and
criminal liabilities for contravention of the provisions of the Act.
(f) Adjudicating Officers.—To know whether any person has
committed a contravention of the provisions of the Act or of any rule,
regulation, direction or order made thereunder, the Act provides for
appointment of adjudicating officer for holding an inquiry in the manner
prescribed by the Central Government.
(g) Offences committed outside India.—The Act applies to offences or
contraventions committed outside India also if they relate to a computer,
computer system or computer network located in India.
(h) Cyber terrorism and cyber security.—The Act provides for
punishment for cyber terrorism. It also provides for designating any
organisation of the Government as the national nodal agency in respect of
Critical Information Infrastructure Protection (CUP) by the Central

Government.
(i) The Tribunal. The Act provides for speedy adjudication of cases
arising out of the Act by Telecom Dispute Settlement and Appellate Tribunal.
SCOPE OF THE ACT

The Act extends to the whole of India (including Jammu and Kashmir). It
applies also to any offence or contravention committed outside India by any
person, irrespective of his nationality if the act or conduct constituting the
offence or contravention involves a computer, computer system or computer
network located in India. The Act came into force on 17th October, 2000.
Non Applicability of the Act

The Act has not been made applicable to certain instruments/documents
as there are legal issues concerning conversion of said instruments/
documents into their electronic functional equivalent (electronic records).
These instruments/documents are as follows :
(1) a negotiable instrument (other than a cheque) as defined in section 13
of the Negotiable Instruments Act, 1881 (26 of 1881);
(2) a power-of-attorney as defined in section 1A of the Powers-of-Attorney
Act, (7 of 1882);
(3) a trust as defined in section 3 of the Indian Trusts Act, 1881 (2 of
1882);
(4) a Will as defined in clause(h) of section (2) of the Indian Succession
Act, 1925 (39 of 1925) including any other testamentary disposition
by whatever name called;
(5) any contract for the sale or conveyance of immovable property or any
interest in such property.
Note : As per section 2 (h) of the Indian Succession Act, 1925 : “Will is the legal
declaration of the intention of a testator with respect to his property which he
desires to be carried into effect after his death”.
DEFINITIONS UNDER THE ACT (SECTION 2)

The Information Technology Act, 2000 defines the legal scope of certain
important terms and concepts of information technology. These definitions
help in understanding concepts and legislative intent. These are explained
below :
1. Access [S. 2(1)(a)]. Access’ means gaining entry into, instructing or
communicating with the logical, arithmetical or memory function resources of
a computer, computer system or computer network. It covers both physical and
virtual access to a computer, computer system or compute network. Physical
access means ‘physically present’; and virtual access means being ‘remotely
connected’ using satellite, microwave or other communication device.
350 Business Laws
2. Addressee [S. 2(1)(b)]. “Addressee’’ means a person who is intended

by the originator to receive the electronic record but does not include any
intermediary. He is recipient of the electronic record sent by the originator.
3. Adjudicating officer [S. 2(1)(c)]. “Adjudicating officer” means an
adjudicating officer appointed under sub-section (1) of section 46. His power is
to adjudge any person who has committed a contravention under the
provisions (Chapter XI : Penalties, Compensation and Adjudication) of the
Act.
4. Affixing electronic signature [S. 2(1)(d)]. “ Affixing electronic
signature” means adoption of any methodology or procedure by a person for
the purpose of authenticating an electronic record by means of electronic
signature. A person may authenticate an electronic record by affixing his
electronic signature. It determines the identity of the person who has affixed
his electronic signature to authenticate an electronic record.
5. Appropriate Government [S. 2(1)(e)]. “Appropriate Government”
means as respects any matter,—
(i) enumerated in List II of the Seventh Schedule to the Constitution;
(ii) relating to any State law enacted under List III of the Seventh
Schedule to the Constitution.
the State Government and in any other case, the Central Government.
Thus “appropriate Government” is State Government for matters
enumerated in List II (State List) and relating to any State law enacted
under List III (Concurrent List) of the Seventh Schedule to the Constitution.
The “appropriate Government” is the Central Government for any other
matter enumerated in List I (Union List) or List III (Concurrent List) of the
Seventh Schedule of the Constitution.
6. Appellate Tribunal [2(da)]. Appellate Tribunal means the appellate
tribunal referred to in section 48 (1) of the Act. The Finance Act, 2017 has
merged the erstwhile Cyber Appellate Tribunal with the Telecom Disputes
Appellate Tribunal (in short, TDSAT). TDSAT is an appellate authority.
TDSAT is now empowered to exercise appellate jurisdiction both on facts and
on law over the decision or order passed by the Controller of Certifying
Authorities or the adjudicating officer.
7. Asymmetric crypto system [S. (2)(1)(f)]. “Asymmetric crypto system”
means a system of a secure key pair consisting of a private key for creating a
digital signature and public key to verify the digital signature. Thus, the Act
provides a dual-key cryptography, where one is used to encrypt and the other
one to decrypt. Encryption is the transformation of data in the coded form to
prevent information being read by unauthorised parties. Decryption is the
transformation from coded form to original or ordinary writing by means of a
key. [For details : See next chapter].
8. Certifying Authority [S. 2(1)(g)]. “Certifying Authority “ means a
person who has been granted a licence to issue an Electronic Signature
Certificate under section 24. The certificate is issued to subscribers. The

Certifying Authority is granted a licence for this purpose by the Controller.
Controller is defined in S. 2(1)(m).
9. Computer [S. 2(1)(i)]. Computer means any electronic, magnetic,
optical or other high-speed data processing device or system which performs
magnetic or optical impulses.
A computer includes all input, output, processing, storage, computer
software or software facilities which are connected or related to the computer
in a computer system or computer network.
Performance of logical, arithmetic and memory functions is one of the
very important aspect of a computer.
Washing machine cannot come within the definition of computer as it
does not perform arithmetic functions like addition, subtraction, division and
multiplication.
CASE : In Diebold Systems Pvt. Ltd. v. Commissioner of Commercial Taxes [ILR

2005 Ker 5210], it was held that an Automatic Teller Machine (ATM, for short) is an
electronic device. ATM is not a computer by itself and it is connected to a computer that
performs the task requested by the person using ATMs. ATMs would fit into the
description of electronic goods, parts and accessories thereof and therefore, falls under
Entry 4 of the Part ‘E’ of the Second Schedule of the Karnataka Sales Tax Act, 1957
and the basic rate of tax applicable is 12%. ATM is not a computer for the purposes of
Karnataka Sales Act, although technically it may be called computer network.
10. Computer network [S. 2(1)j)]. According to S. 2(1)(j) “Computer

network” means the interconnection of one or more computers through—
(i) the use of satellite, microwave, terrestrial line or other communication
media; and
(ii) terminals or a complex consisting of two or more interconnected
computers whether or not the interconnection is continuously
maintained”
The examples of S. 2(1)(j)(i) of computer network are : internet, satellite
phones, mobile phones, net telephony, ATM machines, Broadband (optical
fibre/cable), etc. The examples of S. 2(1)(j)(ii) of computer network are : Local
Area Network, Wide Area Network, Wi-Fi (Wireless Fidelity), Cloud
Computing, etc.
11. Computer resource [S. 2(1)(k)]. According to S. 2(1)(k)
“Computer resource” means
(a) computer,
(b) computer system,
(c) computer network,
(d) data,
(e) computer data base or software.
352 Business Laws
It includes both hardware and software interface of computer,

communication device, computer system and computer network because a
computer without operating software cannot effectively function.
12. Computer system [S. 2(l)(1)]. S. (2)(1)(l) defines computer system as
follows :
Computer system is a device or collection of devices including:
(a) input support devices such as keyboard, mouse, scanners, digital
camera, microphone etc. and (b) output support devices such as monitor,
printer, speakers, etc.
and capable of being used in conjunction with external files which contain
– computer programmes,
– electronic instructions,
– input data and
– output data
which performs following functions:
– logic,
– arithmetic,
– data storage and retrieval,
– communication control and other functions.
Calculators, which are not programmable, have been excluded from the
scope of the definition of computer system.
Controller [S. 2(1)(m)]. “Controller” means the Controller of Certifying
Authorities appointed under sub-section (1) of section 17.
13. Cyber Security [S. 2(1)(nb)]. Cyber security means
(i) securing computer, computer system and computer network;
(ii) securing devices, products and applications,
(iii) securing hardware and software, and
(iv) securing information and data
from anauthorised access, use disclosure, disruption, modification or
destruction.
14. Data [S. 2(1)(o)]. Data means
(a) representation of information, knowledge, facts, concepts or
instructions which are being prepared or have been prepared in a
formalised manner, and
(b) is intended to be processed, or is being processed or has been
processed in a computer system or computer network, and
(c) may be present in any form (including computer printouts, magnetic
or optical storage media, punched cards, punched tapes) or stored
internally in the memory of the computer.
15. Digital signature [S. 2(1)(p)]. “Digital signature” means
authentication of any electronic record by a subscriber by means of an
electronic method or procedure in accordance with the provisions of section 3.

Digital signature is an actual transformation of an electronic message using
public key cryptography. Digital signature requires a key pair and a hash
function (algorithm). Section 3 of the Act deals with the process of digital
signature creation and its verification. [For details : See next Chapter]
16. Digital Signature Certificate [S. 2(1) (q)]. “Digital Signature
Certificate” means a Digital Signature Certificate issued under sub-section (4)
of section 35. This certificate confirms the identity of the subscriber. It also
certifies the subscriber’s public key and bona fides of the issuer of the
certificate. [For details : See Chapter 28].
17. Electronic form [S. 2(1)(r)]. “Electronic form”, includes audio,
video, data, text or multimedia files generated, sent, received or stored in
media, magnetic, optical, computer memory, micro film, computer generated
micro fische or similar device.
18. Electronic Gazette [S. 2(1) (s)]. “Electronic Gazette” means the
Official Gazette published in the electronic form. By recognising Electronic
Gazette the Act has introduced an important tool for ‘electronic governance’.
19. Electronic record [S. 2(1) (t)]. “Electronic record” means data,
record or data generated, image or sound stored, received or sent in an
electronic form or microfilm or computer generated microfiche. Examples of
“electronic record include audio, video, text or multimedia files generated,
stored, received or sent in an electronic form or micro film or computer
generated micro fische. It may be noted that micro fische is a flat piece of film
containing microphotographs of the pages of a newspaper, catalogue or other
document.
20. Electronic Signature [S. 2(1)(ta)]. “Electronic signature” means
authentication of any electronic record by a subscriber by means of electronic
technique specified in the Second Schedule and includes digital signature.
Electronic signature includes digital signature. The Information
Technology (Amendment) Act, 2008 introduced the technology neutral
concept of ‘electronic signature’. [For details : See next chapter].
2 1 . Electronic Signature Certificate [S. 2(1)(tb)]. Electronic
Signature Certificate means an Electronic Signature Certificate issued under
Section 35 and includes Digital Signature Certificate.
22. Information [S. 21 (1)(v)].”Information” includes data, text, images,
sound, voice, codes, computer programmes, software and data bases or
microfilm or computer generated micro fiche.
23. Intermediary [S. 2(1)(w)]. An intermediary is a link between an
“originator” [S. 2(1)(za)] and an addressee 2(1)(b)[S. 2(1)(b)]. The function of
an intermediary is that of facilitator, a third party service provider.
Intermediary, with respect to any particular electronic records, means any
person who on behalf of another person receives, stores or transmits any
service with respect to that record. It includes (i) telecom service providers, (ii)
354 Business Laws
network service providers, (iii) internet service providers, (iv) web-hosting

service providers, (v) search engines, (vi) on-line payment sites, (vii) on-line
auction sites, (viii) on-line market place and (ix) cyber cafes .
CASE : In Vyakti Vikas Kendra, India Public Charitable Trust through Trustee
Mahesh Gupta & Others v. Jitender Bagga and Another [CS (OS) No. 1340/2012],
Delhi High Court held Google to be “intermediary” within the definition of Section
2(1)(w) of the Information Technology Act, 2000. In this case four plaintiffs filed
successfully a suit against the defendants for damages and permanent injunction
mainly on the ground that they were aggrieved and hurt because of certain defamatory
material posted on www.blogger.com owned by google (defendant No. 2) by Mr.
Jitender Bagga (defendant No. 1)
24. Key pair [S. 2(1)(x)].“ Key pair”, in an asymmetric crypto system,
means a private key and its mathematically related public key, which are so
related that the public key can verify a digital signature created by the private
key.
A key pair is combination of the two keys: Private key and Public key.
25. Originator [S. 2(1)(za)]. Section 2((1)(za) defines originator as
follows:
“Originator, “ means a person who sends, generates, stores or transmits
any electronic message; or causes any electronic message to be sent, generated,
stored or transmitted to any other person but does not include an
intermediary.
A person could be an originator for a particular electronic message and an
addressee for another message. For example, A sends an e-mail to B.B
receives the e-mail. Here A is the originator and B is the addressee. B replies
back to A by sending e-mail to him. Now, B becomes an originator and A an
addressee. Webmail service provider is an intermediary.
26. Private key [S. 2(1)(zc)]. “Private key” means the key of a key pair
used to create a digital signature. Private key is confidential, i.e., known to
the subscriber only. It is an ‘unlisted key’, which belongs to a secure key pair.
27. Public key [S. 2(1)(zd)]. “ Public key” means the key of a key pair
used to verify a digital signature and listed in the Digital Signature
Certificate. Each party is assigned a pair of keys :
(a) private-key which is known to the owner only and
(b) public key-which is widely known. Information encrypted with the
private key can only be decrypted by the corresponding public key.
It fulfills the requirements of confidentiality, integrity, authenticity and
non reputability. In asymmetric crypts-system there is no need to
communicate private keys. Public key is a listed key.
28. Secure system [S. 2(1)(ze)]. Section 2(1)(ze) defines secure system
as follows: “Secure system” means computer hardware, software, and
procedure that—
(a) are reasonably secure from unauthorized access and misuse;

(b) provide a reasonable level of reliability and correct operation;
(c) are reasonably suited to performing the intended functions; and
(d) adhere to generally accepted security procedures.
The definition incorporates ‘reasonableness’ as the criteria to adjudge
whether one has a secure system or not.
29. Security procedure [S. 2(1)(zf)].“Security procedure” means the
security procedure prescribed under section 16 by the Central Government.
30. Subscriber [S. 2(1)(zg)]. “Subscriber” means a person in whose name
the Digital Signature Certificate is issued. A subscriber may be a person,
entity or organisation in whose name such a certificate is issued. The
subscriber certifies that he holds the private key corresponding to the public
key listed in the Certificate. He also certifies that all information in the
Certificate that is within his knowledge is true. In a Public Key
Infrastructure, a subscriber is the customer who pays to become one of the
members of Digital Signature Certificate ‘club’.
31. Verify [S. 2(1)(zh)]. The term “verify” is defined in S. 2(1)(zh) as
follows :
“Verify”, in relation to a digital signature, electronic record or public key,
with its grammatical variations and cognate expressions, means to determine
whether—
(a) the initial electronic record was affixed with the digital signature by
the use of private key corresponding to the pubic key of the subscriber’,
(b) the initial electronic record is retained intact or has been altered since
such electronic record was so affixed with the digital signature.
The verification process grant legal sanctity to digital signatures.
DIFFERENCE BETWEEN PAPER BASED AND ELECTRONIC

DOCUMENTS
Basis Paper Based Documents Electronic Documents
1. Meaning 1. A paper based document 1. An electronic document is a
consists of the following four document generated from a
components: computer.
(i) the carrier (the sheet of
paper);
(ii) text and pictures (the
physical presentation
of the information);
(iii) information about the
originator; and
(iv) the measures to verify
the authenticity
(written signatures)
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2. Detection 2. It is easy to detect any 2. It can be deleted, modified

of alterations on tempering and rewritten without
alteration leaving a mark.
3. Reliability 3. A paper based document can 3. It cannot be sealed in the
be sealed hence it is more traditional way, when the
reliable as its integrity can author affixes his signature
be easily checked. hence its difficult to verify
integrity of electronic
document.
4. Photostat 4. There is usually one 4. A copy is similar to the
copies original. It can be original and indistingui-
reproduced in innumerable shable
photostat copies.
5. 5. Paper based document is 5. The functions of identifica-
Verificati created, sealed and verified tion, declaration, proof of
on in a physical manner. electronic document is
carried out using
digital/electronic signature
based cryptography.
REVIEW QUESTIONS
1. Discuss the objects of the Information Technology Act, 2000.
[B.Com. (Hons), D.U.]
2. Name the instruments to which IT Act, 2000 does not apply. [B.Com., D.U.]
3. What are the areas involving paper based documents to which the
Information Technology Act. 2000 does not apply. [B.Com. (Hons.), D.U]
4. Define the following terms as defined in the IT Act, 2000 :
(i) Asymmetric Crypto System
(ii) Computer Network
(iii) Intermediary [B.Com. (Hons.), D.U]
5. The IT Act is not applicable to some specific documents.
[B.Com. (Hons.), D.U]
6. Define the following terms as per the IT Act, 2000 :
(a) Digital Signature (b) Public and Private Key
(c) Computer Network (d) Asymmetric Crypto System
(e) Addressee (f) Computer
(g) Data (h) Information
(i) Key pair (j) Computer Resource
7. Define ‘Asymmetric Crypto System’. [B.Com. (Hons.), D.U]
8. Define the terms ‘ Computer Resources’ and ‘Intermediary’.
9. Write a note on : ‘ Digital Signature Certificate’. [B.Com. (Hons.), D.U]
10. State whether each of the following statements is true or false :
(a) The Information Technology Act, 2000 is not applicable to ‘Will’ as
defined in section 2(h) of the Indian Succession Act, 1925.
(b) The Information Technology Act, 2000 gives legal recognition to
electronic records.
(c) The Information Technology Act, 2000 is applicable to Cheque.
[Hint : (a) True; (b) False; (c) True]
Digital Signature and
23 Electronic Signature
LEARNING OBJECTIVES
➥ Technology behind Digital Signature.
➥ Transition from Digital Signature to Electronic Signature.
➥ Digital Signature : Meaning, Creation and Verification
➥ Electronic Signature
A contract may be oral or in writing or it may be implied from the conduct

of the parties. But oral agreements are difficult to prove with evidence in a
court of law. Traditionally, a written contract was printed on a paper and
duly signed by the parties. Therefore, paper-based contracts which are duly
signed by the contracting parties were prevalent in the past as they were
easier to prove in a court of law.
However, in to-day’s world where e-contract can be concluded through e-
mail, the ‘ink and paper concept’ has become obsolete. The traditional
principles of contract law have been adapted to apply to the cyberspace.
Electronic records are duly admissible in courts of law now-a-days, to prove
the existence of valid contract and its terms.
DEVELOPMENT OF INTERNET AND DIGITAL SIGNATURE

Posts and telegraphs have been important communication channels. They
have played a very important role in the spread of commerce all over the
world. Use of fixed line telephones and mobile phones have further fast-
forwarded the process of business transactions. In the early 1960s there was
a new development in the form of Electronic Data Interchange (in short,
EDI). It was a “paperless” approach to various business processes such as
inquiries, purchase, orders, pricing, shipping, payments etc. The early
adapters of EDI were large companies in the airlines, shipping, railroad and
retail sectors in the developed countries. For small companies it was a costly
proposition. In the beginning these were proprietary systems and in early
1970s, there was development of shared EDI system sponsored by the third
parties for a common industry or trade group. It was the beginning of
electronic commerce (in short, e-commerce). The development of Internet in
1990s opened up EDI to a wider range of business opportunities in the form
of B2B, B2C, C2B and C2C market places. Electronic commerce may be
referred to as the Internet enabled EDI.
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Electronic commerce means, doing business over the internet.

Goods and services may be delivered off-line and products like
computer software which can be digitised may be delivered on-line.
Internet is a public network. Electronic commerce transactions over the
internet include (a) formation of contracts, (b) delivery of information and
services, and (c) delivery of content. Its future depends on “the trust the
transacting parties place in the security of the transmission and content of
their communication.”
Electronic commerce has led to the development of digital
signatures, as a means to secure electronic transactions.
The Article 7(1)(a) of the UNCITRAL Model Law on E-commerce states
the law requires a person to sign a ‘data message’, such requirement will be
fulfilled, if ‘a method is used to identify the person’ and the method shows
that the person has approved the contents of the ‘data message’.
The Article 7(1) (b) states that the method should be ‘reliable’ and
‘appropriate’ for the purpose for which the data message was ‘generated or
communicated’.
In order to become legally binding all electronic communication
or transactions must determine who really sent the message and
whether or not message received has been modified in transit or it is
incomplete. Further it must be ensured -that the sender cannot deny
sending the message and the contents of the message. It led to the
acceptance of data encryption technique known as cryptography.
Cryptography may be symmetric (a single secret key system) or asymmetric
(key pair system consisting of a public and a private key). Digital
signatures are based on asymmetric cryptography and provide
message authentication, integrity and non-repudiation function.
TECHNOLOGY BEHIND DIGITAL SIGNATURE

Meaning of “Encryption ” and “Decryption”
Digital signatures are based on encryption and decryption mechanism
that ensure integrity and confidentiality of information that two persons may
exchange on the internet. Let us first understand the meanings of encryption,
decryption, encryption technologies and hash function.
Encryption is a procedure to convert a regular text into a coded
text or secret text or encrypted text with the help of mathematical
functions called algorithm and key.
Encryption is the transformation of data to prevent information
being read by unauthorised parties.
Cryptography is a mathematical science used to secure confidentiality
and authentication of information on internet by replacing it with
transformed version that can be reconverted to reveal the original data by
someone holding proper cryptography algorithm and key.
Digital Signature and Electronic Signature 359
Decryption is the reconversion of coded or encrypted data into

the original form.
Example: Suppose the original message is “SECURITY”. Suppose
further that it is to be converted into a coded or encrypted message by adding
a fixed number of characters, say five, to the each character in the message
that is being coded. If each character of the message is replaced as per the
formula, the coded or encrypted message will be “XJHZWNYD”. While
decoding or decrypting the message the formula applied will be reversed. As
stated above, the receiver must know the formula applied for coding or
encrypting and only then he will be able to decode the coded or encrypted
message.
Encryption involves the following:
(i) Original data or message that is to be codified or encrypted.
(ii) Algorithm or mathematical function to codify.
(iii) ‘Key’ to encrypt and decrypt the data or message.
(iv) Encrypted or coded data formed out of the original data.
Algorithm is a mathematical function or a statement of sequence of steps
to be followed to solve a problem.
Key.'Key' here means the specific sequence of digits representing a very

large numerical value. It is generated by a complex mathematical formula. It
is used in association with algorithm for transformation of original data or
message into secret or coded or encrypted data or message. Every
communicator of electronic data or message must own a unique key to
encrypt his data or message. The secret or encrypted data or message
generated by a particular key is different from the secret or encrypted data or
message generated by any other key. Thus the encrypted data or message
generated by a particular key is always unique.
Further, the key should be very long, i.e., the number of digits of
the key should be very large so that the possibility of it becoming
known, by trial and error, is minimised. For example, if there is a 4-bit
key, it will have a maximum of 24 i.e., 16 possible digit combinations. In such
a case it will be easy to find out the actual key as it will be one of these 16
combinations. Therefore, the Information Technology Act, 2000 recommends
a 1024-bit key for subscribers and 2048-bit key for use of Certifying
Authorities.
Encryption Technologies
There are two types of encryption technologies. These are as follows:
1. Symmetric cripto system or Single Key encryption or Private key
encryption.
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2. Asymmetric cripto system or Double key encryption or Public key

encryption.
1. Symmetric cripto system or Private key encryption

In symmetric cripto system identical or single key is used for encryption
and decryption. It requires both the parties (sender and the receiver of the
message) to do a digital conversation to know the key. The Information
Technology Act, 2000 does not recognise symmetric cripto system.
2. Asymmetric cripto system or Public key encryption

According to Section 2(1)(f) of the Act asymmetric cripto system
means a system of a secure key pair consisting of a private key for
creating a digital signature and a public key to verify the digital
signature. Thus it is public key cryptography that uses a key pair of
mathematically related cryptographic keys. According to Section 2(1)(x),
a “key pair”, in cripto asymmetric cripto system, means a private key and its
mathematically related public key, which are so related that the public key
can verify a digital signature created by a private key. Thus, in this system
there are two keys : (i) pubic key and (ii) private key. The Information
Technology Act, 2000 recognises only this system of cryptography.
Features of Asymmetric Cripto System or Public Key Cryptography

1. Each party is assigned a pair of keys. These are:
2. Public key—It is widely known
3. Private key—It is known only to the owner.
4. Information codified or encrypted with the private key can only be
decodified or decrypted by the public key and vice-versa.
5. The sender of the data or message can encrypt his signature in his
private key and send it to the receiver. The receiver can decrypt the
signature of the sender by the pubic key.
6. Fulfills the requirements of confidentiality, integrity, authenticity and
non- reputability.
7. There is no need to communicate private keys.
“Public key” means the key of a key pair used to verify a digital
signature and listed in the Digital Signature Certificate [S. 2(1)(2d)].
It can be made available to anyone who wishes to use it. It can encrypt or
codify the data or message. It can also verify a digital signature.
“Private key” means the key of the key pair used to create digital
signature [S. 2(1)(zc)]. It is kept secret by the holder, i.e., it is not shared
by the subscriber with any other person. It can decrypt or decode the data or
message. It can generate digital signature.
Distinction between Private Key and Public Key

Basic Private Key Public Key
1. Function Private key is the key of the key Public key is the key of the key
pair used to create digital pair used to verify digital
signature. [S. 2(1)(zc)] signature [S. 2(1)(zd)].
2. Nature Private key is confidential, i.e., it Public key is widely known.
is not shared by the subscriber
with any other person.
3. Listing Private key is not listed in the Public key is listed in the
digital signature certificate issued digital signature certificate
to the subscriber by a Certifying issued to the subscriber by a
Authority. Certifying Authority.
Hash Function
A hash function is a mathematical process based on algorithms which
creates a digital representation or “digital finger print” in the form of Hash
result. Hash function is used to create and verify a digital signature. When
hash function is used the data message is compressed into a ‘message
digest’ of the message which is shown in the form of a hash result.
‘Message digest’ is smaller than the original message. It involves signer
(creator of digital signature) and recipient (verifier of digital signature).
TRANSITION FROM DIGITAL SIGNATURE TO ELECTRONICS

SIGNATURE
The Information Technology Act, 2000 was initially a technology specific
Act that accepted ‘digital signature’ as an electronic authentication technique
Subsequently (w.e.f. 27-07-2009) the Act has adopted technology neutral
regime in the form of ‘electronic signature’ as an electronic authentication
technique.
Section 3 of the Act gives the process of digital signature creation and
verification and section 3A advocates authentication of electronic record by
any such electronic signature or electronic authentication technique.
It is important to note that the Information Technology Act, 2000
and its subsequently amendments have made both digital signature
and electronic signature as legally binding signatures. Thus, both
digital signature and electronic signature coexist. Further, digital
signature is a type of electronic signature.
It may be noted that electronic signature in the form of biometric record
were used by commercial, industrial and some other concerns even before
their legal recognition in 2009.
DIGITAL SIGNATURE
Meaning of Digital Signature [S. 2(1)(p)]
According to S. 2(1) (p), digital signature means authentication of
electronic record by a subscriber by means of an electronic method or
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procedure in accordance with the provisions of Section 3 of the Act.

Digital signature is an actual transformation of an electric message using
public key cryptography. Digital signature is not a digitized image of a
handwritten signature. It is a digitally signed hash result of the “message”. It
is a block of data at the end of an electronic message. It is unique to its
message. It requires a key pair : private key for encryption and public key for
decryption. It also requires a hash function.
Creation or Affixing of Digital Signature

The following steps are taken for creating or affixing digital signature:
Step 1: Preparation of message : The sender or signer, who is the
owner of a unique PKI pair, writes the information on his computer or takes
an already written information to be signed. This demarcated information is
called the message (including the name of the sender) to be signed.
Step 2: Application of ‘hash function’ : The signer uses a secure hash
function to create ‘message digest’. A hash result or message digest is formed
which is unique to the signed data message. Any change in the message with
the same hash function will produce a different hash result. Thus the hash
function provides assurance that there has been no change in the message
since it was digitally signed. Hash result is also known as hash value, i.e., a
unique mathematical value.
Step 3: Encryption of ‘message digest’ : The sender’s software
encrypts the hash result i.e. message digest into a digital signature by using
signer’s private key. The date and time shall then be made part of digital
signature. The digital signature so created is unique to the message. Thus,
the digital signature will be different for a different message. Thus, digital
signature is digitally signed hash result of the message. In other words,
digital signature comprises of the encrypted data message digest.
Step 4: Attachment of digital signature : The digital signature is
attached to the message and stored or sent to the addressee. In other words,
the sender sends both the message as well as the digital signature to the
addressee.
Creation or Affixing of digital signature is shown below:
Sender demarcates Addressee receives the

information to be signed message and digital singnature
Digital Signature
Application of Hash Signature is attached to
Message hash function result function the message
+
Private Key
of sender
Fig. 23.1: Creation of digital signature

Digital signature regime operates in online, software driven space.

Therefore, both the sender and the recipient must have a digital signature
software at their respective ends.
Verification of Digital Signature

The following steps are required to be taken by the recipient to verify the
digital signature:
Step 1: The addressee or recipient receives the digital signature and the
message.
Step 2: The recipient applies sender’s i.e., signer’s public key on the
digital signature and recovers the hash result i.e. message digest from the
digital signature.
Step 3: The recipient computes a new hash result of the original message
by applying the same hash function used by the signer to create digital
signature. .
Step 4: The recipient compares the two hash results i.e. message digest.
If they are identical it indicates that the message has not been modified. If
the two hash results are not same, it would mean that the message either
originated somewhere else or it was altered after it was signed, and the
recipient in such a case can reject the message.
The process of verification of digital signature is shown below :
Receipt of Application of Hash

message hash function result
If both the results

are same, the
digital signature
stands verified
Digital signature Signature Hash

of the sendr function result
Sender’s
Public key
Fig. 23.2: Verification of digital signature
Authentication of electronic records by affixing digital signature

Section 3(1) provides that any subscriber may authenticate an electronic
record by affixing his digital signature. It confirms the identity of the person
(subscriber) who has affixed his digital signature to authenticate an
electronic record. Electronic record may include any text, audio, video or
multimedia content. The authentication of electronic records is not
mandatory under the sub-section.
“The authentication of the electronic record shall be effected by the use of
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asymmetric crypto system and hash function which envelop and transform
the initial electronic record into another electronic record.” [S. 3(2)].
Section 3(2) advocates asymmetric crypto system. As explained earlier, in
this system encryption and decryption is done involving an asymmetric key
pair consisting of public and private key.
On the other hand, in case of symmetric cryptography a single key is used
for both encryption and decryption of a message.
Authentication of an electronic record can be done by creation and
verification of digital signature as explained earlier in creation and
verification of Digital Signature.
Distinction between handwritten signatures & digital signatures

The purpose of both, handwritten signature and digital signature, is to
authenticate the document/message as originating from the purported signer.
In both the cases the signer is bound by the legal implications of written
content/electronic record. Both are distinctive and attributable to the signer
only. The digital signature cannot be forged, unless the signer loses
control of the private key. Handwritten signatures can be attested by
notary public/ witnesses. Digital signatures are certified by the
Certifying Authority. It is impracticable to alter the signed matter or the
signature without detection in case of handwritten signature. Digital
signature prevents a person from unilaterally modifying the “message”.
II. ELECTRONIC SIGNATURE

The Act prescribes asymmetric cryptography, i.e., public key
cryptography to digitally sign an electronic message. Encryption/decryption
technology may change in future.
Therefore, the Act was amended (w.e.f. 27-10-2009) to provide for built-in-
flexibility by adopting the principle of ‘technological neutrality’. Electronic
signature is ‘technological neutral’ and digital signature is ‘technological
specific’.
The Model Law on Electronic Signature defines an electronic signature as
follows:
Electronic signature is a data in electronic form affixed to a data message
that identifies and verifies the signer with recording a data message and
describes his consent to the content in such data message; [Article 2(1)].
According to S. 2(1) (ta) of the Act “electronic signature” means
authentication of any electronic record by a subscriber by means of the
electronic technique specified in the second schedule and includes digital
signature.
Thus, digital signature is a type of electronic signature.

Electronic signature is a technology-neutral term. It can be created by
many different technologies by which one can “sign” an electronic record. The
examples of electronic signature includes a secret code or PIN such
as that used with ATM cards and credit cards to identify the sender
to the recipient.
Authentication of an electronic record by electronic signature

Section 3A(1) of the Act states that a subscriber may authenticate any
electronic record by such electronic signature or such electronic
authentication technique which—
(a) is considered reliable: and
(b) may be specified in the Second Schedule.
Section 3A(2) states that any electronic signature or electronic
authentication technique shall be considered reliable if—
(a) the signature creation data or the authentication data are, linked to
the signatory or, his authenticator and to no other person;
(b) the signature creation data or the authentication data were, at the
time of signing, under the control of the signatory or, his
authenticator and no other person.
(c) any alteration to the electronic signature made after affixing such
signature is detachable;
(d) any alteration to the information made after its authentication by
electronic signature is detachable; and
(e) it fulfills such other conditions which may be prescribed.
Sub-sections (3), (4) and (5) of Section 3 provide that the Central
Government may prescribe the procedures to authenticate the signer of the
electronic record. It may add or omit any electronic signature or electronic
authentication technique from the Second Schedule.
Emerging New Forms of Electronic Signatures

There are various techniques and products available in the market which
use one or more means of electronically signing documents. These include
Personal Identification Number (PIN), password or biometric identification,
digital signature, symmetric cryptography, smart card. The public key
infrastructure model is by the most reliable out of the above electronic
signatures. In India the Unique Identification Card (i.e. Aadhar Card)
employs biometrics technology.
Aadhaar e-KYC (Know Your Customer) can be used by the Government
for certain specified services. In other cases, Aadhar e-KYC can be used if the
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customer opts to do so in the light of the Supreme Court verdict. Further, e-

authentication technique using e-KYC services other than Aadhar e-KYC
have also been inserted in the Second Schedule w.e.f. 1st March, 2019.
e-Hastakshar
The Information Technology Act, 2015 introduced electronic
authentication technique by insertion in Schedule II. eSign or e-Hastakshar
service was launched on 3rd September, 2016 by the Government of India. It
is based on asymmetric crypto technology. e-Hastakshar offer on-line
platform to citizens for instant signing of their documents securily in a legally
acceptable form, under the IT Act, 2000 and various Rules and Regulations
made under it.
C-DAC offers a service called eSign or e-Hastakshar that allow citizens to
sign electronically, thereby saving time and efforts for them.
The objective of eSign or e-Hastakshar is to offer on-line service to
citizens for instant signing of their documents in a legally acceptable form.
Two major challenges involved are (a) authentication of the user and
(b) trusted method of signing.
Aadhaar based authentication is carried out to address the first challenge
and Public Key Infrastructure (in short, PKI) is used to securily sign the user
document and establish the trust.
Requirements and Process of e-Hastakshar. C-DAC through its e-
hastakshar initiative enables citizens with valid Aadhaar ID and registered
mobile number to carry out digital signing of their documents on-line.
The digital certificate offered by C-DAC Certifying Authority through the
eSign service to the applicant is for one-time signing usage and shall be of
class “Aadhaar-eKYC—OTP”. OTP acts as the private key of the user. C-DAC
utilises the service of Unique Identification Authority of India (in short,
UIDAI) for on-line authentication and Aadhaar e-KYC service.
C-DAC plays the role of Certifying Authority under the Controller of
Certifying Authority.
Examples
Examples where eSign or -Hastakshar oneline service is used are :
(i) Application for issue or renewal of passport.
(ii) Application for new telephone connection.
(iii) Application for driving licence, renewal of licence and registration of
vehicle.
(iv) Application for e-filing of tax return.
(v) Application for opening of account in banks.
(vi) Application for birth certificate.
(vii) Self attestation in case of Digital Locker.
Distinction between Digital Signature and e-Hastakshar

Basis Digital Signature eSign or e-Hastakshar
1. When Digitally signatures were It was introduced in 2015 and
introduced introduced by the IT Act, 2000 launched on 3rd September,
when the Act came into force. 2016.
It cause into force w.e.f. 17-10-
2000.
2. Validity Digital signature certificate is Digital certificate offered by
valid for a particular period. It C-DAC Certifying Authority
may be one year. is for one time usage only.
Private key is deleted after
one-time use.
3. Elements in Controller of Certifying Application service provider,
the process of A u t h o r i t y , C e r t i f y i n g certifying authority, Aadhaar
eSign Authority and the subscriber card, and end user.
(i.e. and user)
4. Certifying It includes Safescrip, IDRBT, It includes C-DAC, (n) Code
Authority (n) Code Solutions, eMudhra, S o l u t i o n s , eMudhra,
offering these Capricorn Capricorn, NSDL e-Gov.
services
5. Hardware Certifying authority gives Certifying authority does not
given by the crypto token to the end user. give any hardware to the end
CA and its Further, it is the responsibility user. However, the end user
safe custody of the end user to keep it in should have a mobile for
safe custody. getting OTP. The OTP is
deleted after its use.
The following are the points of difference between electronic

signature and digital signature:
Basis Electronic Signature Digital Signature
1. Meaning and It means authentication of It means authentication of
Scope any electronic record by a any electronic record by a
subscriber by means of an subscriber by means of an
electronic technique specified electronic method or
in the Second Schedule and procedure in accordance with
includes digital signature. the provisions of S. 3 of the
Thus, the term electronic Act. Section 3 provides for
signature is broader than asymmetric cripto system and
digital signature. hash fashion for transforming
initial electronic record into
another electronic record.
2. Technology It is ‘technology-neutral’. It It is ‘technology specific’. It is
may be crated by many based on asymmetric cripto
different technologies. system i.e. public key
cryptography.
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3. Authenticity Taking into consideration the It provides greater assurance

technologies available at of a document’s authenticity
present electronic signature due to dual key crytography.
(excluding digital signature)
may not be that authentic as
in the case of dual key
cryptography.
4. International Electronic signatures Digital signatures are
Standards (excluding digital signatures) accepted universally, as they
are not universally comply with international
acceptable. standards of security.
5. Tempering Electronic s i g n a t u r e s Digital signatures cannot be
(excluding digital signatures) tempered with.
can be tempered with.
REVIEW QUESTIONS
1. What are the functions performed by public and private keys?
2. Distinguish between private key and public key.
3. What is meant by electronic signature? Distinguish between digital signature
and electronic signature. [B.Com. and B.Com. (H), D.U.]
4. State the process of creation of digital signature.
5. State the process of verification of digital signature.
6. What is meant by digital signature? State the procedure of creation and
verification of digital signature. [B.Com. and B.Com. (H), D.U.]
7. What is meant by encryption and decryption.
8. Write a note on asymmetric cripto system. [B.Com. and B.Com. (H), D.U.]
9. State giving reasons whether each of the following statements are true or
false:
(a) Electronic signature is a data in electronic form affixed to a data message
that identifies and verifies the signer recording a data message and
describes his consent to the content in such data message.
(b) Encryption means converting a data message into incomprehensible form
that can be transformed into the original data without the use of a
description key.
(c) In digital signature technology as recommended by the IT Act, 2000, the
private key compliments its corresponding public key.
(d) Digital signature is not a form of electronic signature.
(e) Digital signature is a digitized image of handwritten signature.
Hints: (a) true; (b) false; (c) true; (d) false; (e) false.
24 Electronic Governance
LEARNING OBJECTIVES
➥ Meaning and Benefits of E-Governance
➥ E-governance Initiatives in India
➥ Provision which facilitate and Strengthen Electronic Governance
MEANING AND BENEFITS OF E-GOVERNANCE

Electronic Governance (e-governance) is the use of information
and communication technologies by government agencies to
transform relations with citizens, business and other areas of the
government.
Distinction between Physical Governance and E-governance
Basis Physical Governance e-governance

1. Documents Legal recognition is given to Legal recognition is given to
paper documents. electronic records
2. Authentication Paper documents are Electronic records are
recognised if they are recognised if they are
supported by handwritten supported by digital signature
signatures. or electronic signature.
3. Example Publication of Official Publication of electronic
gazette. gazette.
Benefits of E-Governance
E-governance is SMART governance. E-governance facilities a much
faster interaction between government and its people. The following are the
benefits of e-governance :
1. E-governance is simple and convenient. For example, on-line
booking of railway tickets, on-line filing of documents, online
registration of LLPs and companies, online filing of income tax
returns.
2. It reduces the moral hazard of delayed response.
3. It makes the government employees more accountable.
370 Business Laws
4. The possibility of quick response from the government employees

increases.
5. It facilitator transparent interaction between government and its
people.
E-GOVERNANCE INITIATIVES IN INDIA

In India, the Central Government and State Governments have created a
network of e-services (the interaction between government and citizens and
business or government and business) and e-administration (the interactions
between various arms of the government). Initial forays were more rural
centric than urban centric.
E-governance initiatives taken by the Central Government, various State
Governments and Municipal Corporation include the following:
• Computerisation of public offices and government departments;
• Internet reservation facility by the Indian Railways;
• Digi Locker;
• Mandatory e-filing of income tax returns;
• Issues of identity proof cards such as Unique Identification (UID)
cards having biometrics based fingerprints and retina scanning;
• Use of social media such as twitter by the Prime Minister of India and
others;
• Use of social media such as twitter, facebook etc. by the Delhi Traffic
Police;
• Use of twitter, blogs and acceptance of online and mobile complaint by
the Indore Police;
• Launch of a forum on facebook to interact with citizens by Municipal
Corporation of Delhi;
• Online registration of companies with Registrar of Companies through
Ministry of Corporate Affairs using form SPICe;
• Online filing of vehicle licences registration card, etc. and certificates
of birth and death;
• Jeevan Pramaan which is Aadhaar based Digital Life Certificate for
pensioners;
• E-procurement process across various sectors whereby the
government tenders and requisition for goods and services online;
• E-auction of coal and iron are mines;
• Online filing of application forms for candidates seeking admission in
Delhi University;
• Announcement of cut-off through website by various colleges of Delhi
University;
• E-filing of property tax in Delhi;
• E-filing of application-cum-bid for shares by the prospective investors;
• Publication of Electronic Gazette.
Electronic Governance 371
PROVISIONS WHICH FACILITATE AND STRENGTHEN ELECTRONIC

GOVERNANCE (SECTIONS 4-10A)
The Act gives legal recognition to electronic governance. Sections 4-10 of
the Act contain provisions for e-governance. These are as follows :
1. Legal recognition of electronic records (Section 4)
2. Legal recognition of electronic signatures (Section 5)
3. Use of electronic records and electronic signatures in government and
its agencies (Section 6)
4. Delivery of service by service providers (Section 6A)
5. Retention of electronic records (Section 7)
6. Audit of documents, records or information maintained in electronic
form (Section 7A)
7. Publication of rule, regulations etc., in Electronic Gazette (Section 8)
8. No right to insist acceptance of document in electronic form (Section
9)
9. Power to make rules by central government in respect of electronic
signature (Section 10)
10. Validity of contracts formed through electronic means (Section 10A).
1. Legal recognition of electronic records (S. 4)

Where any law provides that information or any other matter shall be in
writing or in the typewritten or printed form, then such requirement shall be
deemed to have been satisfied if such information or matter is—
(a) rendered or made available in an electronic form; and
(b) accessible so as to be usable for a subsequent reference [S. 4],
Section 4 has made electronic form as a functional equivalent of
writing or typewritten or printed form. The electronic form as per S.
2(1)(r) means any information generated, sent, received or stored in media.
magnetic, optical, computer memory, micro film, computer generated micro
fiche or similar device.
2. Legal recognition of electronic signatures (S. 5)

Section 5 has made electronic signatures as a functional
equivalent of “handwritten signature”. If any information or any
other matter is required by law to be authenticated by affixing the
signature, then such requirement shall be deemed to have been
satisfied if such information or matter is authenticated by means of
electronic signature affixed in the prescribed manner. It is
important to note that one has to be a subscriber to authenticate an
electronic record as the digital signatures are subscriber specific. A
non-subscriber cannot authenticate an electronic record. A subscriber may be
372 Business Laws
an individual, Hindu Undivided Family (Karta), Company, Firm, Body of

Individuals, Association of Persons, Local Authority, or Government
Organisation/ Agencies.
3. Use of electronic records and electronic signatures in

Government and its agencies (S. 6)
Section 6 creates an effective e-governance model by permitting
the use of electronic records and electronic signatures in the filing of
any form, application or any other document with any office,
authority, body or agency owned or controlled by the appropriate
government, the issue or grant of any licence, permit, sanction or
approval, the receipt or payment of money by means of electronic
form.
The appropriate Government may, be rules, prescribe—
(a) the manner and format in which such electronic records shall be filed,
created or issued;
(b) the manner or method of payment of any fee or charges for filing,
creation or issue any electronic record under clause (a).
4. Delivery of service by service providers (S. 6A)

Section 6 provides for private partnership in delivery of e-government
services. It states that the appropriate government for the purposes of
efficient delivery of services through electronic means authorise any service
provider to set-up, maintain and upgrade the computerised facilities and
perform such other services as it may specify by notification in the Official
Gazette.
5. Retention of electronic records (S. 7)

Section 7 lays down stringent conditions for retention of
electronic records because for effective e-governance, proper
retention of electronic records plays a very important role. It states:
Where any law provides that documents, records or information shall be
retained for any specific period, then, that requirement shall be deemed to
have been satisfied if such documents, records or information are retained in
the electronic form, if—
(a) the information contained therein remains accessible so as to be
usable for a subsequent reference;
(b) electronic record is retained in the format in which it was originally
generated, sent or received or in a format which can represent
accurately the information originally generated, sent or received;
(c) the details which will facilitate the identification of the origin,
destination, data and time of despatch or receipt of such electronic
record are available in the electronic record.
However, any information which is automatically generated is non-
applicable for the purpose of retention of electronic records.
Electronic Governance 373
Digilocker system is a good illustration in this respect. Digilocker is a

platform for issuance and verification of documents and certificates in a
digital way. It eliminates the use of physical documents. It is linked to a
person’s Aadhar number.
6. Audit of documents, etc., maintain in electronic form (S. 7A)

Section 7A provides that electronic records must also be audited. It states
that where in any law for the time being in force, there is a provision for
audit of documents, records or information, that provision shall be applicable
for audit of documents, records or information processed and maintained in
the electronic form.
7. Publication of rule, regulation etc., in Electronic Gazette (S. 8)

Section 8 considers Electric Gazette at par with Official Gazette. It
provides that where any law provides that any rule, regulation, order, bye-
law, notification or any other matter shall be published in the Official
Gazette, then, such requirement shall be deemed to have been satisfied if
such rule, regulation, order, bye-law, notification or any other matter is
published in the Official Gazette or Electronic Gazette. However, where any
rule, regulation, order, bye-law, notification or any other matter is published
in the Official Gazette or Electronic Gazette, the date of publication shall be
deemed to be the date of the Gazette which was first published in any form
[S. 8].
Section 8 equates the Electronic Gazette at par with the Official
Gazette and thus makes available rule, regulation, order, bye-law,
notification in electronic form to any person. The date of publication
shall be deemed to be the date of the Gazette which was first
published in any form.
8. No right to insist acceptance of document in electronic form

(Section 9)
Sections 6, 7 and 8 do not confer a right upon any person to insist that
any ministry or Department of the Central Government or the State
Government or any authority or body established by or under any law or
controlled or funded by the Central or State Government should accept, issue,
create, retain and preserve any document in the form of electronic records or
effect any monetary transactions in the electronic form.
The section gives a breather to the Government and its agencies as they
are still in the process of implementing information technology processes.
9. Power to make rules by Central Government in respect of

electronic (signature (S. 10)
The Central Government may, for the purposes of this Act, by rules,
prescribe—
(a) the type of electronic signature;
374 Business Laws
(d) control processes and procedures to ensure adequate integrity,

security and confidentiality of electronic records or payments; and
(e) any other matter which is necessary to give legal effect to electronic
signatures.
10. Validity of contracts formed through electronic means

(Section 10A)
The section states that where in a contract formation, the communication
of proposals, the acceptance of proposals, the revocation of proposals and
acceptances, as the case may be, are expressed in electronic form or by means
of an electronic record, such contract shall not be deemed to be unenforceable
on the ground that such electronic form or means was used for that purpose.
REVIEW QUESTIONS
1. What is meant by e-governance? Give examples of e-governance initiatives in
India.
2. Explain legal provisions of the IT Act as regards e-governance.
3. Explain Legal Recognition of Electronic Records.
4. What is e-governance ? How does IT Act, 2000 facilitate e-governance ?
5. What are the provisions relating to e-governance in IT Act, 20 00 ? Explain in
brief. [B.Com and B.Com. (Hons), D.U]
6. E-governance is SMART governance. Discuss the provisions of IT Act, 2000 to
facilitate and strengthen e-governance. [B.Com. (Hons.), D.U]
7. Comment on the following statements:
(a) Electronic records are as authentic as the hard copies.
(b) Digital signatures are as authentic as the handwritten signatures.
8. Write short notes on the following:
(a) E-governance
(b) Legal recognition of electronic records.
(c) E-governance initiatives in India
(d) Legal recognition of electronic signature.
(e) Use of electronic records and digital signatures in government and its
agencies.
9. “E-governance is SMART governance.” Discuss the provisions of the IT Act,
2000 which facilitate and strengthen e-governance. [B.Com. (H), D.U.]
Attribution,
Acknowledgement
25 and Despatch of
Electronic Records
LEARNING OBJECTIVES
➥ Attribution of Electronic Records to the Originator
➥ Acknowledgment or receipt of Electronic Records by the Addressee or
Receiver
➥ Determination of Time and Place of Despatch and Receipt of Electronic
Record.
As per the Indian Contract Act, 1872, for formation of a contract there
should be communication of offer and communication of acceptance. The
Information Technology Act, 2000 has not amended the Indian Contract Act,
1872. In order to form a valid electronic contract there should be a ‘promisor’
and a ‘promisee’. The Information Technology Act, 2000 identifies the
originator [S. 2(1)(za)], the intermediary [S. 2(1)(w)] and addressee [S. 2(1)(b)]
as the parties to the electronic transmission process. All these three parties
perform specific functions in the electronic transmission process. Originator
and addressee are not to be considered as equivalent to ‘promisor’ and
‘promisee’ of the Indian Contract Act, 1872.
LEGAL PROVISIONS AS REGARDS ATTRIBUTION,

ACKNOWLEDGEMENT AND DESPATCH OF ELECTRONIC RECORDS
The following provisions have been made in this respect in the Act :
1. Attribution of electronic record to the originator (Section 11)

Section 11 lays down conditions when an electronic record shall be
attributed to the originator. It states:
An electronic record shall be attributed to the originator,—
(a) if it was sent by the originator himself;
(b) by a person who had the authority to act on behalf of the originator in
respect of that electronic record; or
(c) by an information system programmed by or on behalf of the
originator to operate automatically.
376 Business Laws
Example. (i ) If a person X has an e-mail address as xg @ yahoo.com and sends an e-

mail to Y. X is the originator of the e-mail. If X instructs his secretary to e-mail on his
behalf, then also X will be called as the originator of the e-mail. Y is the addressee.
Yahoo.com is the intermediary.
(ii) If Y sends an e-mail to X, then Y is the originator and X is the addressee.
Thus, a person may be originator for one electronic message and addressee for
another message.
2. Acknowledgment of receipt of electronic records by the

addressee i.e. the receiver (S. 12)
Section 12 deals with a number of legal issues arising from the use of
acknowledgment of receipt. They are as follows :
(a) Where there is no stipulation for the mode of
acknowledgement by the originator. Section 12(1) states that where the
originator has not stipulated the form or method of acknowledgement, then
acknowledgement may be given by
(i) any communication by the addressee, automated or otherwise; or
(ii) any conduct of the addressee, sufficient to indicate to the originator
that the electronic record has been received.
(b) Stipulation by the originator for receipt of the
acknowledgement. Section 12(2) deals with the situation where the
originator has stipulated to the addressee that the electronic record shall be
binding only on the receipt of an acknowledgment of such electronic record by
him. In such a situation unless acknowledgment has been so received, the
electronic record shall be deemed to have been never sent by the originator.
Example.— A person X requests for information about the price of a
particular model of a particular brand of a refrigerator in a mail to Y and also
requests for acknowledgment of receipt of his e-mail. But Y does not send
acknowledgement of receipt of B’s e-mail, it will be presumed that X’s mail
was never received by Y.
(c) No stipulation for receipt of an acknowledgement by the
originator. Section 12(3) states that where the originator has not stipulated
to the addressee that the electronic record shall be binding only on receipt of
an acknowledgment. In such a situation the section lays down an optional
procedure. It provides that if the acknowledgment has not been received by
the originator within the time specified or agreed, or if no time has been
specified or agreed to within a reasonable time, then, the originator may give
notice to the addressee stating that no acknowledgment has been received by
him and specifying a reasonable time by which the acknowledgment should
be received by him. If no acknowledgment is received within the aforesaid
time limit, he may after giving notice to the addressee, treat the electronic
record as though it has never been sent.
Attribution, Acknowledgement and Despatch of Electronic Records 377
3. Time and place of despatch and receipt of electronic record

(S. 13)
(i) Time of despatch of electronic record [S. 13(1)]. Save as otherwise
agreed between the originator and the addressee, the despatch of an electronic
record occurs when it enters a computer resource outside the control of the
originator [S. 13(1). The purpose of sending the electronic record is that it
should reach the addressee. If the computer resource of the addressee does
not function at all or does not function properly, despatch under S. 13(1) does
not occur.
According to S. 2(1)(k) computer resource means computer, computer
system, computer network, data, computer data base or software.
(ii) Time of receipt of electronic record. [S. 13(2)]. It lays down
conditions for the time of receipt of an electronic record for a designated
computer resource and for a non-designated computer resource. These are as
follows :
(a) If the addressee has designated a computer resource, receipt
occurs at the time when the electronic record enters the designated
computer resource. E-mail ids given on the visiting cards, letterheads etc.
are examples of designated computer resource. If the addressee has not
designated a computer resource, receipt occurs at the time when the
electronic record is retrieved by the him.
(b) In a situation where the addressee has neither designated a resource
nor any timings for receiving the electronic records. In this situation,
receipt occurs when the electronic records enters the computer
resource of the addressee.
(iii) Place of dispatch and receipt of electronic record [S. 13(3)].
Save as otherwise agreed to between the originator and the addressee, an
electronic record is deemed to be despatched at the place where the
originator has his place of business, and is deemed to be received at
the place where the addressee has his place of business.”
CASE : In P.R. Transport Agency v. Union of India [AIR 2006 All 23], the
respondent held an e-auction for certain coal in different lots. The petitioner submitted
the tender or bid in the said auction and the petitioner’s bid was accepted for 4000
metric tons of coal from Dobari Colliery at the price of 1,625/- per metric ton. The
R
acceptance letter was issued at the petitioner’s e-mail address. Acting upon the said
acceptance, the petitioner deposited the full amount of 81,12,000/- through cheque in
R
favour of the respondent Bharat Cooking Coal Ltd. The cheque was accepted and
encashed by the respondent. Subsequently, instead of delivering the coal to the
petitioner, the respondent sent an e-mail to the petitioner saying that the sale as well as
e-action in favour of the petitioner stands cancelled due to some technical and
unavoidable reasons. This communication was successfully challenged by the
petitioner through a writ petition in the Allahabad High Court. The petitioner has two
places of business—one at Chandauli (in U.P.) and the other at Varanasi (in U.P.). It
was held that the contract became complete by receipt of e-mail at Chandauli/Varanasi
and therefore, the Allahabad High Court had territorial jurisdiction to accept the writ
378 Business Laws
petition. The High Court set aside the decision to cancel the contract and directed the
respondent to supply the coal to the respondent.
Section 13(4) provides that the location of computer resource is

irrelevant. The provisions of S. 13(2) regarding time of receipt of electronic
record shall apply notwithstanding that the place where the computer
resource is located. It may be different from the place where the electronic
record is deemed to have been received as under S. 13(3).
Place of Business for the purposes of Section 13

Section 13(5) provides that for the purposes of this section—
(a) if the originator or the addressee has more than one place of business,
the principal place of business, shall be the place of business;
(b) if the originator or the addressee does not have a place of business,
his usual place of residence shall be deemed to be the place of
business;
(c) “usual place of residence”, in relation to a body corporate, means the
place where it is registered.
Thus, for the purpose of determining the time of despatch and receipt of
electronic record, place of business is relevant. The location of computer
resource is not relevant for this purpose.
REVIEW QUESTIONS
1. State provisions regarding attribution of electronic records under the IT Act,
2000.
2. State the provisions regarding acknowledgment of receipt of electronic
records. [B.Com. and B.Com. (H), D.U.]
3. Explain the rules as regards time and place of dispatch and receipt of
electronic records under the Information Technology Act, 2000.
4. Where an offer is said to be complete through e-mail as per the Information
Technology Act, 2000?
5. When an acceptance through e-mail is binding as per the Information
Technology Act?
PRACTICAL PROBLEMS
1. An e-commerce company claims that it can deliver books within 24 hours
from the receipt of an e-mail and provides a designated e-mail address for
placing orders. Decide when the message will be considered as received in the
following cases;
(a) If message is sent on designated e-mail address.
(b) If the message is sent on general e-mail id.
Hint: (a) When e-mail reaches the company’s server; (b) When the message is
in fact read by a person from the company.
2. An e-commerce company claims that it can deliver books within 24 hours from
the receipt of an e-mail, but does not provide a designated e-mail address. A
Attribution, Acknowledgement and Despatch of Electronic Records 379
person sends an order on general e-mail address. What would be the time of
receipt of order?
Hint: Time of receipt of order would be time when the electronic record is
retrieved by the addressee.
3. X, resident of Delhi, sends an e-mail accepting an offer to a company whose
principal place of business is in Mumbai. The company has two branch offices
in Pune and Ahmedabad. An officer of the company reads the e-mail at
Ahmedabad. Decide whether the contract is complete at Mumbai or
Ahmedabad.
Hint: Mumbai.
Secure Electronic
26 Records and
Signatures
LEARNING OBJECTIVES
➥ Secure Electronic Records
➥ Secure Electronic Signatures
➥ Security Procedure and Practices.
Section 3 of the IT Act, 2000 states that the electronic records may be
authenticated by affixing digital signatures based on the PKI model or other
means of affixing digital signature which can be considered reliable. Section
3A of the Act lay down the criteria for assessing reliability of an electronic
authentication technique. Section 4 of the Act confers legal recognition to
electronic records. Further, electronic signatures are legally recognised by
virtue of Section 5 of the Act.
Section 14 and 15 of the IT Act, 2000 describes the meaning of ‘secure
electronic record’ and ‘secure electronic signatures’ respectively. Section 16 of
the Act empowers the Central Government to prescribe the security
procedure and practices that shall be covered under Section 14 and 15.
SECURE ELECTRONIC RECORDS AND SECURE ELECTRONIC

SIGNATURES (SECTIONS 14-16)
Information is valuable if it remains confidential, secure and retains its
integrity. Both public network (internet) and private networks (intranet,
extranet etc.) are sometimes attacked through virus and sometimes the
information is hacked. Therefore, appropriate security procedure should be
adopted to protect the message and the information technology
infrastructure, particularly the former. Security issues include:
confidentiality, integrity. authenticity and non-repudiability.
The IT Act, 2000 lays down following provisions/presumptions in
this respect :
Secure Electronic Record (S. 14)

Where any security procedure has been applied to an electronic record at
a specific point of time, then such record shall be deemed to be a secure
electronic record from such point of time to the time of verification.
Secure Electronic Records and Signatures 381
The expression verification here signifies two things:

First whether the said record was affixed with the digital signature by the
use of the private key corresponding to the public key of the subscriber and
Second whether the electronic record was retained intact or has been
altered since the electronic record was so affixed with the digital signature.
Secure Electronic Signature (S. 15)

According to S. 15, an electronic signature shall be deemed to be a secure
electronic signature if—
(i) the signature creation data, at the time of affixing signature, was
under the exclusive control of signatory and no other person; and
(ii) the signature creation data was stored and affixed in such exclusive
manner as may be prescribed.
In case of digital signature, the “signature creation data” means the
private key of the subscriber.
Security Procedures and Practices (S. 16)

The Central Government may, for the purposes of sections 14 and 15,
prescribe the security procedures and practices. However, in prescribing such
security procedures and practices, the Central Government shall have regard
to the commercial circumstances, nature of transactions and such other
factors as it may consider appropriate.
The Central Government may consider finger printing and/or retina
scanning to be secure electronic signatures as it will be unique to the
subscriber and remain within his/ her exclusive control. There can be easily
affixed by even illiterate persons or those who are not technologically adopt to
use sophisticated techniques such as digital signatures. For example, in case
of Unique Identification Card (i.e. Aadhar Card) scheme biometrical retina
scanning tool was used for authentication purposes.
REVIEW QUESTIONS
1. Explain the provisions of the Information Technology Act, 2000 as regards
‘secure electronic record’ and ‘secure electronic signature’. [B.Com. (H), D.U.]
2. Write short notes on the following:
(a) Secure electronic record
(b) Secure electronic signature
(c) Security procedure and practices.
Regulation of
27 Certifying Authorities
LEARNING OBJECTIVES
➥ Public Key Infrastructure
➥ Appointment and Functions of Controller of Certifying Authorities
➥ Grant of Licence to be a Certifying Authority
➥ Duties of Certifying Authorities
PUBLIC KEY INFRASTRUCTURE

Computerized environment is more process based than
personalised. Therefore, a system of identity authentication is
required. One or more trusted third parties are required to
authenticate a digital signature and to dispense the public keys.
That trusted third party is known as a ‘certifying authority’. Its
function is to verify and authenticate the identity of the subscriber.
It issues digital signature certificates to the subscribers. A certifying
authority has to receive a licence from the Controller of Certifying
Authorities, before it starts issuing digital signature certificates. The
issuing certifying authority’s digital signature on the digital signature
certificate can also be verified by using public key of the certifying authority
mentioned in the repository of the Controller of Certifying Authorities. These
multi-level authorities are referred to as public key infrastructure. It
can also be defined as a set of policies, processes, server platforms,
software and workstations used for the purpose of issuing digital
signature certificates and public-private key pairs.
The certifying authority also identifies and authenticate the subscriber’s
information contained in the digital signature certificate for the benefit of the
relying party. Thus, the role of certifying authorities is quite crucial.
Before the amendment introduced in 2009 vide Information Technology
(Amendment) Act, 2008, India adopted a technology specific approach (i.e.
‘only digital signature’ approach). It may be noted that ‘only digital
signature’ approach is more complex. According to S.2(p) read with S. 3
of the unamended IT Act, 2000 digital signature using Public Key
Infrastructure was the only prescribed method to authenticate the electronic
records. However, after the aforesaid amendment technology neutral
approach has been adopted. Under this approach, apart from the use
Regulation of Certifying Authorities 383
of digital signatures using Public Key Infrastructure, the use of other

forms of electronic signatures such as retina scanning or biometrics
have also been granted legal recognition by the Information
Technology Act, 2000. The electronic signature are affixed in the manner as
As the technology neutral approach includes simpler methods of
authentication of electronic records, it will gain more popularity as
compared to ‘only digital signature’ approach.
Levels of hierarchy of public key infrastructure is shown below:
Controller
Certifying Authority
Subscriber
Fig. 27.1: Hierarchy of India’s PKI infrastructure
CONTROLLER OF CERTIFYING AUTHORITIES

The Information Technology Act, 2000 provides for the appointment of
Controller of Certifying Authorities (in short, Controller) who shall supervise
the activities of the Certifying Authorities. The Controller is to act primarily
as an administrative authority rather than as a quasi-judicial body. The
Controller, as per the IT (Amendment) Act, 2008, is no more the "Repository
for electronic signature certificates. The Certifying Authorities shall also
maintain and update the records of electronic signature certificates with
effect from 27th October, 2009. In India, the Department of
Telecommunication (DoT) prescribes encryption norms while granting licence
to Internet Service Providers to ensure the integrity and security of messages
transmitted.
APPOINTMENT OF CONTROLLER AND OTHER OFFICERS (S. 17)
Appointment
The Central Government has appointed the Controller of Certifying
Authorities on November 1, 2000. The Office of the Controller of
Certifying Authorities has been divided into three functional departments:
384 Business Laws
(1) Technology, (2) Finance and Legal, and (3) Investigation. Each
department has a Deputy Controller and Assistant Controllers.
Controller
Deputy Controller Deputy Controller Deputy Controller Director

(Technology) (Finance and Legal) (Investigation) (Administration)
Assistant Controller Assistant Controller Assistant Controller

(Technology) (Finance and Legal) (Investigation)
Technical
Officers
Fig. 27.2. Organisational Chart of CCA
The Controller shall discharge his functions under this Act subject to the
general control and directions of the Central Government [S. 17(2)].
The Deputy Controllers and Assistant Controllers shall perform the
functions assigned to them by the Controller under the general
superintendence and control of the Controllers [S. 17(3)].
Qualifications, experience and terms and conditions of service.
The qualifications, experience and terms and conditions of service of
Controller, Deputy Controllers and Assistant Controllers shall be such as
may be prescribed by the Central Government [S. 17(4)].
Head Office and Branch Offices. The Head Office and Branch Offices
of the Controller shall be at such places as the Central Government may
specify, and these may be established at such places as the Central
Government may think fit [S. 17(5)].
Seal. There shall be a seal of the Office of Controller [S. 17(5)].
FUNCTIONS OF CONTROLLER OF CERTIFYING AUTHORITIES

1. To act as regulator of certifying authorities (S. 18). The
Controller may perform all or any of the following functions:
(i) Exercising supervision. The Controller is to exercise supervision
over the activities of the Certifying Authorities. This is so because the
Certifying Authorities have to fulfill all the conditions laid down by
the Controller.
(ii) Certifying public keys. The Controller is to certify the public keys
of the Certifying Authorities. The Controller has established the Root
Certifying Authority of India (RCAI) to certify public keys of all
Certifying Authorities in India. RCAI is a functional aspect of the

operations of the Controller; and not a separate organisation.
(iii) Laying down the standards. The Controller lays down the
standards to be maintained by the Certifying Authorities. Standards
are set up in respect of public key cryptography, form and size of key
pairs etc.
(iv) Specifying the qualifications. The Controller may specify the
qualifications and experience which employees of the Certifying
Authority should possess.
(v) Specifying the conditions. The Controller may specify the
conditions subject to which the certifying Authorities shall conduct
their business.
(vi) Specifying the contents. The Controller may specify the contents of
written, printed or visual materials and advertisements that may be
distributed or used in respect of Electronic Signature Certificate and
public key.
(vii) Specifying the form and content. The Controller may specify the
form and content of an Electronic Signature Certificate and the key.
(viii) Specifying the form and manner. The Controller may specify the
form and manner in which accounts shall be maintained by the
Certifying Authorities.
(ix) Specifying term of appointment of auditor. The Controller may
specify the terms and conditions subject to which auditor may be
appointed and the remuneration to be paid to them. The Controller
has certain auditors in its panel.
(x) Facilitates the establishment of any electronic system. The
Controller may facilitate the establishment of any electronic system
by a Certifying Authority either solely or jointly with other Certifying
Authorities and regulation of such systems.
(xi) Specifying the manner of conducting dealings. The Controller
may specify the manner in which certifying authorities shall conduct
their dealings with the subscribers.
(xii) Resolving any conflict of interest. The ‘Controller may resolve
any conflict of interests between the Certifying Authorities and the
subscribers. The Controller can mediate between Certifying Authority
and subscriber directly or through an arbitrator to resolve the conflict
of interest.
(xiii) Laying down duties. The Controller may lay down the duties of the
Certifying Authorities.
(xiv) Maintaining database. The Controller may maintain database
containing disclosure record of every Certifying Authority containing
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such particulars as may be specified by regulations, which shall be

accessible to public.
2. To recognise the foreign certifying authority (S. 19). The
controller may, with the previous approval of the central government
and by notification in the official gazette, recognise any foreign
certifying authority as a certifying authority under the Act.
The controller may, for reasons to be recorded in writing, by notification

in the official gazette, revoke such recognition.
3. To grant licence to certifying authorities to issue electronic
signature certificates (S. 21). The controller can grant license to any
person to issue electronic signature certificates provided he applies for it and
fulfills the requirements in respect to qualification, expertise, manpower,
financial resources and other infrastructure facilities.
4. To suspend or revoke licence (S. 25). The controller may by order
suspend the license of Certifying Authorities in accordance with the
provisions of Section 25(2). (For details see point 4 of the heading : Powers of
Controller of Certifying Authorities).
5. To investigate contraventions (S. 28). The Controller or any
officer authorised by him in this behalf shall investigate any contravention of
the provisions of this Act, rules or regulations made thereunder.
6. Notice of suspension and revocation of licence (Section 26).
Where the licence of the Certifying Authority is suspended or revoked, the
Controller shall publish notice of such suspension or revocation, as the case
may be, in the data base maintained by him.
GRANT OF LICENCE TO BE A CERTIFYING AUTHORITY BY CCA

The following are provisions of Information Technology Act, 2000 in this
respect:
1. Licence to issue Electronic Signature Certificates (S. 21)

Any person may make an application to the Controller for a licence to
issue Electronic Signature Certificates.
However, no licence shall be issued unless the applicant fulfills such
requirements with respect to qualification, expertise, manpower, financial
resources and other infrastructure facilities, which are necessary to issue
Electronic Signature Certificates as may be prescribed by the Central
Government.
A licence granted under this section shall—
(a) be valid for such period as may be prescribed by the Central
Government;
(b) not be transferable or heritable;
(c) be subject to such terms and conditions as may be specified by the

regulations.
2. Application for licence (S. 22)

Every application for issue of a licence shall be in such form as may be
Every application for issue of a licence shall be accompanied by
(a) a certification practice statement;
(b) a statement including the procedures with respect to identification of
the applicant;
(c) payment of such fees, not exceeding twenty-five thousand rupees as
may be prescribed by the Central Government;
(d) such other documents, as may be prescribed by the Central
Government.
Who can apply. According to Rule 8 the following persons may apply for
grant of a licence to issue Digital Signature Certificates, namely:-
(a) an individual, being a citizen of India and having a capital of five
crores of rupees or more in his business or profession;
(b) a company having —
(i) paid-up capital of not less than five crores of rupees; and
(ii) net worth of not less than fifty crores of rupees;
(c) a firm having —
(i) capital subscribed by all partners of not less than five crores of
rupees; and
(ii) net worth of not less than fifty crores of rupees;
(d) Central Government or a State Government or any of the Ministries
or Departments, Agencies or Authorities of such Governments.
Submission of application (Rule 10). According to Rule 10 of the
Information Technology (Certifying Authorities) Rules, 2000, every
application for a licenced Certifying Authority shall be made to the
Controller,—
(i) in the form given at Schedule I; and
(ii) in such manner as the controller may, from time to time, determine,
supported by such documents and information as the Controller may
require.
The aforesaid Rule has listed certain documents and information for this
purpose, According to Rule 11, the application for the grant of a licence shall
be accompanied by a non-refundable fee of twenty-five thousand rupees
payable by a bank draft or by a pay order drawn in the name of the
Controller.
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3. Validity of Licence (Rule 13)

The licence shall be valid for a period of 5 years from the date of its issue.
The licence is not transferable or inheritable.
4,. Procedure for grant or rejection of licence (S. 24)

The Controller may, on receipt of an application under sub-section (1) of
section 21, after considering the documents accompanying the application
and such other factors, as he deems fit, grant the licence or reject the
application. However, no application shall be rejected unless the applicant
has been given a reasonable opportunity of presenting his case. The
Controller should act fairly, impartially and reasonably.
5. Renewal of Licence (S. 23)

An application for renewal of a licence shall be—
(a) in such form;
(b) accompanied by such fees, not exceeding five thousand rupees,
as may be prescribed by the Central Government and shall be made not less
than forty- five days before the date of expiry of the period of validity of the
licence.
6. Suspension and Revocation of Licence (Section 25)

See point 4 of Power of the Controller.
POWERS OF CONTROLLER OF CERTIFYING AUTHORITIES

The following are the powers of the Controller of Certifying Authorities:
1. Power to regulate Certifying Authorities (S. 18)

The Controller has the following powers in relation to certifying
authorities—
(i supervising the activities;
(ii) certifying public keys;
(iii) laying down standards to be maintained;
(iv) specifying the conditions of conduct of their business and
(v) specifying the manner in which the Certifying Authorities shall
conduct their dealings with the subscribers.
The powers to regulate certifying authorities has been explain in detail
under Functions of the Controller.
2. Recognition of Foreign Certifying Authorities (S. 19)

Section 19 empowers the Controller to recognise any foreign certifying
Authority as Certifying Authority under the IT Act, subject to such conditions
as may be prescribed. However, the Controller has to take previous approval
of the Central Government before recognizing any foreign Certifying

Authority. Further the name of the foreign Certifying Authority has to be
notified in the Official Gazette.
The Electronic Signature Certificate issued by such Certifying Authority
shall be valid for the purposes of this Act.
Revocation of recognition. The Controller has the power to revoke the
recognition of any foreign Certifying Authority, if he is satisfied that it has
contravened any of the conditions and restrictions subject which it was grated
recognition. The Controller has to record the reasons for the revocation and
notify the same in the Official Gazette.
3. Power to grant or reject the application for giving licence to

issue Electronic Signature Certificates (Sections 21 and 24)
As per section 21, any person may make an application to the Controller
for a licence to issue.
As per section 24, the controller may, on receipt of an application for
grant of licence to issue Electronic Signature Certificates and after
considering the documents accompanying the application and such other
factors, as he deems fit, grant the licence or reject the application. However,
no such application shall be rejected unless the applicant has been given
reasonable opportunity of presenting his case. The Controller should act
fairly, impartially and reasonably. (Provisions for Grant of Licence have
been explained in detail earlier in this chapter.
4. Power of suspension and revocation of licence (Sections 25)

S. 25 gives power to the Controller to revoke the licence of a Certifying
Authority in certain cases. He has to hold an inquiry before revoking the
licence. It says:
Revocation of licence. The Controller may revoke the licence, if he is
satisfied after making such inquiry, as he may think fit, that a Certifying
Authority has—
(a) made a statement in, the application for the issue or renewal of the
licence, which is incorrect or false in material particulars;
(b) failed to comply the terms and conditions subject to which the licence
was granted;
(c) failed to maintain the procedures and standards specified in section
30;
(d) contravened any provisions of this Act, rule, regulation or order made
thereunder.
However, no license shall be revoked unless the verifying authority has
been given a reasonable opportunity of showing cause against the proposed
revocation.
Suspension of licence. The Controller may, if he has reasonable cause
to believe that there is any ground for revoking the licence as stated above, by
390 Business Laws
order, suspend such licence pending the completion of any inquiry ordered by
him. However, no licence shall be suspended for a period exceeding ten days
unless the Certifying Authority has been given a reasonable opportunity of
showing cause against the proposed suspension.
No certifying authority whose licence has been suspended shall issue any
Electronic Signature Certificate during such suspension.
5. Power to delegate (S. 27)

The Controller may, in writing, authorise the Deputy Controller,
Assistant Controller or any officer to exercise any of the powers of the
Controller under Section 17 to 34.
The Controller has created three separate departments, namely: (1)
Technology; (2) Finance and Legal and (3) Investigation. Each department is
currently being headed by one Deputy Controller and assisted by Assistant
Controllers.
6. Power to investigate contraventions (S. 28)

The Controller or any officer authorised by him in this behalf shall take
up for investigation any contravention of the provisions of this Act, rules or
regulations made thereunder.
7. Power to access to computers and data (S. 29)

The Controller or any other person authorised by him shall have access to
any computer system, data or any other material connected with such
system, for the purpose of searching for obtaining any information or data
contained in such computer system if the controller has reasonable cause to
suspect that any contravention of the provisions of Chapter VI (Sections 17 to
34) of the Information Technology Act, 2000 has been committed.
The Controller can also direct the person incharge of the computer
system, data apparatus or material, to provide him with such reasonable,
technical and other assistance as he may consider necessary.
8. Power of Controller to give directions (S. 68)

The controller may, by order, direct a Certifying Authority or any
employee of such authority to take such measures or cease carrying on such
activities as specified in the order if those are necessary to ensure compliance
with provisions of the Act, rules or regulations made thereunder.
CERTIFYING AUTHORITIES
According to S. 2(1)(g), “Certifying Authority” means a person
who has been granted a licence to issue a an electronic signature
certificate under Section 24.
Certifying Authorities may be individuals, partnership firms, companies

or Central Government, State Government or any of the Ministries or
Departments, Agencies or Authorities of such Governments. Certifying
Authorities are usually those corporate bodies which possess the technical
skills to issue electronic signature certificates to the subscribers. Certifying
Authorities include NSDL, Indian Air Force, E-Mudhra, Capricorn, CDAC,
IDRBT; (n) Code Solutions, Verasys. IDRBT is a certifying authority only to
banks and Indian Air Force is only to Indian Air Force. They work under the
supervision of Controller of Certifying Authorities.
REGULATORY PROVISIONS FOR CERTIFYING AUTHORITIES (OR

DUTIES OF CERTIFYING AUTHORITIES) (SECTIONS 30 TO 34)
1. Certifying Authority to follow certain procedures regarding
security system (S. 30). Every Certifying Authority shall,—
(a) make use of hardware, software, and procedures that are secure
from intrusion and misuse;
(b) provide a reasonable level of reliability in its services which are
reasonable suited to the performance of intended functions;
(c) adhere to security procedures to ensure that the secrecy and privacy
of the digital signatures are assured;
(ca) be the repository of all Electronic Signature Certificates issued
under this Act;
(cb) publish information regarding its practices, Electronic Signature
Certificates and current status of such certificate; and
(c) observe such other standards as may be specified by regulations.
The basic purpose of S. 30 is that the Certifying Authority should
not only have a secure system but also adopt and implement
security procedures.
The Information Technology (Amendment) Act, 2008 (w.e.f 27-10-2009)
has introduced two new clauses (ca) and (cb). Repository which was being
maintained by the Controller as per S. 20 earlier, will now be maintained by
the respective Certifying Authorities. Section 20 has been repealed w.e.f. 27-
10-2009.
2. Certifying Authority to ensure compliance of the Act, etc. (S.
31). Every Certifying Authority shall ensure that every person employed or
otherwise engaged by it complies, in the course of his employment or
engagement, with the provisions of this Act, rules, regulations or orders made
thereunder.
3. Display of licence (S. 32). Every Certifying Authority shall display
its licence at a conspicuous place of the premises in which it carries on its
business.
4. Surrender of licence (S. 33). Every Certifying Authority whose
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licence is suspended or revoked shall immediately after such suspension or

revocation, surrender the licence to the Controller [S. 33(1)]
Where any Certifying Authority fails to surrender a licence under S.
33(1), the person in whose favour a licence is issued, shall be guilty of an
offence and shall be punished with imprisonment which may extend up to six
months or a fine which may extend up to ten thousand rupees or with both
[S. 33(2)].
Thus, non-submission of a suspended or revoked licence is an offence and
not merely a contravention.
5. Disclosure [S. 34]. (1) According to Section 34(1), every Certifying
Authority shall disclose in the manner specified by regulations—
(a) its Electronic Signature Certificate;
(b) any certification practice statement relevant thereto;
(c) notice of the revocation or suspension of its Certifying Authority
Certificate, if any; and
(d) any other fact that materially and adversely affects either the
reliability of a Electronic Signature Certificate, which that authority
has issued, or the Authority’s ability to perform its services.
(2) Section 34(2) provides as follows :
Where in the opinion of the Certifying Authority any event has occurred
or any situation has arisen which may materially and adversely affect the
integrity of its computer system or the conditions subject to which an
[Electronic Signature] Certificate was granted, then, the Certifying Authority
shall—
(a) use reasonable efforts to notify any person who is likely to be affected
by that occurrence; or
(b) act in accordance with the procedure specified in its certification
practice statement to deal with such event or situation.
It may be noted that ‘Certificate Practice Statement’ means a statement
issued by a certifying authority to specify the practices the certifying
authority employs in issuing electronic signature certificate [S. 2(1)(k)].
FUNCTIONS AND POWERS OF CERTIFYING AUTHORITIES

A Certifying Authority has the following functions and powers:
1. Issue of Electronic Signature Certificates (S. 35)
2. Suspension of Digital Signature Certificates (S. 37)
3. Revocation of Digital Signature Certificate (S. 38)
4. Notice of Suspension or Revocation (S. 39)
These provisions have been discussed in the next chapter
“Electronic Signature Certificate”.
REVIEW QUESTIONS
1. How is the Controller of Certifying Authorities appointed ? What are his
functions. [B.Com. and B.Com. (Hons.), D.U.]
2. Explain powers of the Controller of Certifying Authorities under the
Information Technology Act, 2000. [B.Com. (H), D.U.]
3. Define Certifying Authority and state its duties. [B.Com., D.U.]
4. Explain the powers of the Controller of Certifying Authorities.
[B.Com. (H), D.U.]
5. Explain the functions of the Controller of Certifying Authorities.
6. Write a note on : Role of Certifying Authorities. [B.Com. (H), D.U.]
7. How the Controller of Certifying Authority appointed? What are his functions
under the Information Technology Act, 2000? [B.Com. (H), D.U.]
8. Explain the duties of “Certifying Authority” under the Information
Technology Act, 2000. [B.Com. (H), D.U.]
9. State whether the following statements are true or false :
(a) The Controller of Certifying Authorities does not issue electronic
signature certificates.
(b) Foreign Certifying Authority cannot be recognised under the IT Act,
2000.
Hint : True (a); False (b).
Electronic Signature
28 Certificate
LEARNING OBJECTIVES
➥ Meaning and Purpose of Digital Signature Certificate
➥ Procedure relating to Electronic Signature Certificate
ELECTRONIC SIGNATURE CERTIFICATE

According to S. 2(1)(tb), “Electronic Signature Certificate” means
an electronic signature certificate issued under S. 35 and includes
Digital Signature Certificate.
DIGITAL SIGNATURE CERTIFICATE (DSC)

According to S. 2(1)(q), “Digital Signature Certificate” means a
Digital Signature Certificate issued under S. 35(4). There are basically
three types of Digital Signature Certificates based on level of security. These
are : Class I, Class II and Class III.
As you know that electronic signature includes digital signature. In other
words, digital signature is a sub-set of electronic signature. A Digital
Signature Certificate is an instrument of trust. A relying party who wishes to
make use of Digital Signature infrastructure shall identify a subscriber over
the network. The data as to whom the DSC has been issued can be retrieved
from repository. Such information on the network ensures the relying party
that the DSC of the subscriber is accurate. A DSC also confirms the
subscriber’s public key and the bonafides of the issuer of DSC i.e. certifying
authority.
Further, the certificate revocation list maintained by licensed CA shall
confirm whether certificate is valid or is revoked. Thus a Digital Signature
Certificate establishes binding linkages between the subscriber, the issuer
and the relying party.
Purpose of Digital Signature Certificate

1. It identifies the applicant over the network.
2. It also confirms the subscriber’s public key and the bonafides of the
issuer of the certificate
3. Digitally Signature Certificates are legally admissible in a court of
law as evidence.
Electronic Signature Certificate 395
Sections 35-39 of the Information Technology Act, 2000 are about the life
cycle of Digital Signature Certificates.
Components of Digital Signature Certificate

1. Serial Number 2. User Name
3. User’s e-mark ID 4. User’s Public Key
5. Certifying Authority’s Name 6. Certificate Class
7. Validity
8. Digital Signature of Certifying Authority.
PROCEDURE RELATING TO ELECTRONIC SIGNATURE CERTIFICATE

Sections 35 to 39 highlight the important steps in certificate management
processes, i.e., certificate generation, issuance, publication, suspension,
revocation and archival. These are explained below :
1. Certifying Authority to Issue Electronic Signature Certificate

(S. 35)
(a) Making of Application. Any person may make an application to the
Certifying Authority for the issue of a Electronic Signature Certificate in such
form as may be prescribed by the 'Central Government [S. 35(1)].
Every such application shall be accompanied by such fee not exceeding
twenty five thousand rupees as may be prescribed by the Central
Government to be paid to the Certifying Authority [S. 32(2)] and Certification
Practice Statement, containing such particulars as may be prescribed [S.
32(3)].
(b) Grant of Certificate. On receipt of an application, the Certifying
Authority may, after making such enquiries as it may deem fit, grant the
Electronic Signature Certificate or for reasons to be recorded in writing,
reject the application.
(c) Rejection of application. Further no application shall be rejected
unless the applicant has been given a reasonable opportunity of showing
cause against the proposed rejection [Second proviso to S. 35(4)].
2. Representations upon Issuance of Digital Signature Certificate

(S. 36)
A Certifying Authority while issuing a Digital Signature Certificate shall
certify that—
(a) it has complied with the provisions of this Act and the rules and
regulations made thereunder;
(b) it has published the Digital Signature Certificate or otherwise made
it available to such person relying on it and the subscriber has
accepted it;
(c) the subscriber holds the private key corresponding to the public key,
listed in the Digital Signature Certificate;
396 Business Laws
(ca) the subscriber holds a private key which is capable of creating a

digital signature;
(cb) the public key to be listed in the certificate can be used to verify a
digital signature affixed by the private key held by the subscriber;
(d) the subscriber’s public key and private key constitute a functioning
key pair;
(e) the information contained in the Digital Signature Certificate is
accurate; and
(f) it has no knowledge of any material fact, which if it had been included
in the Digital Signature Certificate would adversely affect the
reliability of the representations in clauses (a) to (d).
3. Suspension of Digital Signature Certificate (S. 37)

The Certifying Authority which has issued a Digital Signature Certificate
may suspend such Digital Signature Certificate,—
(a) on receipt of a request to that effect from—
(i) the subscriber listed in the Digital Signature Certificate; or
(ii) any person duly authority to act on behalf of that subscriber;
(b) if it is of opinion that the Digital Signature Certificate should be
suspended in public interest [S. 37(1)].
A Digital Signature Certificate shall not be suspended for a period
exceeding fifteen days unless the subscriber has been given an opportunity of
being heard in the matter [S. 37(2)]. There is no maximum limit to the
number of days a certificate remains suspended.
On suspension of a Digital Signature Certificate under this section, the
Certifying Authority shall communicate the same to the subscriber [S. 37(3)].
Thus the burden is on the Certifying Authority to communicate to the
subscriber that his Digital Signature Certificate has been suspended. Mere
listing of the same in the Certificate Revocation list (CRL) and publishing in
the Repository of the Certifying Authority is not sufficient.
4. Revocation of Digital Signature Certificate (S. 38)

A Certifying Authority may revoke a Digital Signature Certificate issued
by it—
(a) where the subscriber or any other person authorised by him makes a
request to that effect; or
(b) upon the death of the subscriber; or
(c) upon the dissolution of the firm or winding up of the company where
the subscriber is a firm or a company [S. 38(1)].
A Certifying Authority may revoke a Digital Signature Certificate which
has been issued by it at any time, if it is of opinion that—
Electronic Signature Certificate 397
(a) a material fact represented in the Digital Signature Certificate is

false or has been concealed;
(b) a requirement for issuance of the Digital Signature Certificate was
not satisfied;
(c) the Certifying Authority’s private key or security system was
compromised in a manner materially affecting the Digital signature
certificate’s reliability;
(d) the subscriber has been declared insolvent or dead or where a
subscriber is a firm or a company, which has been dissolved, wound-
up or otherwise ceased to exist [S, 38(2)].
A Digital Signature Certificate shall not be revoked unless the subscriber
has been giver an opportunity of being heard in the matter [S. 38(3)].
On revocation of a Digital Signature Certificate under this section, the
Certifying Authority shall communicate the same to the subscriber [S. 38(4)].
The revoked Digital Signature Certificate shall be added to the
Certificate Revocation List [Rule 29].
Notice of Suspension and Revocation (S. 39)

Where a Digital Signature Certificate is suspended or revoked under
section 37 or section 38, the Certifying Authority shall publish a notice of
such suspension or revocation, as the case may be, in the repository specified
in the Digital Signature Certificate for publication of such notice [S. 39(1)].
Where one or more repositories are specified, the Certifying Authority
shall publish notices of such suspension or revocation, as the case may be, in
all such repositories [S. 39(2)].
REVIEW QUESTIONS
1. Explain the provisions of the Information Technology Act, 2000 with respect
to Electronic Signature Certificate. What purposes does this certificate
serve? [B.Com. (H), D.U.]
2. Explain the concept of Digital Signature Certificate as per the IT Act, 2000.
3. Write a short note on “Digital Signature Certificate.”
4. In what cases Digital Signature Certificate can be suspended ?
[B.Com. (H), D.U.]
29 Duties of Subscribers
LEARNING OBJECTIVES
➥ Meaning of Subscriber
➥ Duties of a Subscriber
Subscriber means a person in whose name the Electronic

Signature Certificate is issued [S. 2(1) (zg)]. In the ordinary language a
subscriber means a person who promises to contribute, or to give a sum of
money to avail some kind of service. However, in a Public Key Infrastructure,
a subscriber is the customer who pays to become one of the member of a
Digital Signature Certificate ‘club’.
A person has to take the following steps to become a subscriber:
Step 1: Approach the Certifying Authority with the request to issue a
Digital Signature Certificate, fill the application form for this purpose and
submit the necessary documents.
Step 2: Enter into a ‘Certifying Authority - Subscriber’ Agreement.
Step 3: Applicant to generate confidentially signing key pair by applying
the security procedure and prove the possession of private key corresponding
to the public key.
Step 4: After verifying the credential the certifying Authority generates
the Digital Signature Certificate for the public key.
Step 5: Subscriber to download the Digital Signature Certificate from the
website of the Certifying Authority and verify its contents before accepting it.
In some cases (for example, CPS version 3.0 of TCS-CA) if subscriber
downloads the Certificate, it amounts to acceptance.
Step 6: Upon acceptance of the Digital Signature Certificate by the
subscriber, the Certifying Authority publishes the Digital Signature
Certificate in its repository.
DUTIES OF SUBSCRIBER
The following are the duties of a subscriber:
1. Generating Key Pair (S. 40)

Where any Digital Signature Certificate, the public key of which
corresponds to the private key of that subscriber which is to be listed in the
Duties of Subscribers 399
Digital Signature Certificate has been accepted by a subscriber, the

subscriber shall generate that key pair by applying the security procedure [S.
40], In other words, the subscriber is to generate an appropriate private key
which matches the public key being allotted to him.
2. Duties of Subscriber of Electronic Signature Certificate (S. 40A)

In respect of Electronic Signature Certificate subscriber shall perform
such duties as may be prescribed.
3. Acceptance of Digital Signature Certificate (S. 41)

(i) A subscriber shall be deemed to have accepted a Digital Signature
Certificate if he publishes or authorises the publication of a Digital Signature
Certificate—
(a) to one or more persons;
(b) in a repository; or
otherwise demonstrates his approval of the Digital Signature Certificate in
any manner [S. 41(1)].
(ii) By accepting a Digital Signature Certificate the subscriber certifies to
all who reasonably rely on the information contained in the Digital Signature
Certificate that—
(a) the subscriber holds the private key corresponding to the public key
listed in the Digital Signature Certificate and is entitled to hold the
same;
(b) all representations made by the subscriber to the Certifying
Authority and all material relevant to the information contained in
the Digital Signature Certificate are true;
(c) all information in the Digital Signature Certificate that is within the
knowledge of the subscriber is true [S. 41(2)].
4. Control of Private Key (S. 42)

Every subscriber shall exercise reasonable care to retain control of the
private key corresponding to the public key listed in his Digital Signature
Certificate and take all steps to prevent its disclosure [S. 42(1). Thus the
burden of protecting the private keys is solely on the subscribers as the
Certifying Authority neither generates nor holds the private keys of the
subscribers.
If the private key corresponding to the public key listed in the Digital
Signature Certificate has been compromised, then, the subscriber shall
communicate the same without any delay to the Certifying Authority in such
manner as may be specified by the regulations. The subscriber shall be liable
till he has informed the Certifying Authority that the private key has been
compromised [S. 42 (2)].
400 Business Laws
REVIEW QUESTIONS
1. Explain the duties of a subscriber under the IT Act, 2000.
2. Explain the term “Subscriber” as per the IT Act, 2000. [B.Com. (H), D.U.]
3. What are the duties of the subscriber under the IT Act, 2000 ?
Penalties,
Compensation,
30 Adjudication and
Appellate Tribunal
LEARNING OBJECTIVES
➥ Penalties and Compensation or Contraventions
➥ Adjudicating Officer : Powers, Qualifications and Jurisdiction
➥ Provisions of the Appellate Tribunal (i.e. TDSAT)
Sections 43 to 47 of the Information Technology Act, 2000 deal with

unauthorised access to computer, computer system and computer network.
These sections are about ‘cyber contraventions’ and impose variable penalties
on the offenders depending upon the contravention.
PENALTIES AND COMPENSATION OR CONTRAVENTIONS

Contraventions deal primarily with unauthorised access to computer,
computer system, computer network or computer resource. These are civil
offences. These are discussed below :
1. Penalty and Compensation for damage to computer,

computer system, etc. (S.43)
Section 43 identifies following cases of causing damage to computer,
computer system, computer network or computer resource. According to it if
any person, without the permission of the owner or any other person who is
incharge of a computer, does any of the following acts, he shall be liable to
pay damages by way of compensation to the person so affected:
(a) Wrongfully accessing or securing access to computer, computer
system or computer network or computer resource of another person [S. 43(a)].
There may be physical access and/or virtual access.
(b) Downloading, copying, extracting, etc. any information from such
computer, computer system or computer network including information or
data held or stored in any removable storage medium [S. 43(6)].
(c) Introducing computer containment or computer virus into any
computer, computer system or computer network [S. 43(c)]. It may cover
402 Business Laws
instances of deletion, alteration or damage of stored computer data or

computer programme.
(d) Damaging any computer, computer system or computer network,
data, computer data base or any other programmes residing in such
computer, computer system or computer network [S. 43(d)], It may cover
instances of on-line fraud.
(e) Disrupting any computer, computer system or computer network.
Disruption here implies unexpected deviations in the normal operations of a
computer, leading to malfunctioning of computer, computer system or
computer network.
(f) Denying access, if he denies or causes the denial of access to any
person authorised to access any computer, computer system or computer
network by any means [S. 43(f)], It may be done by manipulating the access
code/password/user id etc.
(g) Providing assistance to facilitate access to a computer, computer
system or computer network in contravention of the provisions of this Act,
rules or regulations made thereunder [S. 43(g)].
(h) Charging the services availed of to the account of another
person by tempering with or manipulating any computer, computer system,
or computer network [S. 43(h)].
(i) Destroying, deleting or altering an information it may cover
instances of hacking, data theft, data loss, on-line frauds, forgery, etc.
(j) Stealing, concealing, destroying or altering any computer
source code with an intention to cause damage.
CASE : In Shri Umashankar Sivasubramanian v. ICICI Bank, Petition No. 2462 of

2008 in the Office of Adjudicating Officer of Judicature at Chennai (judgement dated
12.4.2010), the petitioner (non-resident Indian) was employed in a company in Abu
Dhabi and residing in Abu Dhabi. He maintained a savings bank account (NRE) with
ICICI Bank, V.E. Road, Tuticorin (India). The Bank has activated an Internet Banking
facility for the account. On 4th September, 2007 petitioner’s credit balance was
R 6,46,046. The petitioner received a security update from customercare@icicibank.com
for updation. He assumed it to be a routine mail from the ICICI Bank, the customer
complied with the request consequent to which he has shocked to find that his account
had been debited to the extent mentioned above. He received a telephone call from
ICICI Bank, Mumbai on September 7th, 2007 when a representative from ICICI Bank,
Mumbai telephoned at 1800 hours (UAE time) and requested for confirmation whether
money transfer from the petitioner had been made to ‘Uday Enterprises’, Mumbai
through internet banking on 6th and 7th September, 2007. The petitioner denied any
transfer being made as suggested by the Mumbai branch.
The petitioner filed a complaint with the Customer Care, ICICI Bank Mumbai within 24
hours. He also faxed and emailed a complaint to the ICICI Bank, Tuticorin and the NRI
Service Centre, Mumbai. An amount of Rs, 4,60,000 was withdrawn by self-cheque
across the counter from the Uday Enterprises account. The balance of 1,50,171 was
R
transferred from Uday Enterprise account to petitioner’s account. The petitioner also
Penalties, Compensation, Adjudication and Appellate Tribunal 403
filed a complaint before the Superintendent of Police, Tuticorin detailing all the events
requesting the police to initiate action against the ICICI Bank and retrieve the money.
Later the petitioner lodged a fresh complaint with the Cyber Crime Cell, at Mumbai. The
Adjudicating Officer held that ICICI Bank did not exercise due diligence to prevent the
financial loss to the petitioner. He directed the Bank to pay a compensation of
R 12,85,000 to the petitioner.
2. Compensation for failure to protect data (S. 43A)

Where a body corporate, possessing, dealing or handling any sensitive
personal data or information in a computer resource which it owns, controls
or operates, is negligent in implementing and maintaining reasonable
security practices and produces and thereby causes wrongful loss or wrongful
gain to any person, such body corporate shall be liable to pay damages by way
of compensation to the person so affected.
For the purposes of this section body corporate means a company and
includes a firm, sole proprietorship or other association of individuals
engaged in commercial or professional activities.
3. Penalty for failure to furnish information, return, etc. (S. 44)

Act Penalty
(a) Failure to furnish any document, report, Not exceeding Rs. 1,50,000 for each
etc. to the controller or certifying such failure
authority
(b) Failure to file any return books or other Not exceeding Rs. 5,000 per day till
documents or other information within such default continues.
the time specified.
(c) Fails to maintain books of accounts or Not exceeding Rs. 10,000 per day
records till such default continues.
Under the above clauses the person could be subscriber, Certifying

Authority, auditor or any person incharge of the computer resource.
4. Residuary penalty (S. 45)

Whoever contravenes any rules or regulations made under this Act, for
the contravention of which no penalty has been separately provided, shall be
liable to pay a compensation not exceeding twenty five thousand rupees
to the person affected by such contravention
Section 45 is effective against all such contraventions of which no penalty
has been separately provided under S. 43 and S. 44 of the Act,
Compounding of contravention (S. 63)

Any contravention under this Act may, either before or after the
institution of adjudication proceedings, be compounded by the Controller or
such other officer as may be specially authorised by him or by the
adjudicating officer, subject to such conditions as the Controller or such other
404 Business Laws
officer or the adjudicating officer may specify. However, such sum shall not,
in any case, exceed the maximum amount of the penalty which may be
imposed under this Act for the contravention so compounded.
Subsequent contravention.—The aforesaid provision (i.e. sub-section 1
of section 63) shall not apply to a person who commits the same or similar
contravention within a period of three years from the date on which the first
contravention, committed by him, was compounded [S. 63(2)].
No proceedings.—When any contravention has been compounded, no
proceeding or further proceeding, shall be taken against the person guilty of
such contravention in respect of the contravention so compounded [S. 63(2)].
Thus, if contravention has been compounded, the person shall be acquitted.
Recovery of penalty and compensation (S. 64)

A penalty imposed or compensation awarded under this Act, if it is not
paid, shall be recovered as an arrear of land revenue and the licence or the
Electronics Signature Certificate, as the case may be, shall be suspended till
the penalty is paid.
ADJUDICATION ON CONTRAVENTIONS
Appeal against order
Controller of of Controller to
Certifying Appeal against order
Authorities of the Appellate,
The Appellate Tribunal to
High Court
Tribunal
Adjudicating
Officer Appeal against order
of Adjudicating Officer to
Fig. 30.1. Adjudication under the IT Act, 2000
The following are the provisions of adjudication on contraventions :
1. Power to adjudicate (S. 46)

For the purpose of adjudging under Chapter IX (i.e. Sections 43-47) of the
IT Act, 2000 whether any person has committed a contravention of any of the
provisions of this Act or of any rule, regulation, direction or order made
thereunder the Central Government shall appoint any officer not below the
rank of a Director to the Government of India or an equivalent officer of a
State Government to be an adjudicating officer for holding an inquiry in the
manner prescribed by the Central Government [S. 46(1)]. The provision of
adjudicating officer has been made for speedy trials.
The adjudicating officer shall exercise jurisdiction to adjudicate
matters in which the claim for injury or damage does not exceed
rupees five crore. If the claim exceeds five crores the jurisdiction
shall vest with the competent court [S. 46(1 A)].
The adjudicating officer shall, after giving the person a reasonable
opportunity for making representation in the matter and if, on such inquiry,
he is satisfied that the person has committed the contravention, he may
impose such penalty or award such compensation as he thinks fit in
accordance with the provisions of that section [S. 46(2)].
Qualifications and Jurisdiction of Adjudicating Officer. No person
shall be appointed as an adjudicating officer unless he possesses such
experience in the field of Information Technology and legal or judicial
experience as may be prescribed by the Central Government [S. 46(3)].
Where more than one adjudicating officers are appointed, the Central
Government shall specify by order the matters and places with respect to
which such officers shall exercise their jurisdiction [S. 46(4)].
Powers of Adjudicating Officer. Every adjudicating officer shall have
the powers of a civil court which are conferred on the Cyber Appellate
Tribunal under sub-section (2) of section 58 [S. 46(5)].
Thus, the adjudicating officer, inter alia, has the power to summon
witnesses, enforce their attendance; examine them on oath and require
production of documents. He can give a decision or a definite judgement
which has finality and authoritativeness.
2. Factors to be taken into account by the adjudicating officer

(S.47)
While adjudging the quantum of compensation under Sections 43 to 47
(i.e. Chapter IX of the Information Technology Act, 2000) the adjudicating
officer shall have the regard to the following factors, namely:—
(a) the amount of gain of unfair advantage, wherever quantifiable, made
as a result of the default;
(b) the amount of loss caused to any person as a result of the default;
(c) the repetitive nature of the default. (S. 47).
However, it is clear from sections 43 to 45 that the pecuniary
jurisdiction of the adjudicating officer is not to exceed five crore
rupees
THE APPELLATE TRIBUNAL

Before amendment of Information Technology Act, 2000 by the Finance
Act, 2017, Cyber Appellate Tribunal was the Appellate Tribunal to exercise
jurisdiction, powers and authority conferred on the Appellate Tribunal under
the Information Technology Act, 2000. However, the Finance Act, 2017 has
merged Cyber Appellate Tribunal with the Telecom Dispute Settlement and
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Appellate Tribunal (in short, TDSAT), hereinafter called the Appellate

Tribunal. The Finance Act, 2017 has repealed sections 49, 50, 51, 52, 52A,
52B, 52C, 53, 54 and 56 of the Information Technology Act, 2000.
The various provisions of the Appellate Tribunal,, as amended by the
Finance Act, 2017 (w.e.f. 26th May, 2017) are as follows :
1. TDSAT to be the Appellate Tribunal (Section 48 of the IT Act).
The Telecom Disputes Settlement and Appellate Tribunal established under
section 14 of the Telecom Regulatory Authority Act, 1997 shall, on and from
the commencement of the Finance Act, 2017, be the Appellate Tribunal for
the purposes of this Act and the said Appellate Tribunal shall exercise the
jurisdiction, powers and authority conferred on it by or under this Act.
The Central government shall specify, by notification, the matters
and places in relation to which the Appellate Tribunal may exercise
jurisdiction.
2. Composition of Appellate Tribunal [Section 14B of the Telecom
Regulatory Authority of Indian Act, 1997). The Appellate Tribunal shall
consists of a Chairperson and not more than two members to be appointed, by
notification, by the Central Government in consultation with the Chief
Justice of India.
3. Decision by majority (S. 52D). The section advocates the rule of
decision by majority. If the members of a Bench consisting of two members
differ in opinion, they shall state the point or points on which they differ. The
Chairperson in such a case constitute a larger Bench. The larger Bench shall
be headed by the Chairperson. The larger Bench will also include those
Members who first heard it. There may be other new Members also in the
larger Bench.
4. Orders Constituting Appellate Tribunal to be final and not to
invalidate its proceedings (S. 55). No order of the Central Government
appointing any person as the Presiding Officer of a Appellate Tribunal shall
be called in question in any manner and no act or proceeding before an
Appellate Tribunal shall be called in question in any manner on the ground
merely of any defect in the constitution of an Appellate Tribunal.
5. Appeal to the Appellate Tribunal (S. 57). Any person aggrieved
by an order made by controller or an adjudicating officer under this Act may
prefer an appeal to an Appellate Tribunal having jurisdiction in the matter [S.
57(1)]. “Appeal” is defined, in the New Oxford Dictionary of English, Oxford
University Press, Indian Edition, 2000, as the transference of a case from an
inferior to a higher court or tribunal in the hope of reversing or modifying the
decision of the former.
No appeal shall lie to the Appellate Tribunal from an order made by an
adjudicating officer with the consent of the parties [S. 57(2)].
Period allowed for appeal. Every appeal shall be filed within a period
of forty-five days from the date on which a copy of- the order made by the
Controller or the adjudicating officer is received by the person aggrieved and it

shall be in such form and be accompanied by such fee as may be prescribed.
However, the Appellate Tribunal may entertain an appeal after the expiry of
the said period of forty-five days if it is satisfied that there was sufficient
cause for not filing it within that period [S. 57(3)].
Order by Appellate Tribunal. On receipt of an appeal, the Appellate
Tribunal may, after giving the parties to the appeal, an opportunity of being
heard, pass such orders thereon as it thinks fit, confirming, modifying or
setting aside the order appealed against [S. 57(4)].
Copy of the order. The Appellate Tribunal shall send a copy of every
order made by it to the parties to the appeal and to the concerned Controller
or adjudicating officer [S. 57(5)].
Disposal of appeal. The appeal filed before the Appellate Tribunal shall
be dealt with by it as expeditiously as possible and endeavour shall be made
by it to dispose of the appeal finally within six months from the date of
receipt of the appeal [S. 57(6)].
6. Procedure of the Appellate Tribunal [S. 58(1)]. The Appellate
Tribunal shall not be bound by the procedure laid down by the Code of Civil
Procedure, 1908 (5 of 1908). It shall be guided by the principles of natural
justice. Subject to the other provisions of this Act and of any rules, the
Appellate Tribunal shall have powers to regulate its own procedure including
the place at which it shall have its sitting [S. 58(1)].
7. Powers of the Appellate Tribunal [S. 58(2)]. The Appellate
Tribunal shall have, for the purposes of discharging its functions under this
Act, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following
matters, namely:—
(a) summoning and enforcing the attendance of any person and
examining him on oath;
(b) requiring the discovery and production of documents or other
electronic records;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) any other matter which may be prescribed [S. 58(2)].
According to the Information Technology (Other Powers of Civil
Courts vested in the Appellate Tribunal) Rules, 2003, the Tribunal
has been given the following powers in addition to the above:
(a) setting aside any order of dismissal of any application for default or
any order passed by it, ex parte;
408 Business Laws
(b) requisitioning of any public record, document or electronic record

from any court or office.
8. Right to legal representation (S. 59). The appellant may either
appear in person or authorise one or more legal practitioners or any of its
officers to present his or its case before the Appellate Tribunal.
9. Limitation (S. 60). The provisions of the Limitation Act, 1963 (36 of
1963), shall, as far as may be, apply to an appeal made to the Appellate
Tribunal.
10. Civil court not to have jurisdiction (S. 61). No court shall have
jurisdiction to entertain any suit or proceeding in respect of any matter which
an adjudicating officer appointed under this Act or the Appellate Tribunal
constituted under this Act is empowered by or under this Act to determine
and no injunction shall be granted by any court or other authority in respect
of any action taken or to be taken in pursuance of any power conferred by or
under this Act.
11. Appeal to High Court (S. 62). Any person aggrieved by any
decision or order of the Appellate Tribunal may file an appeal to the High
Court within sixty days from the date of communication of the decision or
order of the Appellate Tribunal to him , on any question of fact or law arising
out of such order.
However, the High Court may, if it is satisfied that the appellate was
prevented by sufficient cause from filing the appeal within the said period,
allow it to be filed within a further period not exceeding sixty days.
In Ram Nath Sao v. Gobardhan Sao [(2002) 3 SCC 195], it was held
that the expression “sufficient cause” should receive a liberal construction so
as to advance substantial justice when no negligence or inaction or bonafides
is imputable to a party.
12. Qualification for appointment of Chairperson (w.e.f. June 1,
2017). A person shall not be qualified for appointment to Chairperson unless
he :
(a)is or has been, or is qualified to be, a judge of supreme court; or
(b)is, or has been, Chief Justice of a High Court; or
(c)has, for a period or not less than three years held office as member; or
(d)is a person of ability, integrity and standing, and having special
knowledge of and professional experience of, not less than 25 years in
economics, business, commerce, law, finance, accountancy,
management, industry, public affairs, administration,
telecommunications or any other matter which in opinion of Central
Government is useful to the Telecom Disputes Settlement and
Appellate Taibonal.
Similar is the qualification for a member of the Appellate Tribunal.
REVIEW QUESTIONS
1. Explain the provisions of the IT Act, 2000 as regards Cyber Contraventions.
2. Explain the provisions of the IT Act, 2000 as regards compounding of
contraventions.
3. Distinguish between cyber contraventions and cyber offences. Explain the
provisions in respect of cyber contraventions as provided in the Information
Technology Act, 2000. [B.Com. (H), D.U.]
Hint. For distinction between cyber contraventions and cyber offences, see
next chapter.
4. What is ‘Appellate Tribunal’? Explain its working as per the Information
Technology Act, 2000. [B.Com. and B.Com. (Hons.), D.U.]
5. Write a note on: Appellate Tribunal. [B.Com. and B.Com. (Hons.), D.U.]
6. The Appellate Tribunal has same powers as a Civil Court but an aggrieved
may appeal to the High Court. [B.Com. (H), D.U.]
7. Describe the provisions of the IT Act, 2000 regarding Adjudicating Officer.
Offences under the IT
31 Act, 2000
LEARNING OBJECTIVES
➥ Meaning of Offence
➥ Distinction between Contravention and Cyber Offence
➥ Offences under the Information Technology Act, 2000
➥ Miscellaneous Provisions
MEANING OF OFFENCE
A contravention is a mere violation of law or procedure which does not
result in criminal prosecution. It may result in civil prosecution. It may be
punishable with a liability to pay a penalty or compensation. On the other
hand, an offence is an act forbidden by law and made punishable by fine
and/or imprisonment. The difference between cyber contravention and cyber
offence is more about the degree and extent of criminal activity.
DISTINCTION BETWEEN CONTRAVENTIONS (THAT IS CIVIL

OFFENCES) UNDER THE ACT AND CYBER OFFENCES (THAT IS
CRIMINAL OFFENCES) UNDER THE ACT
The following are the points of difference between the two:
Criteria Cyber Contraventions Cyber Offences

1. Meaning A contravention is a mere A offense is an act, forbidden
violation of law or procedure law and made punishable by
which does not result in fine and/or imprisonment.
criminal prosecution.
2. Nature Cyber contravenes are a mere Cyber offences deal with
violation of law or procedure. computer, computer system,
Cyber contraventions deal computer network or
primarily with unauthorised computer resource related
access to computer, computer serious offences.
system, computer network a
computer resource. These have
been provided under sections
43 of the Act, particularly
section 43(a) to (j)
Offences under the IT Act, 2000 411
3. Prosecution Cyber contravention may Cyber offence may result in

result in civil prosecution. criminal prosecution.
4. Power to The Controller or any other In case of cyber offence, the
investigate Officer authorised by him in police officer not below
this behalf shall take up for the rank of Deputy
investigation any contraven- Superintendent of Police has
tion of the provisions of the the power to investigate any
Act, rules or regulations made cyber offence.
thereunder (S. 28).
5. Consequences The person who is guilty of The offender is punishable
cyber contravention is liable to with upto a certain period, or
pay damages by way of with imprisonment upto a
compensation to the person so certain limit, or with both.
affected.
OFFENCES UNDER THE ACT

The following cyber offences are provided in the Act:
1. Tampering with computer source documents (S. 65)

This offence takes place when a person knowingly or intentionally
conceals, destroys or alters or intentionally or knowingly causes another to
conceal, destroy, or alter any computer source code used for a computer,
computer programme, computer system or computer network, when the
computer source code is required to be kept or maintained by law for the time
being in force. For the purposes of this section, “computer source code” means
the listing of programmes, computer commands, designs and layout and
programme analysis of computer resources in any form.
Punishment.—A person guilty of such an offence shall be punishable
with imprisonment upto three years or with fine which may extend
upto two lakh rupees, or with both.
Note: If a person knowingly conceals/destroys/alters any computer source
code used for a computer/computer programme/Network —Imprisonment
upto 3 years or fine upto Rs. 2,00,000 or both.
CASE : In Syed Asifuddin v. The State of Andhra Pradesh, 2005 Cr.LJ 4314, the
CDMA handsets which were given to the Reliance Infocomm subscribers were
technologically locked so that it would only work with Reliance Infocomm services.
However, certain employees of the Tata Indicom manipulated the electronic 32-bit
Electronic Serial Number (ESN) programmed into those mobile phones which were
exclusively franchised to Reliance Infocomm. It was found that the handsets could be
unlocked for the Tata Indicom services as well. It may be noted that ESN is a unique 32-
bit number programmed into the phone when it is manufactured by the instrument
manufactures: and System Identification Code (SID) is a unique 5-digit number that is
assigned to each telecom operator by the Government of India. The Andhra Pradesh
High Court held that both ESN and SID fall within the definition of computer source code
under section 65 of the Information Technology Act, 2000. Therefore, the employee of
the Tata Indicom were held guilty under this section.
412 Business Laws
2. Computer related offences (S. 66)

If any person, dishonestly or fraudulently, does any act referred to in
section 43 (discussed in the previous chapter, he shall be liable under this
section. Under section 43 unauthorised access to a computer resource is cyber
contravention and under section 66 it is an offence as section 66 has
introduced the concept of mens rea, i.e. intention, in the form of “dishonestly
and fraudulently”. Thus, a mere unauthorised access to a computer resource
is not a “computer related offence” unless there is a dishonest or fraudulent
intent behind such unauthorised access.
Punishment.—A person guilty of an offence under this section shall be
punishable with imprisonment for a term which may extend upto three
years or with fine which may extend upto five lakh rupees or with
both.
Note: A person guilty of dishonest and fraudulent unauthorised access to a

computer resource—Imprisonment upto 3 years or fine upto Rs. 5,00,000 or
both.
CASE : In Sunjay Sen Gupta v . State of Haryana (decided by the Punjab and
Haryana High Court on May 2, 2013), the accused were found guilty of using
complainant company’s computer system and computer network and parting with trade
secrets and information, confidential in nature.
NOTES
Punishment for sending offensive messages through communication
service, etc (Section 66A). – Any person who sends, by means of a computer
resource or a communication device –
(a) any information that is grossly offensive or has a menacing character ; or
(b) any information which he knows to be false, but for the purpose causing
annoyance, inconvenience, danger, obstruction, insult, injury, criminal
intimidation, enmity, hatred, or ill will, persistently by making use of such
computer resource or a communication device ; or
(c) any electronic mail or electronic mail message for the purpose of causing
annoyance or inconvenience or to deceive to misled the addressee or
recipient about the origin of the message,
shall be punishable with imprisonment for a tern which may be extend to
three years and with fine.
In Shreya Singhal v. Union of India [(2015) 5 SCC 1], the Supreme Court
in its judgment dated 24th march, 2015, struck down in its entirety section
66A of the Information Technology Act, 2000, relating to restrictions on
online speech, as unconstitutional on the ground of violating Article 19(1)
(a) of the Constitution of India. Therefore, now comments on social networking
sites will not be offensive unless they violate provisions of the Indian Penal Code,
1860.
3. Dishonestly receiving stolen computer resource or

communication device (S.66B)
A person is punishable for an offence under this section if he dishonestly
receives or retains any stolen computer resource or communication device
knowing or having reason to believe the same to be stolen computer resource

or communication device. The essentials of this offence are:
(a) dishonestly receiving or retaining any stolen computer resource or
communication device; and
(b) knowledge or reason to believe that the computer resource or
computer device is stolen.
If a person does anything with the intention of causing wrongful gain to
one person or wrongful loss to another person, he is said to do that thing
dishonestly.
Punishment.—The person who is guilty of offence under this section
shall be punished with imprisonment of either description, which may extend
to three years or with fine which may extend to rupees one lakh or
both.
Note: A person who is guilty of dishonestly receiving stolen computer
resource or communication device is punishable with—imprisonment upto
3 years or fine upto Rs. 1,00,000 or both.
4. Identity theft (S. 66C]

A person is punishable for the offence of identity theft if he fraudulently
or dishonestly makes use of the electronic signature, password or any other
unique identification feature of any other person, Thus this section is meant
to protect the identification details of all e-commerce and e-governance users
in the form of electronic/digital signatures, passwords, PINs etc.
Punishment.—A person who is found guilty of identity theft shall be
punished with imprisonment of either description for a term which may
extend to three years and shall also be liable to fine which may extend
to rupees one lakh.
Note: Fraudulently/dishonestly makes use of electronic signature/

password of another person—upto 3 years and upto Rs. 1,00,000.
5. Cheating by personation by using computer resource (S. 66D)

A person is punishable for the offence under this section if he by means of
communication device or computer resource cheats by personation. Examples
of offence under this section are: creation of a clone website to capture
personal information of a user and creation of a fake profile on matrimonial
with the intention to cheat.
Punishment.—A person who is found guilty of offence of cheating by
personation by using computer resource shall be punished with imprisonment
of either description for a term which may extend to three years and shall
also be liable to fine which may extend to one lakh rupees.
Note: Cheating by personation through a computer resource/

communication device—upto 3 years and upto Rs. 1,00,000.
414 Business Laws
6. Violation of privacy (S. 66E)

Whoever, intentionally or knowingly captures, publishes or transmits the
image of a private area of any person without his or her consent, under
circumstances violating the privacy of that person is punishable for violation
of privacy. Examples of this offence include installation of hidden
cameras/communication device inside washrooms, bedrooms, changing rooms,
hotel rooms etc. for the purpose of violating privacy of any user.
Punishment.—The punishment for violation of privacy is imprisonment
which may extend to three years or with fine not exceeding two lakh
rupees, or with both.
Note: If a person knowingly captures/publishes/transmits images of
private area of any person without his or her consent, he is punishable
with—imprisonment upto 3 years or fine upto Rs. 2,00,000 or both.
7. Cyber terrorism (S. 66F)

Cyber terrorism as an offence exist in the following forms:
1. Whoever, with the intent to threaten the unity, integrity, security
or sovereignty of India or to strike terror in the people or any section
of the people by—
(i) denying or cause the denial of access to any person authorised
to access computer resource: or
(ii) attempting to penetrate or access a computer resource without
authorisation or exceeding authorised access; or
(iii) introducing or causing to introduce any computer
containment;
commits the offence of cyber terrorism if by means of such conduct causes or
is likely to cause death or injuries to persons or damage to or destruction of
property or disrupts or knowing that it is likely to cause damage or
disruption of supplies or services essential to the life of the community or
adversely affect the critical information infrastructure specified under section
70 of the Information Technology Act, 2000.
2. Whoever (a) knowingly or intentionally penetrates or access a
computer resource without authorisation or exceeding authorised
access, and (b) thereby obtaining access to restricted information,
data or computer data base, (c) with reasons to believe that such
information, data or computer base so obtained may be used to cause
or likely to cause injury to the sovereignty and integrity of India, the
security of the state, friendly relations with foreign states, public
order, decency or morality, or in relation to contempt of court,
defamation or incitement to an offence, or to the advantage of any
foreign nation, group of individuals or otherwise, commits the offence
of cyber terrorism.
Thus the scope of cyber terrorism has been made very exhaustive.
Punishment.—Whoever commits or conspires to commit cyber terrorism

shall be punishable with imprisonment which may extend to imprisonment
for life.
NOTES:
Forms of Cyber Terrorism
1. Acts committed to threaten unity integrity, security or sovereignty of
India in form of
— denying access of computer resource to any authorised person
— unauthorisedly accessing a computer resource
— introducing computer contaminant
and causes by such acts injury to person/property/life of
community or adversely affects the critical infrastructure
specified under section 70 of IT Act, 2000.
2. Unauthorised access of any information/data from a computer resource
causing injury to sovereignty and integrity of India contempt of courts,
etc.
Punishment—upto life imprisonment.
8. Cyber offences relating to obscenity and pornography

(i) Publishing or transmitting obscene material in electronic form
(S. 67)
Whoever publishes or transmits or causes to be published in the
electronic form, any material which is lascivious or appeals to prurient
interest or if its effect is such as to deprave and corrupt persons who are
likely to read, see or hear the matter contained or embodied in it, commits the
offence of publishing or transmitting obscene material in electronic form.
The following are the essentials of this offence:
(a) publication or transmission in electronic form,
(b) material which is lascivious or appeals to the prurient interest,
(c) tendency to deprave and corrupt persons,
(d) likely to read, see or hear the matter contained in the electronic form.
Punishment.—A person who commits the offence of publishing obscene
material in electronic form shall be punished on first conviction with
imprisonment of either description for a term which may extend to three
years and with fine which may extend to five lakh rupees and in the
event of a second or subsequent conviction with imprisonment of either
description for a term which may extend to five years and also with fine
which may extend to ten lakh rupees.
Note: First conviction—Imprisonment upto 3 years and fine upto Rs.

5,00,000
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Second or subsequent conviction—Imprisonment upto 5 years and fine

upto Rs. 10,00,000
CASES : In Vyakti Vikas Kendra, India Public Charitable Trust through Mahesh
Gupta & Others v. Jitender Bagga and Another [CS (OS) No. 1340/2012 (popularly
known as ‘Art of Living’ case)], is a typical example of how vulnerable public figures in
India are to cyber defamation. Certain highly defamatory material was posted on
www.blogger.com owned by google (dependent No. 2) by Mr. Jitender Bagga
(defendant No. 1). As per the plaintiff, the defendant No. 1 was indiscriminately sending
e-mails and publishing a large number of blog posts, which according to them was
making highly vulgar, disgusting and abusive references towards His Holiness Sri Sri
Ravi Shankar, owner of Art of Living Foundation, and other persons associated with the
Art of Living.
Delhi High Court in this case held Google to be an “intermediary” within the definition of
Section 2(1)(w) and Section 79 of the Information Technology Act, 2000. The Court
directed google to remove all defamatory contents about the plaintiffs posted by the
defendant No. 1 from its website www.blogger.com as well as all the links containing
defamatory content within 36 hours from the date of knowledge of the order by this
Court. The Court refrained defendant No. 1 from sending any such e- mails or posting
any material over the internet having a direct or indirect reference to the plaintiffs or the
Art of Living Foundation or any member of the Art of Living Foundation, or His Holiness
Sri Sri Ravishankar.
(ii) Punishment for publishing or transmitting of material containing

sexually explicit act, etc., in electronic form (S. 67A)
Whoever publishes or transmits or causes to be published or transmitted
in the electronic form any material which contains sexually explicit act or
conduct shall be punished. The punishment shall be on first conviction with
imprisonment of either description for a term which may extend to five
years and with fine which may extend to ten lakh rupees and in the
event of second or subsequent conviction with imprisonment of either
description for a term which may extend to seven years and also with fine
which may extend to ten lakh rupees.
Note: Publishing/transmitting any sexually explicit act in electronic

form—Imprisonment
First conviction—Imprisonment upto 5 years and fine upto Rs.
10,00,000
Second or subsequent conviction—Imprisonment upto 7 years and fine
upto Rs. 10,00,000
(iii) Punishment for publishing or transmitting of material depicting

children in sexually explicit act, etc., in electronic form (S. 67B)
Section 67B criminalizes following instances of online child pornography.
The instances of child pornography covered by the section are as follows:
(a) publishing or transmitting or causing to be published or transmitted
material in any electronic form which depicts children engaged in

sexually explicit act or conduct; or
(b) creating text or digital images, collects, seeks, browses, downloads,
advertises, promotes, exchanges or distributes material in any
electronic form depicting children in obscene or indecent or sexually
explicit manner; or
(c) cultivating, enticing or inducing children to online relationship with
one or more children for and on sexually explicit act or in a manner
that may offend a reasonable adult on the computer resource; or
(d) facilitating abusing children online, or
(e) recording in any electronic form own abuse or that of others
pertaining to sexually explicit act with children,
Punishment. The person who commits the offence under section 67B
shall be punished on first conviction with imprisonment of either description
for a term which may extend to five years and with fine which may
extend to ten lakh rupees and in the event of second or subsequent
conviction with imprisonment of either description for a term which may
extend to seven years and also with fine which may extend to ten lakh
rupees.
Exception
Provisions of section 67, section 67A and 67B does not extend to any book,
pamphlet, paper, writing, drawing, painting representation or figure in
electronic form-—
(i) the publication of which is proved to be justified as being for the
public good on the ground that such book, pamphlet, paper, writing
drawing, painting representation or figure is in the interest of
science, literature, art or learning or other objects of general concern;
or
(ii) which is kept or used for bona fide heritage or religious purposes.
Meaning of “Children”. For the purposes of this section “children”
means a person who has not completed the age of 18 years.
Note (i): Committing acts of child pornography by—
(a) Publishing/transmitting depiction of children engaged in sexually
explicit act;
(b) creating text/images or circulating material in electronic form
depicting children in pornography;
(c) inducing children to indulge in online sexually explicit act;
(d) Abusing children online;
(e) Recording any form of sexually explicit act with children.
Note (ii): First conviction—Imprisonment upto 5 years and fine upto Rs.
10,00,000
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Second/subsequent conviction—Imprisonment upto 7 years and upto

Rs. 10,00,000
9. Offence of not preserving and retaining information by

intermediaries (S. 67C)
Intermediary shall preserve and retain information as may be specified
for such duration and in such manner and format as the Central Government
may prescribe.
Punishment.—Any intermediary intentionally or knowingly contravenes
the aforesaid provision shall be punished with an imprisonment for a term
which may extend to three years and also liable to fine.
Note: Any intermediary knowingly not-preserving and retaining

information as prescribed by Central Government—Imprisonment upto 3
years and a fine.
10. Offence of not following the directions of the Controller (S.

68).
Controller, by order, direct a Certifying Authority or any employee of
such Authority to take such measures or cease carrying on such activities as
specified in the order if those are necessary to ensure compliance with the
provisions of this Act, rules or any regulations made thereunder [S. 68(1)].
Any person who fails to comply with any such order under sub-section(1)
shall be guilty of an offence and shall be liable on conviction to imprisonment
for a term not exceeding three years or to a fine not exceeding two lakh
rupees or to both [S. 68(2)].
Note: Any person who fails to comply with directions of controller specified
for compliance with the Act—Imprisonment upto 3 years or fine upto Rs.
2,00,000 or both.
11. Violations of Government directions on monitoring or

blocking information
(a) Offence of not following the directions for interception or
monitoring or decryption or blocking for public areas of any
information through any computer resource (S. 69).—Where the
Central Government or a State Government or any of its officers specially
authorised by the Central Government or the State Government, as the case
may be, in this behalf may, if satisfied that it is necessary or expedient to do
in the interest of the sovereignty or integrity of India, defence of India,
security of the State, friendly relations with foreign State or public order or
for investigation of any offence, it may, for reasons to be recorded in writing,
by order, direct any agency of the appropriate Government to
(i) intercept, monitor or decrypt or cause to be intercepted or monitored
or decrypted any information generated, transmitted, received or

stored in any computer resource.
(ii) to block for access by the public or cause to be blocked for access by
the public any information generated, transmitted, received, stored or
hosted in any computer resource.
Punishment.—The intermediary who fails to comply with the direction
issued as a foresaid shall be punished with an imprisonment for a term which
may extend to seven years and shall also be liable to fine.
Note: Any person or subscriber who fails to let government or any officer
on its behalf monitor or decrypt or block for public access any information
transmitted or stored in any computer source necessary for security of
state—Imprisonment upto 7 years and a fine.
(b) Offence of not providing assistance to monitor and collect

traffic data or information through any computer resource for cyber
security (S. 69C).—The Central Government may, to enhance cyber security
and for identification, analysis and prevention of intrusion or spread of
computer contaminant in the country, by notification in the Official Gazette,
authorise any agency of the Government to monitor and collect traffic data or
information generated, transmitted, received or stored in any computer
resource.
The intermediary or any person in-charge of the computer resource shall,
when called upon by the agency which has been authorised, provide technical
assistance and extend all facilities to such agency in this respect.
Punishment.—Any intermediary who intentionally or knowingly
contravenes the provisions stated above shall be punished with an
imprisonment for a term which may extend to three years and shall also
be liable to fine.
Note: Any intermediary who fails to let government or any of its agency
monitor and collect traffic data or information transmitted or stored in any
computer resource—Imprisonment upto 3 years and also fine.
12. Cyber Security (S. 70)

Protected Systems—The appropriate Government may declare any
computer resource which directly or indirectly affects the facility of Critical
Information Infrastructure, to be a protected system. Any unauthorised
person who access or attempts to secure access to the protected system shall
be punished with imprisonment of either description for a term which may
extend to ten years and shall also be liable to fine. (S. 70).
Note: Any unauthorised access to any computer resource effecting critical

information infrastructure declared by government as a protected system—
upto 10 years and fine.
420 Business Laws
CIIP.—The Central Government may designate any organisation of the

Government as a modal agency in respect of critical Information
Infrastructure Protection (in short, CIIP) [Section 70A].
ICERT.—The Central Government shall appoint an agency of the
Government to be called the Indian Computer Emergency Response Team (in
short, ICERT) [Section 70B].
The Indian Computer Emergency Response Team shall serve as the
national agency for performing the following functions in the area of cyber
security,—
(a) collection, analysis and dissemination of information on cyber
incidents;
(b) forecast and alerts of cyber security incidents;
(c) emergency measures for handling cyber security incidents;
(d) coordination of cyber incidents response activities;
(e) issue guidelines, advisories, vulnerability notes and whitepapers
relating to information security practices, procedures, presentation,
response and reporting of cyber incidents;
(f) such other functions relating to cyber security as may be prescribed.
For carrying out these provisions, the agency may call for information
and give direction to the service providers, intermediaries, data centres, body
corporate and any other person.
Punishment.—Any service provider, intermediaries, data centres, body
corporate or person who fails to provide the information called for or comply
with the aforesaid direction shall be punishable with imprisonment for a
term which may extend to one year or with fine which may extend to
one lakh rupees or with both.
Note: Any service provider/data centre/intermediary/person/body corporate

who fails to provide information desired by ICERT—Imprisonment upto 1
year or fine upto Rs. 1,00,000 or both.
13. Penalty for misrepresentation (S. 71)

Whoever makes any misrepresentation to, or suppresses any material
fact from the Controller or the Certifying Authority for obtaining any licence
or Electronic Signature Certificate, as the case may be, shall be punished
with imprisonment for a term which may extend to two years, or with fine
which may extend to one lakh rupees, or with both.
14. Penalty for breach of confidentiality and privacy (S. 72)

If any person has secured access to any electronic record, book, register,
correspondent, information, document or other material without the consent
of the person concerned and discloses the same to any other person then he
shall be punished with imprisonment upto two years, or with fine upto
one lakh rupees, or with both.
15. Punishment for disclosure of information in breach of lawful

contract (S. 72A).
If any person including an intermediary, who while providing services
under the terms of lawful contract, has secured access to any material
containing personal information about another person, with the intent to
cause or knowing that he is likely to cause wrongful loss or wrongful gain
discloses, without the consent of the person concerned, or in breach of a
lawful contract, such material to any other person, shall be punished with
imprisonment for a term which may extend to three years, or with fine
which may extend to five lakh rupees, or with both.
Note: Any person having access to personal information of another

discloses it in breach of a lawful contract to another—Imprisonment upto 3
years or fine upto Rs. 5,00,000 or both.
16. Offences related to Electronic Signature Certificate

An Electronic Signature Certificate is an instrument of trust identifying
the subscriber over the networks, any attempt to falsify an Electronic
Signature Certificate of its use for fraudulent purposes has been made an
criminal offence by virtue of S. 73 and S. 74.
(i) Penalty for publishing Electronic Signature Certificate false
in certain particulars (S. 73).—No person shall publish an Electronic
Signature Certificate or otherwise make it available to any other person with
the knowledge that—
(a) the Certifying Authority listed in the certificate has not issued it; or
(b) the subscriber listed in the certificate has not accepted it; or
(c) the certificate has been revoked or suspended,
unless such publication is for the purpose of verifying a digital signature
created prior to such suspension or revocation.
Thus knowingly publication of a Electronic Signature Certificate, or
otherwise making it available to any other person with the knowledge that it
has not been issued or accepted or it has already been revoked or suspended
is an offence. However, publication of a Electronic Signature Certificate for
the purpose of verifying a digital signature created prior to suspension or
revocation is not an offence.
A person who contravenes the above provisions shall be punished with
imprisonment for a term which may extend to two years, or with fine
which may extend to one lakh rupees, or with both [S. 73(2)].
Note: Publication of ESC despite knowing that it has net been issued or
accepted or has been revoked or suspended—Imprisonment upto 2 years or
fine upto Rs. 1,00,000 or both.
422 Business Laws
(ii) Publication for fraudulent or unlawful purposes (S. 74).—

Whoever knowingly creates, publishes or otherwise makes available a
Electronic Signature Certificate for any fraudulent or unlawful purpose shall
be punished with imprisonment for a term which may extend to two years,
or with fine which may extend to one lakh rupees, or with both (S.
74).
Publication for fraudulent purpose means dissemination, storage and
transmission of ‘modified’ Electronic Signature Certificate with the intent to
commit fraud.
Note: Knowingly publishing ESC for fraudulent or unlawful purpose—

Imprisonment upto 2 years or fine upto Rs. 1,00,000 or both.
MISCELLANEOUS PROVISIONS ON CONTRAVENTIONS AND

OFFENCES
1. Act to apply for offence or contravention committed outside
India (S. 75).—The provisions of this Act shall apply also to any offence or
contravention committed outside India by any person irrespective of his
nationality if the act or conduct constituting the offence or
contravention involves a computer, computer system or computer
network located in India.
Thus the Act has adopted the principle of universal jurisdiction to cover
with cyber contraventions and cyber offence. But it would be difficult to
enforce the jurisdiction of Indian Courts on cyber criminals of foreign
countries.
2. Confiscation (S. 76).— Any computer, computer system,
floppies, compact disks, tape driver or any other accessories related
thereto, in respect of which any provision of this Act, rules, orders or
regulations made thereunder has been or is being contravened, shall
be liable to confiscation.
However, where it is established to the satisfaction of the court
adjudicating the confiscation that the person in whose possession, power or
control of any such computer, computer system, floppies, compact disks, tape
drives or any other accessories relating thereto is found is not responsible for
the contravention of the provisions of this Act, rules, order or regulations
made thereunder, the court may, instead of making an order for confiscation
of such computer, computer system, floppies, compact disks, tape drives or
any other accessories related thereto, make such other order authorised by
this Act against the person contravening of the provisions of this Act, rules,
orders or regulations made thereunder as it may think fit.
3. Compensation, penalties or confiscation not to interfere with
other punishment (S. 77).—No compensation awarded, penalty imposed or
confiscation made under this Act shall prevent the award of compensation or
imposition of any other penalty or punishment under any other law for the
time being in force.
4. Compounding of offences (S. 77A).—A court of competent
jurisdiction may compound offences, other than offences for which the
punishment for life or imprisonment for a term exceeding three years
has been provided, under this Act.
However, the court shall not compound such offence where the accused is,
by reason of his previous conviction, liable to either enhanced punishment or
to a punishment of a different kind or the offence affects the socio-economic
conditions of the country or has been committed against a child below the age
of 18 years or a woman.
5. Offences with three years imprisonment to be bailable (S.
77B).—Notwithstanding anything contained in the Code of Criminal
Procedure, 1973 (2 of 1974), the offence punishable with imprisonment
of three years and above shall be cognizable and the offence
punishable with imprisonment of three years shall be bailable.
6. Power to investigate offences (S. 78).—Notwithstanding anything
contained in the Code of Criminal Procedure, 1973 (2 of 1974), a police
officer not below the rank of Inspector shall investigate any offence
under this Act.
REVIEW QUESTIONS
1. Explain the meaning and punishment for publishing or transmitting obscene
material in electronic form. [B.Com. (Hons.), D.U.]
2. What do you mean by “Cyber terrorism” as under the Information Technology
Act, 2000.
3. A person knowingly or intentionally conceals, destroys or alters any computer
source, computer programme, computer system or computer network. Is such
an act an offence? If so, what is the punishment ?
4. Write notes on the following:
(a) Publishing obscene information in electronic form.
(b) Identity theft.
(c) Cyber Terrorism
(d) Tampering with Computer Source Documents
5. Distinguish between cyber contravention and cyber offences.
6. Write notes on the following:
(a) Cyber terrorism [B.Com. (H), D.U.]
(b) Cyber security
7. Explain the cyber offences provided in the Information Technology Act, 2000.
8. Explain the offence: Tampering with computer source documents.
424 Business Laws
9. Explain the following offences:

(a) Cyber gterrorism
(b) Publishing of obscene information in electronic form
(c) Breach of confidentiality and privacy
10. Explain the offences: Acts and omissions against the controller.
11. Explain the offences relating to Electronic Signature Certificate.
12. Explain the offences relating to Government directions on monitoring or
blocking information as provided in IT Act, 2000.
13. Explain the offence of ‘Identity theft’ and ‘Violation of Privacy’ as per IT Act,
2000.
14. Explain the offence of ‘cheating by personation by using computer resource’
as per IT Act, 2000.
15. Explain briefly the cyber offences recognised by the IT Act, 2000.
(a) The Information Technology Act, 2000 has adopted symmetric cryptography
system.
(b) A digital signature is not a digitised image of the handwritten signature.
(c) A digital signature is unique to both electronic record and the private key
used to create it.
(d) Originator and addressee as defined in the Information Technology Act, 2000
are equivalent to promisor and promisee as defined in the Indian Contract
Act, 1872.
(e) The subscriber holds the private key corresponding to the public key listed in
the Digital Signature Certificate.
Ans.: True: (b), (c), (e), False: (a), (d)
LIMITED LIABILITY PARTNERSHIP ACT, 2008
Nature of Limited
32 Liability Partnership
LEARNING OBJECTIVES
➥ Administration and Supervision of the Limited Liability Act, 2008.
➥ Definition and Features of Limited Liability Partnership
➥ Beneficiaries of LLP
➥ Nature of LLP
➥ LLP Agreement
➥ Advantages and Disadvantages of LLP
➥ Difference between Partnership, Company and LLP
INTRODUCTION
The Indian economy was dominated by government run enterprises in
pre-liberalisation era, making it a socialist economy pre-dominantly. In the
post-liberalisation era a change gradually came where by the sole-
proprietorship, partnership and company form of enterprises gained
importance. A great significance was attached to these three forms of
business organisations.
Sole-proprietorship gave individuals freedom to run their business
according to their own rules and choices but with unlimited liability for the
debts of the enterprise. The partnership brought together a group of
individuals in a set up whereby they could run their organisation in a mutual
agreement but it also had a disadvantage of unlimited liability and lack of
perpetual succession. The corporate structure was a further development
which had benefits of both perpetual succession and limited liability, giving
members a choice to join or leave the organisation facing a limited liability.
With the growth of Indian economy and with increasing population of
professionals and technical people wishing to be an entrepreneur, a need was
felt to have an alternative business vehicle which would provide benefits of
limited liability and provides freedom to their members to organise
themselves internally as a partnership structure based on a mutually arrived
agreement with perpetual succession. The Limited Liability Partnership (in
426 Business Laws
short, LLP) form is viewed as an alternative corporate business structure

that would enable entrepreneurs, professionals and enterprises providing
services of any kind or engaged in scientific and technical disciplines, to form
commercially efficient vehicle suited to their requirements. Owing to
flexibility in its structure and operation, the LLP would also be a suitable
vehicle for small enterprises and for investment by venture capital.
The LLP Bill was framed considering the recommendations made by
Naresh Chandra Committee (II) and Dr. J.J. Irani Committee. This Act is
broadly based on U.K LLP Act, 2000 and Singapore LLP Act, 2005. Both the
Committees were of the view that unlimited accountability and responsibility
has come in the way of business growth of general partnerships particularly
consisting of professionals there by making them unsuited for international
competition and globalisation. Dr. J.J. Irani Committee recommended the
formation of LLPs, in view of the growth of the service sector where a suitable
vehicle was needed for partnership among professionals who are already
regulated such as Company Secretaries, Chartered Accountants, Cost
Accountants, Lawyers, Architects, Engineers, Doctors etc.
Spurred by the reports of the above two committees the LLP Bill was
framed and introduced in the Rajya Sabha on 15-12-2006 which was replaced
by the Bill in 2008 and the Limited Liability Partnership Act, 2008 came into
existence.
A new legislation for LLP, instead of amendment in Companies
Act or Partnership Act
The Companies Act is not suited to the liability and governance structure
intended for LLPs. The overall intent of the legislation to regulate widely
held companies is different. Therefore, in accordance with the
recommendations of the Irani Committee, it was felt appropriate to bring
about a separate legislation for LLPs. The administration and enforcement of
partnership firms under the Indian Partnership Act, 1932 is at the State
level. Besides, a partnership firm involves full joint and several liability of
the partners. The traditional partnerships are also considered unsuitable for
multi-disciplinary combinations comprising a large number of partners,
seeking a flexible working environment but with limited liability. LLP
structure would promote growth and enable such firms / enterprises expand
their trade / business or services across states in India and also abroad.
Scope
It extends to the whole of India and came into force with effect from 31-3-
2009. The Act consists of 81 sections and 4 Schedules.
Administration and supervision of the Act

The regulatory functions and control in respect of the Act is with the
Central Government, the Registrar of Companies (ROC) has been assigned
the administrative and supervisory duties and functions. The Registrar of
Nature of Limited Liability Partnership 427
Companies is appointed by the Central Government in each State and he

shall act as Registrar of LLPs, who shall supervise and regulate the LLPs.
The state of Maharashtra has 2 ROCs (Mumbai and Pune) and the state of
Tamil Nadu has 2 ROCs (Chennai and Coimbatore).
Section 79 of the LLP Act empowers the Central Government to make
rules for carrying out the provisions of this Act. The Government hence, has
notified the Limited Liability Partnership Rules, 2009 vide Notification GSR
229 (E) dated 1st April, 2009. These Rules came into force on 31st May, 2009,
the latest amendment was made through the Limited Liability
Partnership(Amendment) Rules 2012. The government has also launched a
website www.up.gov.in for administration and regulation of LLPs.
Non-Applicability of the Partnership Act, 1932

Section 4 states that the provisions of the Partnership Act, 1932 shall not
apply to an LLP, unless it is otherwise so provided. This clearly means that
LLP has been conceived to be an altogether a different form of enterprise, but
even so since LLP remains the subject of partnership, many concepts of
partnership are likely to be applied to LLP.
DEFINITION OF LLP
Limited Liability Partnership means a partnership formed and registered
under the Limited Liability Partnership Act, 2008 [Section 2(1)(4)].
FEATURES OF LLP
1. LLP is a Body Corporate [Section 3(1)]. A Limited Liability
Partnership is a body corporate formed and registered under the LLP Act,
2008 [Section 3(1)].
It is assigned a LLP Identification Number (in short, LLPIN).
2. Separate Legal Entity [Section 3(1)]. A limited liability
partnership is a legal entity separate from that of its partners. The LLP is at
law a different person altogether from its partners It can be sue and be sued
not only by the outsiders but by its own partners also. It can buy and own
property in its own name. The partners of LLP do not have insurance interest
in the property of the LLP. The concept if independent legal existence was
laid down in Salamon v. Salamon [(1897) AC 21], in case of a company.
3. Perpetual Existence [Section 3(2)]. A Limited Liability
Partnership shall have a perpetual existence. Any change in the partners of
LLP shall not effect the existence, rights or liabilities of the limited liability
partnership. The life of an LLP does not depend upon the death, insolvency,
retirement or insanity of the partner or partners provided the number of
partners if not reduced below two. LLP is an incorporated association and
therefore its life is brought to an end by the due process of law.
4. LLP Agreement. The mutual rights and duties of partners of an LLP
428 Business Laws
and those of LLP interse shall be governed by an agreement between partners

or between the LLP and the partners.
5. Liability. The LLP would be liable fully for its acts to the extent of its
assets. The partners would be liable to the extent of their agreed
contributions. However, in some cases the liability of the partners can be
unlimited.
6. Number of Partners. Every LLP shall have at least two partners and
shall also have at least 2 individuals as Designated Partners. There is no
limit on the maximum number of partners.
7. Partners. Any individual or body corporate may be a partner is a
limited liability partnership.
8. Non-applicability of the provisions of Indian Partnership Act,
1932. The provisions of the Indian Partnership Act, 1932 shall not apply to a
LLP, unless otherwise provided.
9. Power of Central Government. Central Government shall have
powers to investigate the affairs of LLP, if required.
10. Conversion to LLP. A firm, Private Company or an Unlisted Public
Company are allowed to convert into LLP. Similarly, LLP may be converted
into a company.
11. Winding up. An LLP may be wound up voluntarily or by the
Tribunal. It may be under the Limited Liability Partnership Act, 2008 or
under the Insolvency and Bankruptcy Code, 2016, depending on the
circumstances.
12. Annual Accounts. LLP has to prepare annual accounts showing the
state of affairs and they have to be filed with the Registrar after being
audited, if required.
13. Financial Year. Financial year of an LLP shall be from 1 April of a
year to the 31st March of the following year. In case LLP is incorporated after
30th September of a year, the financial year may end on the 31st March of
the year next following that year, e.g., if LLP is incorporated on 10 October
2014. Its financial year may end on 31st March 2016.
14. Management of Business. The partners are entitled to manage the
business or profession of LLP. However, only designated partners are
responsible for various legal compliances under the LLP Act, 2008.
15. Business for Profit only. Limited liability partnership can be a
profit seeking organisation only. It cannot be formed for any charitable or
not-for profit purpose.
BENEFICIARIES OF LLP
The LLP framework could be used for enterprises such as :
1. Persons providing services of any kind;
2. Enterprises in new knowledge and technology based fields where the

corporate form is not suited;
3. For professional such as Chartered Accountants (CAs), Cost and
Works Accountants (CWAs), Company Secretaries (CSs) and
Advocates, etc.;
4. Venture capital funds where risk capital combines with knowledge
and expertise;
5. Professionals and enterprises engaged in scientific, technical and
artistic discipline, for any activity relating to research production,
design and provision of services;
6. Small Sector Enterprises and
7. Producer Companies in Handloom, Handicraft sector.
NATURE OF LIMITED LIABILITY PARTNERSHIP

Under Section 2(1) (n) Limited Liability Partnership means a
partnership formed and registered under this Act. Since LLP contains
elements of both a ‘corporate structure’ as well as ‘a partnership firm
structure’ LLP is called a hybrid between a company and a partnership.
The following points explain the nature of LLP :
1. Limited liability partnership to be a Body Corporate (Section
3).
(a) Limited liability partnership is a body corporate formed and

incorporated under this Act and is a legal entity separate from
that of its partners.
(b) A limited liability partnership shall have perpetual succession.
(c) Any change in the partners of a limited liability partnership shall
not effect the existence, rights or liabilities of the limited liability
partnership.
2. Non-applicability of the Indian Partnership Act, 1932 (Section
4). Save as otherwise provided, the provisions of the Indian partnership Act,
1932 shall not apply to a limited liability partnership (Section 4).
3. Partner (Section 5). Any individual or body corporate may be a
partner in a limited liability partnership.
4. Minimum number of partners (Section 6). Every limited liability
partnership shall have at least two partners.
5. Designated Partners (Section 7). Every limited liability partnership
shall have at least two designated partners who are individuals and at least
one of them shall be a resident in India.
6. Liabilities of designated partners (Section 8). Unless expressly
provided otherwise in this Act, a designated partner shall be (i) responsible
430 Business Laws
for doing all the acts as are required to be done by an LLP ; and (ii) liable to
all the penalties imposed on the LLP for any contravention of those
provisions.
7. Change in designated partners (Section 9). A limited liability
partnership may appoint a designated partner within 30 days of a vacancy
arising for any reason. If no designated partner is appointed, or if at any time
there is only one designated partner, each partner shall be deemed to be a
designated partner.
8. No mutual Agency. There is no mutual agency in LLP. A partner is
not an agent of other partner or partners of the LLP.
9. Common seal. An LLP may have a common seal. If an LLP decides to
have a common seal, the common seal shall be have name engraved on it
along with its place and date of incorporation.
LLP AGREEMENT
LLP agreement as defined under Section 2(1) (o) means any written
agreement between the partners of the LLP or between the LLP and its
partners which determiners the mutual rights and duties in relation to that
LLP.
It follows that mutual rights and duties of the LLP on one hand and its
partners on the other hand will be governed and decided by the LLP
agreement. The agreement is of fundamental importance to the LLP and its
partners. It is akin to what Memorandum of Association and Articles of
Association is to a company under the Companies Act, 2013. The particulars
of the LLP Agreement are to be filed with the Registrar within 30 days of the
incorporation of an LLP. Any change in the agreements is also to be filed
within 30 days of the change.
Ratification of LLP Agreement

As per Section 23(3), the LLP agreement made in writing before the
incorporation of limited liability partnership between the persons subscribing
their names to the incorporation document may impose obligation on the
limited liability partnership, if such agreement is ratified by all the partners
after the incorporation of the limited liability partnership.
Every limited liability partnership shall file the limited liability
partnership agreement ratified by all the partners after its incorporation
with the Registrar within 30 days of incorporation along with requisite fee.
Whether LLP Agreement is mandatory for all LLPs

As per section 23(4), in the absence of agreement, rights and duties of
LLP and its partners and mutual rights and duties of partners shall be
determined as per the provisions set out in the First Schedule (Schedule I)
of the Act. Therefore, in case any LLP proposes to exclude provisions of
Schedule I to the Act, it would have to enter into an LLP Agreement,

specifically excluding applicability of the provisions (any or all) of Schedule I.
The provisions of Schedule I are discussed below:
S.No. Matter Provision in the Schedule
1. Mutual Rights and Duties The mutual rights and duties of the partners
of Partners and the mutual rights and duties of the LLP
and its partners shall be determined subject to
the terms of any LLP Agreement or in absence
of any such agreement on any matter, by the
provisions in this Schedule.
2. Capital All partners shall contribute equally

3. Profit and loss sharing All partners shall share profits and losses
equally.
4. Personal Liabilities The LLP shall indemnify each partner in
respect of payments made and personal
liabilities incurred by any partner:
(a) in the ordinary course of business of LLP
or
(b) in or about anything necessarily done for
the preservation of the business or property of
the LLP
5. Loss caused due to fraud Every partner shall indemnify the LLP for any
by partner loss caused to it by his fraud in the conduct of
business of the LLP.
6. Management Each partner may take part in the

management of the LLP.
7. Remuneration to Partners No partner shall be entitled to remuneration

for acting in the business or management of
LLP.
8. New Partner Consent of all partners is required to introduce

any new partner.
9. Any other matter or issue Any matter or issue relating to LLP shall be
decided by a resolution passed by majority in
number of partners.
10. No. of votes Each partner shall have one vote each.
11. Change in business Consent of all partners is required to change

the nature of business of LLP.
12. Minutes of meetings LLP shall ensure that decisions taken by it are
recorded in the minutes within 30 days of
taking such decisions.
13. Place of keeping minutes Minutes book of the LLP shall be kept at the
book registered office of the LLP.
432 Business Laws
14. Partners to render true Each partner shall render true accounts and
accounts full information of all things affecting the LLP,
to any partner or his legal representatives.
15. Similar business by any If a partner with out the consent of LLP carries
partner on any business of similar nature which is
competing with the LLP, then he must account
for and pay over all profits made in that
business to the LLP.
16 Profit from use of LLP Every partner shall account to the LLP for any
property or name. benefit derived by him without consent of the
LLP from any transaction concerning the LLP
or from any use of the property by him or name
or any business connection of the LLP.
17. Expulsion of Partner Majority partners cannot expel a partner
unless provided for expressly in the LLP
Agreement.
18. Dispute Resolution If any dispute arising out of LLP agreement
cannot be resolved in terms of such agreement
then it shall be referred as per the provisions of
the Arbitration and Conciliation Act, 1996.
ADVANTAGES OF LLP
1. Separate Legal Entity. LLP is a legal entity distinct and separate
from its partners. It means that LLP can sue and be sued in its own name. It
can own and hold or dispose off property in its own name. Hence, LLP can do
or undertake any act or thing as a natural person may do or undertake.
2. Limited Liability. The liability of the LLP is limited to extent of its
assets and the liability of a partner is limited to his contribution in the LLP.
Hence there is no liability on the partners' personal assets.
3. Capital Requirement. For an LLP there is no legal requirement in
regard to any minimum capital.
4. Freedom of Operations. An LLP enjoys full freedom in the matter of
conducting its business and operations.
5. Number of Partners. There is no restriction as to the maximum
number of partners under LLP hence it is an opportunity for expansion or
diversification of its activities.
6. Responsibility for Compliances. A designated partner is made
responsible for various compliances and filing requirements of the LLP.
Hence the other partners of LLP are relieved of this pressure.
7. Flexibility. It provides flexibility without imposing detailed legal and
procedural requirements.
8. Taxation. LLP has to pay no surcharge, DDT (Dividend Distribution
Tax) or wealth tax so its a relaxation to the LLP on its income.
DISADVANTAGES OF LLP
1. Unlimited liability. There may be unlimited liability on the LLP or
its partners in same cases.
2. Time consuming. It takes more days to form an LLP as signatures of
all the partners are required for each and every document.
3. Assets contribution. The Cash or other assets contributed by a
partner are not returned to a continuing partner unless mentioned in LLP
Agreement.
4. Transfer of ownership. Ownership rights are not transferable easily
without obtaining consent of all the partners of LLP.
5. Conversion to LLP. A firm, private company or unlisted public
company cannot convert to an LLP unless all partners or shareholders
become the partners of LLP.
6. Liabilities of designated partner. LLP makes designated partners
responsible for compliance of the provisions of the Act and liable for all
offences and penalties thereby putting unnecessary pressure on designated
partners.
7. Lack of secrecy. LLP is required to disclose its financial information
hence the secrecy of information is lost.
8. No access to public money. LLP has to function from contribution
made by partners hence it cannot raise money through public.
DIFFERENCE BETWEEN PARTNERSHIP, COMPANY AND LLP

The following are the points of difference between partnership, company
and LLP:
Basic Partnership Company LLP
1. Governing Governed by Governed by Governed by the
Law Partnership Act, Companies Act, Limited Liability
1932. 2013. Partnership Act,
2008.
2. Creation Created by Created by Law Created by Law
Contract.
3. Separate It is not a separate It is a separate It is a separate
Entity legal entity. legal entity. legal entity.
4. Perpetual It does not have It has perpetual It has perpetual
succession perpetual succession succession and the succession and the
as it depends upon members may came partners may came
the will of partners. and go. and go.
5. Liability Unlimited liability Liability is limited Liability is limited
of the partners and to the extent of to the extent of the
the liability extends amount unpaid on contribution of the
to the personal each share partners towards
assets of the subscribed by a LLP except in case
partners. member. fraudulent acts or
434 Business Laws
omissions where
the liability can be
unlimited.
6. Common Seal There is no common There is an option LLP may have a
seal. to use common seal common seal, it is
which denotes not mandatory.
official signature of
a company.
7. Charter Partnership Deed is Memorandum of LLP Agreement is
Document a charter of the firm Association (MOA) a Charter of LLP
which denotes its is the charter of the which denotes its
scope of operation company which scope of operations
and rights and defines its scope of and rights and
duties of the operation. duties of the
partners. partners and
partners and the
LLP.
8. Legal Only registered A company is a LLP is a legal
Proceedings partnership can sue separate legal entity which can
third party. entity which can sue & be sued.
sue & be sued.
9. Number of Minimum 2 and Minimum 2 and Minimum 2
members maximum 50. maximum 200 partners and there
members in case of is no limit for
private company. maximum number
Minimum 7 of partners.
members is case of
public company and
maximum no limit.
Only one person is
required in case of
One Person
Company.
10. Registration Optional. Compulsory with Compulsory with
ROC. ROC.
11. Name Any name as per Name to contain Name to contain
choice. ‘Limited’ in case of ‘Limited Liability
Public company and Partnership’ or
'Private Limited' in ‘LLP’ as suffix.
case of Private
company.
1
12. Tax liability Partnership is taxed Income of company Income of LLP is
at a flat rate of 30% is taxed at flat rate taxed at flat rate of
plus Health and of 30% plus 30% plus Health
education cess. surcharge, Health and education cess
and education cess. and surcharge
where applicable.
1
. for the assessment year 2017-18.
13. Principal/ Partners are the Members are the Partners act as
Agent agents of the firm agents of the agent of LLP and
relation and other partners. company. not of other
partners.
14. Transfer of Not transferable. Ownership is easily Transfer of shares
Share transferable by way is governed by the
of transfer of LLP Agreement.
shares.
15. Admission of A person can be A person can A person can be
Member admitted as a become member by admitted as a
Partners partner as per the buying shares of a partner as per the
partnership company. LLP Agreement.
agreement.
16. Meetings There is no Board Meetings and There is no
provision with General Meetings provision with
regard to holding of are required to be regard to holding
any meeting. conducted at of any meeting.
appropriate time.
17. Annual No return is Annual Financial Annual Statement
Filing required to be filed Statement and of Accounts and
with Registrar of Annual Return is to Solvency and
Firms (ROF). be filed with Annual Return is
Registrar of to be filed with
Companies every ROC every year.
year.
18. Audit of Partnership firms Companies are to If the turnover of
Accounts are required to have get their accounts LLP exceeds 40
R
their accounts audited annually. lakhs or

audited if the contribution
annual sales, exceeds R 25
turnover or gross lakhs in any
reciepts exceeds R financial year they
1crore (in case of have to get their
business) and Rs. 50 accounts audited.
Lakhs (in case of
profession)
19. Whistle No such provision. No such provision Provision has been
Blowing in particular but made to provide
under Clause 49 the protection to
employees can employees and
address their partners providing
concerns and useful information
grievances during
investigation of
any partner or
firm.
20. Dissolution By mutual consent, Voluntary or by Voluntary or by
insolvency and by order of Tribunal or order of Tribunal
Court order. Court. or Court.
436 Business Laws
REVIEW QUESTIONS
1. Define and explain essential features of a Limited Liability Partnership.
[B.Com. (H), Delhi, 2011]
2. Distinguish between Partnership, Company and Limited Liability
Partnership.
3. Distinguish between Company and Limited Liability Partnership.
[B.Com. Delhi, 2016]
4. Explain the advantages of Limited Liability Partnership.
5. Explain the disadvantages of LLP form of business structure.
6. “An LLP is a legal person distinct from its members taken individually or
collectively.” Comment.[B.Com(H), 2014, 2016]
7. What do you understand by LLP Agreement ?
8. “An LLP cannot come into existence unless it has framed an LLP
Agreement.”Do you agree?
9. Discuss the feature of separate legal entity and perpetual existence in
relation to an LLP. [B.Com. (H), Delhi, 2012]
10. “An LLP is a definite improvement over the partnership in the matter of
promoting entrepreneurship.” Discuss. [B.Com. (H), Delhi, 2012, 2015]
11. Define and explain the essential features of LLP. [B.Com(H), 2011]
12. An LLP is a legal entity distinct from its members taken individually or
collectively. Comment. [B.Com (Hons), 2014, Delhi]
13. An LLP has a legal entity separate from its partners. Explain.
[B.Com (Hons) 2016]
14. Define the term ‘LLP Agreement’. Is it mandatory for all LLPs ?
[B.Com. Delhi, 2018]
15. Differentiate between LLP and Limited Liability Company.
[B.Com. Delhi, 2016].
Incorporation of
33 Limited Liability
Partnership
LEARNING OBJECTIVES
➥ Incorporation of LLP
➥ Registered Office of LLP and Change of Registered Office
➥ Effect of Registration
➥ Name of LLP, Reservation of Name and Change of Name.
LLP Second Amendment Rules 2018 have brought changes in LLP

incorporation procedure which came into force from 2nd October, 2018.
Major Highlights
1. From 1 (Application for reservation or change of name) has been
substituted by RUN-LLP (Reserve Unique Name-LLP)
2. Form 2 (Incorporation document and subscriber’s statement) has
been substituted by FiLLiP (Form for incorporating LLP).
From FiLLiP is an integrated form offering the following :
(a) Allotment of DPIN (maximum 2 individuals).
(b) Reservation of Name.
(c) Incorporation of LLP.
If the applicant had applied for reservation of name under RUN-LLP
and it has been approved, he may fill reserved name as proposed name of
LLP in FiLLiP.
So the readers are requested to kindly take note of above changes while
reading the LLP procedures whereby Form 1 (Application for reservation or
change of name) is substituted by RUN-LLP and Form 2 (Incorporation
document and subscriber’s statement) is substituted by FiLLiP.
INCORPORATION OF LLP – SECTION 11

For a limited liability partnership to be incorporated it is stated that two
or more persons associated for carrying on a lawful business with a view of
making profit shall subscribe their names to an incorporation document. An
438 Business Laws
LLP cannot be formed for charitable purposes. The incorporation of an LLP

takes place after the fulfillment of registration process as discussed below :
Registration process of LLP

The registration process of LLP is discussed below:
Step 1 : Deciding the partners and Designated partners of LLP
Step 2 : Obtaining DPIN No.
Step 3 : Obtaining Digital Signature Certificate
Step 4 : Checking the availability of the name
Step 5 : Filing of incorporation document
Step 6 : Certificate of Incorporation
Step 7 : Filing of LLP Agreement
The above steps are discussed in detail below :
Step 1 : Deciding the Partners and Designated Partners of LLP

The very initial task of registration is to select proposed partners and
proposed designated partners of LLP. Any individual or body corporate could
be a partner in the LLP (discussed in detail in chapter 35). Every LLP shall
have at least 2 designated partners who are individuals and at least one of
them shall be resident in India (discussed in detail in chapter 35)
Step 2 : Obtaining DPIN Number

All individual designated partners of the proposed LLP shall obtain
"Designated Partner Identification Number (DPIN)" by filing an application
individually online in form DIN-1. In case there is already a Director
Identification Number (DIN) it can be used as DPIN.
In case the designated partner is a nominee of a body corporate then
enter Corporate Identity Number (CIN) as DPIN. If designated partner is a
nominee of a foreign company then enter Foreign Company Registration
Number (FCRN) and if designated partner is nominee of another LLP or
foreign LLP then enter LLPIN (Limited Liability Partnership Identity
Number) or FLLPIN (Foreign LLPIN) respectively as DPIN.
Step 3 : Obtaining Digital Signature Certificate (DSC)

Information Technology Act, 2000 provides for use of Digital Signatures
on the documents submitted in electronic form in order to ensure the security
and authenticity of the documents filed electronically. (Discussed under
Information Technology Act , 2000).
Acquire DSC : Any partner or designated partner of the proposed LLP,
whose signatures are to be affixed on the e-forms has to acquire DSC from
any authorized certifying authority.
Register DSC : After obtaining DSC, it has to be registered with LLP
application.
Incorporation of Limited Liability Partnership 439
Step 4 : Checking the Availability of the Name

Apply for name of the LLP to be registered by filling Form 1 called RUN-
LLP (i.e. Reserve Unique Name-LLP) for checking the availability of the
name. Any partner or designated partner in the proposed LLP may submit
Form 1 with requisite fee. Earlier, i.e. before 2nd October, 2018, Form 1
(“Application for reservation or change of name”) was required to be filled for
checking the availability of the name.
Details of minimum 2 designated partners of the proposed LLP, one of
whom must be resident in India, is required to be filled in the application for
reservation of name.
Once the Form has been approved, the proposed LLP shall receive an e-
mail regarding the same and the status of the form will get changed to
approved. (Provisions regarding name of LLP have been discussed in detail
later in the chapter)
Step 5 : Filing of Incorporation Document and Statement

Once the name is reserved by the Registrar, Form 2 called FiLLiP (i.e.
Form for incorporation of Limited Liability Partnership) has to be filled in
with prescribed fee based on total monetary value of contribution of partners
in proposed LLP. Earlier, i.e. before 2nd October, 2018, Form 2
(“Incorporation Document and Subscriber’s Statement”) had to be filled for
this purpose. FiLLiP has two parts, namely, Part A : INCORPORATION
DOCUMENT and Part B : STATEMENT.
The Form is to be accompanied by :
(a) Consent of partners and designated partners to act as same.
(b) Proof of address of registered office of LLP.
(c) Subscriber's sheet in respect of names of partners/witnesses and their
signatures.
(d) In principle approval of regulatory authority is required.
The incorporation document shall be filed with the Registrar of
Companies of the State in which the registered office of the limited liability
partnership is to be situated.
As per section 11(1)(c), a statement is to be filed with the
incorporation document made by either
(i) Advocate, or
(ii) Company Secretary, or who is engaged in the formation of the
(iii) Chartered Accountant, or LLP
(iv) Cost Accountant, and
(v) Any one Partner of the LLP who subscribed his name to the
incorporation document.
440 Business Laws
that all the requirements of this Act and the rules made there under have
been complied with in respect of incorporation and matters precedent and
incidental thereto.
The incorporation document shall be available with Registrar for
inspection by any person on payment of prescribed fees.
Penalty. A person, any one from Point 2(i) – (v) above who makes a
known false statement or does not believe it to be true shall be liable for
penalty with
(a) Imprisonment for a term which may extend to 2 years and.
(b) Fine which shall not be less than Rs. 10,000 but which may extend to
Rs. 5,00,000.
Contents of the Incorporation Document [Section 11(2)]

The incorporation document of the LLP serves the same purpose as the
MOA (Memorandum of Association) in respect of a Company.
The contents of the incorporation document are as follows:
(a) Name of LLP,
(b) Proposed business,
(c) Address of its registered office,
(d) Name address of each person who is to be designated partner on
incorporation,
(e) Name and address of each person who is to be partner of the LLP on
incorporation, and
(f) Any other information concerning the proposed LLP as the rules may
prescribe.
Step 6 : Certifiacte of Registration

Incorporation by Registration – Section 12
When all the requirements as mentioned above concerning incorporation
document have been complied with, the Registrar on being satisfied shall
retain the incorporation document and register it within 14 days and give a
certificate that the limited liability partnership is incorporated by the name
specified in the incorporation document.
Registrar in his office shall maintain a register of LLPs in which the
names of LLPs shall be entered in order in which they are registered. Every
LLP so registered shall be assigned a LLP identification number (LLPIN).
The certificate shall be conclusive evidence that the limited liability
partnership is incorporate by the name specified.
Conclusiveness of Certificate of Incorporation – Section 12(4)

The LLP is said to have been incorporated with the name mentioned on
the Certificate of Incorporation. Hence now an LLP can carry on business as
a legal entity. The incorporation certificate granted by the Registrar of

Companies (ROC) on the registration of an LLP under the LLP Act shall be a
conclusive evidence that all the requirements of the Act with respect to
registration and other matters related to it have been duly complied with,
bringing into existence an LLP which is duly registered under the Act. Once
the Certificate of Incorporation is issued, nothing is to be enquired into as to
the regularity of the prior proceedings. No one can later challenge the validity
of the Certificate of Incorporation.
If ROC registers an LLP with unlawful objects then it is forbidden to
carry on any business to fulfill its illegal objects. In such a case also LLP is in
existence and ROC has no power to cancel or revoke the Certificate of
Incorporation. The only option here is to wind up the LLP and incorporate a
new LLP with lawful objects. Hence for any irregularities detected in the
process of incorporation later, it would not negate the existence of the limited
liability partnership, it would be in existence unless it is wound up or such
irregularity is rectified. So the Certificate of Incorporation is the conclusive
evidence of the existence of LLP which no one can deny later.
Step 7 : Filing of LLP Agreement - After incorporation of LLP, an
initial LLP Agreement is to be filed within 30 days of incorporation of LLP in
Form -3 . Where there is no LLP Agreement provisions of Schedule I of the
LLP Act shall be applicable to LLP.
REGISTERED OFFICE OF LIMITED LIABILITY PARTNERSHIP–

SECTION 13
Every limited liability partnership shall have a registered office to which
all communications and notices may be addressed and where they shall be
received. A document can be served on a LLP, or a partner or a designated
partner through electronic transmission or courier at the registered office and
any other address specifically declared by LLP for the purpose.
Other Address in addition to Registered Address

LLP may declare any other address as its address in addition to
registered office in the manner laid down in the LLP agreement. If LLP
Agreement does not provide for such manner, the LLP can declare such other
address only with the consent of all partners. ROC is to be intimated of the
other address within 30 days of the finalisation of the other address.
CHANGE OF REGISTERED OFFICE – SECTION 13

LLP may change its registered office from one place to another within the
same State or from one State to another State as per the manner laid down
below.
442 Business Laws
As per the manner laid down in

LLP Agreement if agreement is
silent then with consent of all
Change from partners Notice of change
one place to of registered
another in the office to be
same State given to ROC
within 30 days
If the change is from the
of complying the
jurisdiction of one Registrar to
requirement
another Registrar within the
with requisite
State (e.g. Maharashtra and
fee.
Tamil Nadu) then file a notice
with ROC from where LLP
proposes to shift its registered
office with a copy of such
change to the ROC under whose
jurisdiction the registered office
is proposed to be shifted
(Change from one State to another involves following procedure)
As per the manner laid LLP shall publish a File a notice with
down in the LLP general notice at least 21 ROC from the State
Agreement, if the days before filing notice where LLP proposes
Agreement is silent with ROC in a daily to shift its registered
then with the consent newspaper published in office with a copy of
of ALL the partners. English and in principal such change to the
The LLP is also to language of the district in ROC of the State
obtain the consent of which the registered office under whose
secured creditors (if of the LLP is situated jurisdiction the
any) for the change. circulating the notice of registered office is
change of registered office proposed to be shifted.
Notice of change of registered office to be given to ROC within 30 days of

complying the requirement with requisite fee.
With the change of registered office, any conviction, ruling or judgement
of any Court initiated against the LLP for the alleged offences under the LLP
Act shall be stated in change of place of registered office and is to be filed
with the ROC.
Penalty. For contravention of above provisions of Section 13, the LLP
and its every partner shall be punishable with fine which shall not be less
than 2,000 and which may extend to Rs. 25,000.
EFFECT OF REGISTRATION – SECTION 14

On registration, a limited liability partnership shall be capable of
(a) suing and being sued;
(b) acquiring, owing, holding or disposing off property whether movable

or immovable, tangible or intangible;
(c) having a common seal, if it decides to have one, and
(d) Doing and suffering such other acts and things as bodies corporate
may lawfully do ad suffer.
Pre-incorporation contracts
Pre-incorporation contracts are not binding on LLP unless the LLP
adopts them after incorporation. Otherwise such a contract is binding on the
person making it for want of ratification by the LLP.
NAME OF LLP – SECTION 15

1. Every LLP shall have either the words “Limited Liability
Partnership” or the acronym “LLP” as the last words of its name.
2. No LLP shall be registered by a name which in the opinion of the
Central Government is
(a) undesirable, or
(b) identical or too nearly resembles to the name of any other
• partnership firm or
• LLP, or
• body corporate, or
• registered trademark, or
• trademark the application of which is pending.
RESERVATION OF NAME – SECTION 16

A person may apply to Registrar of the State having jurisdiction where the
registered office of the LLP is to be situated, for reservation of a name
mentioned in RUN-LLP as
Name of a proposed LLP or
Name to which a LLP proposes to change its name
ROC has to inform the applicant ordinarily within 7 days

about his decision on reservation of the name.
After the expiry of 3 months, if LLP does not get

registered with such name, it has to make
fresh application for reservation of a name.
Foreign LLP has to apply for reservation of the name by which it is
registered abroad and such reservation is valid for a period of 3 years.
444 Business Laws
CHANGE OF NAME
The following are the provisions regarding change of name of LLP :
1. Change of Name of LLP on the Directions of Central

Government – Section 17
If Central Government is satisfied that a limited liability partnership has
been registered under a name which is
(a) undesirable, or
(b) identical with or too nearly resembles the name of any other LLP or
body corporate then Central Government may direct such LLP to
change its name and the LLP shall comply with it within 3 months
after the date of direction by Central Government or such longer
period as Central Government may allow.
Penalty. Any LLP which does not comply with above provision shall be
punishable with
(a) Fine which shall be not less than Rs. 10,000 but which may extend to
Rs. 5,00,000 and
(b) Designated partner shall be liable for an amount not less than Rs.
10,000 but which may extend to Rs. 1,00,000.
Procedure for Change of Name

To comply with the direction of Central Government the following procedure
needs to be followed
LLP may Change its Notice of change of On being satisfied
name by following the Name shall be given ROC shall change
procedure laid down to the ROC within the name of LLP
in LLP Agreement, if 30 days of change and issue a
the agreement is silent along with requisite fresh Certificate of
then with consent of all fee Incorporation
partners
2. Change of Name by ROC on request by Another Entity –

Section 18
Any other entity having name similar to the name of limited liability
partnership which has been incorporated may apply to the ROC to give
direction to the LLP to change its name but such application for change name
must be received by the ROC within 24 months from the date of registration
of the LLP.
3. Change of Name Voluntarily by LLP – Section 19

Any LLP may change its name with the ROC by filing with him a notice
of such change in the form and manner and on payment of such fee as may be
prescribed.
(For the change of name, LLP has to apply to the ROC as per provisions
of Section 15 and 16 and the follow the procedure for change of name as
mentioned earlier)
PENALTY FOR IMPROPER USE OF WORDS “LIMITED LIABILITY

PARTNERSHIP” OR “LLP – SECTION 20
If any person or persons carry on business under any name or title of
which the last words are “Limited Liability Partnership” or “LLP” or any
similar form without being incorporated as an LLP, that person or each of
those persons shall be punishable with fine of at least Rs. 50,000 but which
may extend to Rs. 5,00,000.
PUBLICATION OF NAME AND LIMITED LIABILITY – SECTION 21

(a) Every LLP shall ensure that its invoices, official correspondence and
publications bear the
• name,
• address of registered office and
• registration number of LLP, and
(b) A statement that it is registered with limited liability.
Penalty. Any LLP which contravenes with the above provision shall be
punishable with fine which shall not be less than Rs. 2,000 but which may
extend to Rs. 25,000.
REVIEW QUESTIONS
1. How can an LLP be incorporated and registered under LLP Act, 2008 ?
2. Discuss the contents of incorporation document of an LLP.
3. Explain the legal effect of incorporation of an LLP.
4. How is an LLP formed under the LLP Act, 2008 ? Enumerate the various
documents to be filed with the Registrar in this connection.
5. Explain the rules regarding change of name of LLP.
[B.Com. (H), Delhi, 2012, 2015]
6. ‘Certificate of Incorporation can be revoked after registration of an LLP.’ Do
you agree ? Explain.
7. Can a limited liability partnership have any other address in addition to
registered address ?
8. Explain the procedure for change of registered office from one State to
another. [B.Com(H), 2013]
9. What are the broad provisions of the LLP Act in respect of names of LLPs ?
For what period a name can be reserved by Registrar.
10. “The validity of a Certificate of Incorporation cannot be disputed on any
ground whatsoever.” Critically examine the statement. [B.Com(H), 2013]
446 Business Laws
11. Any person can carry on business under any name having last words as
“LLP” without being incorporated as an LLP ? Comment on the Statement.
12. State the contents of Incorporation Document of an LLP.
13. State the process of formation of LLP. [B.Com(H), 2016]
14. State the provisions of LLP Act, 2008 relating to change in registered office of
an LLP. [B.Com(H), 2016]
15. What are the restrictions relating to name for proposed LLP.
[B.Com, Delhi, 2018]
16. What is incorporation document ? Explain the process of incorporation of
limited liability partnership. [B.Com, Delhi, 2016]
17. State the contents of incorporation document of LLP. [B.Com, Delhi, 2017]
18. Write a note an “Designated Partner Identification Number” (DPIN).
[B.Com, Delhi, 2016]
Partners and Their
34 Relations
LEARNING OBJECTIVES
➥ Who can and who cannot be Partners
➥ Number of Partners
➥ Designated Partners
➥ Cessation of Partners
➥ Partner as Agent of LLP
➥ Extent of Liability of LLP and its Partners
➥ Whistle Blower and Contributions
ELIGIBILITY TO BE PARTNERS – SECTION 22

On the registration of an LLP persons who have subscribed their names
to the incorporation document are its partners. They are the initial partners
of LLP Any other person may become a partners of the LLP by and in
accordance with the LLP Agreement (For LLP agreement refer Chapter 24)
WHO CAN BE PARTNERS OF LLP – SECTION 5

According to Section 2(q), “partner”, in relation to a limited
liability partnership means any person who becomes a partner in it,
in accordance with the limited liability partnership agreement.
According to Section 5, the following can become a partner of LLP :
(a) Any individual, or
(b) A Body corporate – it includes:
• Indian company
• Foreign company
• Indian LLP
• Foreign LLP
may be a partner in a limited liability partnership.
WHO CAN NOT BE PARTNERS OF LLP

(a) Corporation sole – A corporation sole is where a single individual
is constituted as a corporation in respect of some office held by him or
function performed by him eg: Governor of a State
448 Business Laws
(b) Co-operative society.

(c) Any other body corporate notified by Central Government.
DISQUALIFICATIONS TO BECOME A PARTNER OF LLP – SECTION 5

An individual shall not be capable of becoming a partner of limited
liability partnership if
(a) He has been found to be of unsound mind by a competent court.
(b) He is an undischarged insolvent.
(c) He has applied to be adjudicated as insolvent and his application is
pending.
MINIMUM AND MAXIMUM NUMBER OF PARTNERS – SECTION 6

There should be at least two partners but there is no limit for maximum
number of partners. The LLP is to have a minimum of two partners who may
be
– 2 individuals, or
– one individual and a body corporate, or
– both the partners may be body corporate.
REDUCTION OF NUMBER OF PARTNERS BELOW 2 – SECTION 6(2)

If at any time, the number of partners is reduced below two, there shall
be personal liability of the sole partner, if all the following conditions are
present.
(a) Number of partners is reduced below two.
(b) LLP carries business even after such reduction.
(c) Sole partner has knowledge of the above 2 facts.
(d) Business is carried on for more than six months with such reduction.
(e) LLP incurs obligation in the period after the expiry of six months.
In above situation the sole-partner shall be personally liable for the
obligations of the limited liability partnership incurred during the period
after the expiry of six months. Further LLP can be wound up by Tribunal in
such a situation.
For the period within six months from the reduction the liability shall be
of LLP and not of sole partner and the period of six months is considered from
the date of reduction in minimum number of members.
For example, XY LLP has 2 partners Mr. X and Mr. Y. On 31st March, 2012,
Mr. Y expires then if Mr. X carries on business beyond 30th September, 2012
he shall be personally liable for obligations incurred by LLP after 30th
September, 2012. The choices available to Mr. X is such a situation are:
– Mr. X can add another partner by 30th September, 2012, or
– Mr. X can wind up XY LLP any time after 31st March 2012, or
– Mr. X is not able to admit another partner so Tribunal can wind up
LLP.
Partners and Their Relations 449
DESIGNATED PARTNERS – SECTION 7

Meaning of Designated Partner
According to Section 2(j), “designated partner” means any partner
designated as such pursuant to section 7.
Every LLP shall have at least 2 designated partners who are
individuals and at least one of them shall be resident in India
(Section 7).
If in a LLP all the partners are bodies corporate or in which one partner
is individual and other are bodies corporate then at least 2 individuals who
are partners of such LLP or nominees of such bodies corporate being
individual shall act as designated partners (Section 7).
The term “Resident in India” means a person who has stayed in India for
a period of not less than 182 days during the immediately preceding one year.
Manner of Appointment of Designated Partner

The designated partner can be appointed in the following ways.
(a) The incorporation document specifies who are to be designated
partners (First designated partners).
(b) If incorporation document states that each of the partners from time
to time are to be designated partners then every such partner shall be
a designated partner.
(c) A partner may become a designated partner in accordance with
limited liability partnership agreement and a partner ceases to be a
designated partner in accordance with limited liability partnership
agreement.
(d) Each partner shall be designated partner if no designated partner is
appointed by the incorporation document or by the LLP agreement or
by the LLP.
(e) To become a partner, an individual must give prior consent to act as
designated partner of limited liability partnership in form and
manner prescribed. The partner has to give the consent even if the
incorporation document or LLP agreement specifies the persons to be
designated partners.
(f) Every LLP shall file with the Registrar the particulars of every
individual who has given his consent to act as designated partner in
such form and manner as may be prescribed within 30 days of
appointment.
(g) Every designated partner of a limited liability partnership shall
obtain a Designated Partner Identification Number (DPIN) from the
Central Government and the relevant provisions of Companies Act
shall apply for the said purpose.
450 Business Laws
Designated Partner Identification Number (DPIN)

Every individual or nominee of a body corporate who is intending to be
appointed as designated partner of a limited liability partnership shall
submit an application electronically to the Central Government for allotment
of DPIN in form and manner as prescribed with requisite fee. Central
Government shall decide on the approval or rejection of DPIN within 30 days
from receipt of such application and intimate the applicant.
If a person holds both DIN (Director Identification Number) and DPIN,
his DPIN shall stand cancelled and DIN shall be sufficient for being
appointed as Designated Partner under LLP.
DPIN allotted is valid for the lifetime of the applicant. It is a useful and
smart way of keeping a check on the people who are running LLPs and who
have responsibility for fulfilling the legal requirements of the LLP. In case of
any misconduct or fraud by them it becomes easy to identify and penalise
them and it is easy to keep a record of such misconduct by the concerned
individuals.
How is DPIN obtained by an intending partner ? As per LLP
(Amendment) Rules, 2018 (w.e.f. 12-06-2018), “ Every individual, who intends
to be appointed as a designated partner of an existing limited partnership,
shall make an application electronically in Form DIR–3 under the Companies
(Appointment and Qualifications of Directors) Rules, 2014 for obtaining DPIN
under the Limited Liability Partnership Act, 2008 and such DIN shall be
sufficient for being appointed as designated partner under the Limited
Liability Partnership Act, 2008”. [Rule 10(1)]. It is allotted through Form
FiLLiP. Maximum of two DPIN/DIN can be allots through FiLLiP.
Further, “Every individual who has been allotted a DPIN or DIN under
there rules, shall in the event of any change in his particulars, make an
application in Form DIR-6 under the Companies (Appointment and
Qualifications of Directors) Rules, 2014 to intimate such change(s) to the
Central Government within a period of 30 days of such change” [Rule 10(4)].
Disqualifications for a person to be designated partner

A person shall not be capable of being appointed as a designated partner
of an LLP, if he
(a) has at any time within the preceding 5 years been adjudged insolvent,
or
(b) suspends or has at any time within the preceding 5 years suspended
payment to his creditors and has not at any time within the preceding
5 years made a composition with them, or
(c) has been convicted by a court for any offence involving moral
turpitude and sentenced in respect thereof to imprisonment for not
less than 6 months, or
(d) has been convicted by a court for an offence involving section 30 of the
Act
(Section 30 – If LLP or any of its partners carried on the business of
LLP with a view to defraud creditors or for fraudulent purpose it
would be considered an offence under the Act)
The Central Government may, by notification in the Official Gazette,
remove the disqualification incurred by any person by virtue of above clauses
(a) or (b) either generally or in relation to any limited liability partnership
specified in the notification.
Liabilities of Designated Partners – Section 8

A designated partner shall be
(a) responsible for all the acts, matters and things as are required to be
done by the limited liability partnership in respect of compliance of
the provisions of the Act including filing of any document, return or
statement etc.
(b) liable to all penalties imposed on the limited liability partnership for
any contravention of those provisions.
Changes in Designated Partner – Section 9 (Filling Casual

Vacancy)
(a) A limited liability partnership may appoint a designated partner
within 30 days of a vacancy arising for any reason.
(b) If no designated partner is appointed or if at any time there is only
one designated partners then each partner shall be deemed to be a
designated partner.
(c) Such designated partner has to give his consent to act as designated
partner and LLP has to file the particulars of designated partner with
the ROC within 30 days of his appointment.
Punishment for Contravention of Provisions of Section 7, 8& 9

For contravention of provision under Section 7(1) (appointment of at least
2 individuals as designated partners), the partnership and every partner
becomes punishable with a fine which is not to be less than R 10,000 but may
extend to R 5,00,000.
For contravention of Section 7(2), (4) and (5) (failure to inform ROC of
appointments and persons appointed being not qualified) and for
contravention of Section 8 and 9 (failure of the designated partner to fulfil
their responsibility and default in filling casual vacancy), the fine is to be not
less than R 10,000 but may extend upto R 1,00,000.
CESSATION OF PARTNERSHIP INTEREST – SECTION 24

A person may cease to be a partner of an LLP in accordance with an
agreement with other partners. In absence of any such agreement he may
452 Business Laws
cease by service of a notice in writing of not less than 30 days to the other
partners of his intention to resign as a partner.
(The agreement may not be in writing the agreement may cover even an
informal or implied understanding between the partners, if the agreement
specifies a time lesser than 30 days then such time shall be applicable).
Retirement of a partner
A partner of an LLP may retire upon happening of any event /
circumstances as mentioned in the LLP Agreement, which generally may be
upon reaching a particular age.
Removal / Expulsion of a partner

A partner of an LLP may be removed/expelled as per the LLP Agreement.
If the agreement is silent on this issue then Schedule I would be applicable to
the LLP and Schedule I says that majority of partners cannot expel a partner.
In other words, consent of all partners would be required to expel a partner.
How a person ceases to be a partner of an LLP

A person shall cease to be a partner of an LLP
(a) On his death, or
(b) On dissolution of LLP, or
(c) If he is declared to be a person of unsound mind by a competent court,
or
(d) If he has applied to be adjudged as an insolvent, or
(e) If he is declared as an insolvent.
Obligations of a former partner

Where any person has ceased to be a partner (former partner) of a limited
liability partnership, he is under no obligation from the date of his cessation.
However, the former partner is still regarded as a continuing partner in
relation to any person dealing with the LLP as still being a partner unless:
(a) the third person has notice that former partner has ceased to be so, or
(b) a notice of his ceasing to be a partner has been delivered to the ROC.
In absence of (a) & (b) above the cessation does not itself discharge him
from any obligation to the LLP or to the other partners or to any other third
person while he was a partner. He can be discharged in such a situation only
when.
(a) either LLP or other partners agree to absolve him by (LLP Agreement
or agreement with partners), or
(b) Third party agrees to release him, or
(c) LLP or other partners undertake to discharge the obligation itself or
themselves if third party refuses to release him (reimbursement to
former partner by LLP or partners).
Rights of the former partner after cessation

Unless there is an agreement to the contrary, the former partner or a
person entitled to his share in consequence of his death or insolvency is
entitled to receive from the LLP:
(a) an amount equal to the capital contribution of the former partner
actually made to the LLP; and
(b) his right to share in the accumulated profits of the LLP, after
deduction of accumulated losses of the LLP determined as at the date
the former partner ceased to be so.
But former partner or a person entitled to his share does not have any
right to interfere in the management of the LLP.
REGISTRATION OF CHANGES IN PARTNERS – SECTION 25

(a) Every partner has to inform the LLP of any change in his name or
address within a period of 15 days of such change.
(b) When a person becomes a partner, retires, is expelled or ceases to be
so, the LLP has to inform the Registrar within 30 days of the date, on
which that happened.
(c) When there is a change in the name or address of a partner, such
change is to be filed with Registrar within 30 days of the change.
(d) Notice so filed shall be in form prescribed with requisite fee.
(e) If the notice relates to an incoming partner it should contain a
statement by such partner that he consents to be a partner.
(f) A partner who ceases to be partner may file a notice with the
Registrar if he believes that LLP may not file the notice with the
Registrar.
(g) In case of notices filed by the partners themselves, ROC has to obtain
a confirmation to this effect from the LLP unless the LLP has
also filed the notice. If no confirmation comes from the LLP within
15 days, the Registrar has to register the notices filed by the
partner.
(h) In addition, whenever there is a change in partners either by
removal, expulsion, admission or cessation, it would result a change
in the LLP Agreement. The amended LLP Agreement is also to be
filed with the Registrar within 30 days of the amendment.
Penalty. If there is contravention of provision of filing the change of
name and address with ROC by any partner such partner shall be liable for
a minimum fine of R 2,000 but which may extend to R 25,000.
If there is contravention by LLP of filing of notices to Registrar then each
designated partner shall be punishable with a minimum fine of R 2,000 but
which may extend to R 25,000
454 Business Laws
PARTNER AS AGENT OF LLP – SECTION 26

Every partner of a limited liability partnership is for the purpose of the
business of the limited liability partnership, the agent of the LLP but not of
other partners. It means that a partner shall bind the LLP by its acts and not
the other partners.
Since a partner is an agent of the LLP, he is employed to do any act or
represent LLP in dealing with third person and the agent can bind the
principal only if he acts within the scope of his authority and the scope of
agent’s authority is determined by express, implied, apparent authority and
authority in emergency.
Express The partner has been given express

authority authority by LLP to act on behalf of LLP
with the third persons. Then LLP is liable
for all such acts of partner.
Authority of an Implied If a partner has express authority being an
Agent / Partner authority agent of the limited liability partnership to
do a particular act then he has implied
authority also to do all acts & things which
are incidental to the achievement of the
main purpose then LLP is liable for all such
acts.
Apparent A partner can also bind the LLP by acts
authority done within his apparent authority provide
the third party acts bonafide. It is authority
which is in excess of his actual authority:
Authority in If a partner exceeds his authority to protect
Emergency LLP from losses in an emergency as a man
of ordinary prudence would do in his own
case then LLP is liable for all such acts of
the partner.
EXTENT OF LIABILITY OF LLP – SECTION 27

To fix the liability of LLP for acts done by its partners the following
conditions must exist:
(a) The act or omission by the partner must be wrongful.
(b) The act or omission must be in the course of LLP’s business.
(c) The act or omission must be with the LLP’s authority and
(d) The wrongful act or omission must result in the partner’s liability to
some other person
If the act or omission takes place outside the LLP’s business or is
unrelated to the business of the LLP it would not result in any liability for
the LLP.
The extent of liability of LLP is discussed as the Scope of LLPs

liability below in detail.
Scope of LLP’s liability

1) LLP is not liable– A limited liability partnership is not bound by
anything done by a partner in dealing with a person if:
(a) The partner has no authority (Express or Implied) to act for the
limited liability partnership in doing a particular act.
(b) The third person knows that the partner has no authority or does
not know or does not believe him to be a partner of LLP.
2) LLP is liable– The LLP is liable for acts of its partners if
(a) The wrongful act or omission is done in the course of business of
the LLP, or
(b) The wrongful act or omission is done with the authority of the
LLP.
3) Liability in case of holding out (Section 29)– LLP when receives
credit or any financial benefit by a third person due to wrong
representation made by another person then LLP is liable to the
extent of the credit received by it or any financial benefit derived
there on.
4) Unlimited liability (Section 30)– If any event is carried out by the
LLP or any of its partners with an intent to defraud creditors of the
LLP or any other person or for any fraudulent purpose, then the
liability of the LLP shall be unlimited for all such debts unless it is
proved that LLP has no knowledge of it or the act is carried out
without authority of LLP.
5) Liability for compensation (Section 30)– LLP shall be liable to
pay compensation to any person who has suffered any loss or damage
by reason of wrongful conduct of LLP in carrying on the business of
LLP. If such conduct is committed without knowledge of LLP or
without any authority by LLP, LLP shall not be liable.
6) LLP’s property liable– The liabilities of the LLP shall be met out of
the property of the LLP only.
EXTENT OF LIABILITY OF PARTNERS OF LLP – SECTION 28

The liability of partners of LLP for their acts is discussed below:
1) Partner is not liable– A partner is not personally liable for an
obligation of the LLP arising in contract or otherwise by reason solely
of the fact that he is a partner of the LLP.
456 Business Laws
2) Partner not liable for acts of other partners– A partner is not

personally liable for the wrongful act or omission of any other partner
of the LLP.
3) Partners liable– A partner is liable for his wrongful act or omission
without any authority (express or implied) from the LLP.
4) Liability by holding out (Section 29)– If a Person by his words or
conduct represents himself to be a partner is a limited liability
partnership, such a person is liable to any person who has on such
representation given credit to the LLP.
5) Liability of deceased partner (Section 29)– Where after a
partner’s death LLP continues the use of the name of the deceased
partner, the continued use of the name of the deceased partner shall
not itself make his legal representatives or his estate liable for any
act of the LLP done after his death.
6) Unlimited liability (Section 30)– If any event is carried out by any
of its partners with an intent to defraud creditors of the LLP or any
other person or for any fraudulent purpose the liability of the
partners who acted with such intent shall be unlimited (extending to
their personal assets) for the debt of the LLP.
7) Liability for compensation (Section 30)– The partner shall be
liable to pay compensation to any person who has suffered any loss or
damage by reason of wrongful conduct of the partner.
8) Penalty (Section 30)– When there is unlimited liability for a
partner under section 30 then besides the unlimited liability for the
debts of the LLP, the partner shall be punishable with imprisonment
for a term which may extend to 2 years and with fine which shall not
be less than R 50,000 but which may extend to R 5,00,000.
LIABILITY BY HOLDING OUT – SECTION 29

If a person by his words (spoken or written) or conduct represents himself
to be a partner in a limited liability partnership, although he is not a partner,
then such a person is liable to any person who has an such representation
given credit to the LLP.
To fix the liability on the person holding out, the following conditions
must be satisfied:
(a) Such (false) representation has been made by the person by his words
or conduct.
(b) Such representation has reached another person who has given credit
to the LLP and
(c) Credit has been given on the faith of such representation.
LLP is liable to the extent of the credit received by it or any financial
benefit derieved there on.
Where after a partner’s death LLP continues the use of the name of the
deceased partner, the continued use of the name of the deceased partner shall
not itself make his legal representatives or his estate liable for any act of the
LLP done after his death.
UNLIMITED LIABILITY IN CASE OF FRAUD – SECTION 30

1. Liability of LLP and Partners– If any event is carried out by a
limited liability partnership or any of its partners with an intent to defraud
creditors of the limited liability partnership or any other person or for any
fraudulent purpose the liability of the LLP and guilty partners shall be
unlimited for all or any of the debts of the LLP. If LLP has no knowledge of
wrongful act of partner or the act is carried out by the partner without the
authority of the LLP then LLP shall not be liable and only guilty partner
shall be liable.
2. Penalty– Every person guilty for such acts shall be punishable with
(a) imprisonment for a term which may extend to 2 years and
(b) fine which shall not be less than R 50,000 but which may extend
to R 5,00,000.
3. Compensation– Limited liability partnership or a partner(s) or a
designated partner(s) shall be liable to pay compensation to any person who
has suffered any loss or damage by reason of such conduct. LLP shall not be
liable if the partner or designated partner has acted fraudulently without
knowledge of the LLP (whether LLP is in knowledge of such act or not can be
inferred from the course of the conduct also).
4. Liability extends to partner in knowledge– The above provision is
applicable to that partner also who has become aware of the element of fraud
or the fraudulent purpose in the carrying of the LLP’s business but who is not
involved in it but he also does not take any corrective action. (It is like any
notice to the agent is regarded as a notice to the principal and by virtue of
section 26 a partner is an agent of the LLP, so any notice to him is a notice to
LLP also and by such reason he is duty bound to take any corrective action, if
he does not take any action, he shall also be guilty.)
WHISTLE BLOWING (WAIVER OF PENALTY) – SECTION 31

The action of providing information by a partner or employee of limited
liability partnership which alerts the concerned authorities to any wrongful
acts committed or being committed, which involves violation of any laws or
rules is called whistle Blowing and the person who provides such information
is called whistle Blower.
The legal position of the whistle blower is discussed below:
1. The Court or Tribunal may reduce or waive any penalty leviable
against any partner or employee of a limited liability partnership if it is
satisfied that:
458 Business Laws
(a) Such partner or employee of the LLP has provided useful information
during investigation of such LLP, or
(b) When any information given by any partner or employee during
investigation or otherwise leads to LLP or any partner of such LLP being
convicted under this Act or any other Act.
2. No partner or employee of any limited liability partnership may be
discharged, demoted, suspended, threatened, harassed or in any other
manner discriminated in his employment merely because of his providing
information or causing information to be provided.
3. Such protection shall not be available to partner or employee if such
information is provided by a third party like supplier of goods & services.
FORMS OF CONTRIBUTIONS –SECTION 32

A partner may make contribution to the LLP in many forms. The
provision related to contributions is discussed below.
1. Forms– The contribution of a partner may consist of
• tangible (movable or immovable) property, or
• intangible property, or
• some other benefits to the LLP including money, promissory
notes ,or
• other agreements to contribute cash or property and
• contracts for services performed or to be performed
which shall be valued by a practicing Chartered Accountant or by
practicing Cost Account and or by approved Valuer from the panel
maintained by the Central Government
2. Computation of value. The monetary value of the contribution of
each partner is to be accounted for and disclosed in the accounts of the LLP
along with the nature of contribution and amount.
Obligation to Contribute – Section 33

1. As per LLP Agreement– The obligation of a partner to contribute
money or other property, other benefit or perform services for the LLP is to be
as per the LLP Agreement. (But partners can modify this agreement, in
regard to form and computation of value of obligation which is to be
registered with ROC)
2. Obligation to creditor– A creditor of an LLP, who extends credit to
the LLP or extends credit to the LLP in reliance of an original obligation
described in the LLP Agreement, can enforce such original obligation on the
LLP and its partner even if there is modification in contribution by a partner
later and creditor has no notice of such modification at the time of extending
the credit then he can enforce original obligation to his knowledge.
(Original obligation– It does not necessarily refer to the obligation

mentioned in the LLP Agreement, it any means the obligation for
contribution by a partner as on the date when the third party has extended
credit to the LLP)
Interest on Contribution
The Act is silent on payment of interest on contribution but LLP may pay
interest on such contribution as per the terms other LLP Agreement.
Withdrawal of Contribution
The Act is silent as to whether a partner can withdraw his contribution
from the LLP. The withdrawal of contribution by a partner would depend
upon the LLP Agreement. However in case of cessation of partner from the
LLP, unless otherwise provided in the LLP Agreement, the former partner or
a person entitled to his share in consequence of the death or insolvency of the
former partner, shall be entitled to receive from the LLP:
(a) an amount equal to the capital contribution of the former partner
actually made to the LLP, and
(b) his right to share in the accumulated profits of the LLP, after the
deduction of accumulated losses of the LLP, determined as at the date
the former partner ceased to be a partner.
REVIEW QUESTIONS
1. How can a person become a partner of an LLP ? What are the
disqualifications for becoming a partner in an LLP ?
[B.Com. (H), Delhi 2011]
2. Who can be appointed as designated partner in an LLP ? Also discuss the
procedure of his appointment. [B.Com. (H), Delhi 2011, 2014]
3. Discuss the provisions regarding appointment and eligibility condition for a
designated partner under the LLP Act, 2008. [B.Com. (H), Delhi 2012]
4. What is the minimum number of partners that an LLP should have ? What
are the consequences if the number of partners fall below the statutory
minimum ?
5. What are the provisions for filling casual vacancy arising in case of
designated partners?
6. Define the term ‘partner of an LLP’. What will be the obligation of a partner
if he changes his name or address ?
7. How can an existing partner cease to be a partner of an LLP ?
8. Discuss the extent of liability of an LLP. [B.Com. (H), Delhi 2011]
9. State the liability of the LLP for the wrongful act of partner.
10. The partners of LLP have no liability for the acts done an behalf of LLP ? Do
you agree ?
11. What do you understand by the term ‘holding out’ ? What is the liability of
LLP in such a situation ?
460 Business Laws
12. ‘A partner or LLP shall never be liable to an unlimited extent for the debts of
LLP.’ Critically examine the statement. [B.Com. (H), Delhi, 2015]
13. Write a short note on
(a) Contributions
(b) Whistle blowing. [B.Com. Delhi, 2016]
14. State the provisions related to whistle blowing in case of LLP.
[B.Com(H), 2013, 2015]
15. The responsibility for carrying out the legal obligation as laid down by the
LLP Act shall be solely of the designated partners. [B.Com(H), 2016]
16. Every partner of an LLP is an agent of the LLP only and not of other
partners. [B.Com. (H), 2016]
17. Who can become partner in an LLP? What are the disqualifications for
becoming a partner? How can a person become a partner of an LLP?
[B.Com (H), 2016]
18. Define the term “ Designated Partner”. Explain the various provisions in
respect of Designated Partners. [B.Com. Delhi, 2018]
19. What is meant by “Designated partners” ? Discuss provisions of LLP Act,
2008 regarding eligibility conditions for the appointment of Designated
Partners. [B.Com. Delhi, 2017]
20. What is the protection available to a Whistle Blower under the LLP Act,
2008. [B.Com., Delhi, 2018]
35 Financial Disclosures
LEARNING OBJECTIVES
➥ Rules relating to Maintenance of Books of Account
➥ Audit of Accounts
➥ Annual Return
➥ Power of Registrar to obtain Information
➥ Enforcement of Duty to make Returns
BOOKS OF ACCOUNT
LLP has to maintain proper books of account relating to its affairs which
are sufficient to show and explain the limited liability partnership
transactions.
RULES REGARDING MAINTENANCE OF BOOKS OF ACCOUNT AND

OTHER RECORDS – SECTION 34
1. Maintenance of Books of Account. Every LLP shall maintain
proper books of account which:
(a) disclose with reasonable accuracy at any time, the financial position
of the limited liability partnership at that time, and
(b) enable the designated partners to ensure that any Statement of
Account and Solvency prepared complies with the requirements of the
Act.
2. Basis of preparation. The books of account may be made on cash
basis or accrual basis according to double entry system of accounting and
they have to be kept at the registered office of the LLP for such period as may
be prescribed.
3. Financial Year. Financial year of an LLP shall be from 1 April of a
year to the 31st March of the following year. In case LLP is incorporated after
30th September of a year, the financial year may end on the 31st March of
the year next following that year.
4. Contents of Books of Account. The books of account shall contain
(a) particulars of all sums of money received and expended by the LLP
and matters of any receipt and expenditure.
462 Business Laws
(b) a record of assets and liabilities.

(c) statements of cost of goods purchased, inventories, finished goods etc.
and
(d) any other particulars which the partners may decide.
4. Period of Preservation. The books of account shall be preserved for 8
years from the date on which they are made.
6. Statement of Account and Solvency. Statement of Account shows
the financial position in terms of assets and liabilities and receipt and
expenditure of the LLP.
Statement of solvency– .It is a statement of declaration made by
designated partners that they have enquired into the affairs of the LLP and
they believe that LLP shall be able to pay its debts in the normal course of
its business.
Statement of Account and Solvency

Form and Content
The statement is divided in two parts namely :
Part A Part B
Statement of Solvency Statement of Account
It is a declaration by the It is the detailed summary of financial
designated partners that they position of the LLP. It consists of
have made full enquiry in to (a) Statement of Assets and Liabilities.
the affairs of the LLP and (b) Statement of Income and Expenditure
have the opinion whether the
The 2 statements have to report the figures
LLP would be able to pay its
of current financial year and of the
debts in full in the normal
immediately preceding financial year.
course of business or not.
Statement of Account and Solvency has to be prepared within a period of
6 months from the end of each financial year and it has to be submitted with
ROC in Form 8 within a period of 30 days from the end of 6 months of the
financial year to which the Statement of Account and Solvency relates with
prescribed fee.
Signature. The Statement of Account and Solvency shall be signed on
behalf of the limited liability partnership by its designated partners and
each designated partner shall be taken to be party who has approved such
Statement of Account and Solvency. He shall not be taken as a party to such
approval if he shows that he took all reasonable steps to prevent the
statements being approved.
Financial Disclosures 463
Inspection (Section 36). The Statement of Account and Solvency filed

with the Registrar shall be available for inspection by any person in a
manner with the fee prescribed.
7. Penalty. liability for non-compliance of above provisions of section 34
is:
(a) LLP shall be liable for an amount which shall not be less than
R 25,000 but which may extend to R 5,00,000.
(b) Each designated Partner shall be liable for an amount which shall
not be less than R 10,000 but which may extend to R 1,00,000.
AUDIT OF ACCOUNTS
The accounts of limited liability partnerships shall be audited in
accordance with the following rules (Rule 24)
1. Requirement of Audit– A limited liability partnership shall not be
required to get its accounts audited if in any financial year the turnover of
limited liability partnership does not exceed R 40 lakhs or its contribution
does not exceed R 25 five lakhs.
Where the partners of such LLP do not decide for audit of accounts of the
LLP, such LLP shall include in the Statement of Account and Solvency a
statement by the partners to the effect that the partners acknowledge their
responsibilities for complying with the requirements of the Act and the Rules
with respect to preparation of books of account and a certificate in the form
prescribed, in Form 8.
If the partners of such LLP decide to get the accounts of such LLP
audited, the accounts shall be audited in accordance with the rules specified.
2. Auditors Qualification– A person should be a practicing
Chartered Accountant to qualify for appointment as an auditor of a limited
liability partnership.
3. Manner of Auditor appointment and Re-appointment– The
auditor of a limited liability partnership shall be appointed for each financial
year of the LLP for auditing its accounts.
The designated partners may appoint an auditor or auditors:
(a) [First Auditor(s)] at any time for the first financial year but before
the end of the first financial year.
(b) [Subsequent Auditor(s)] at least 30 days prior to the end of the
each financial year (other than the first financial year).
(c) to fill a casual vacancy in the office of auditor, including in the case
when the turnover or contribution exceeds the limit specified.
(d) to fill up the vacancy caused by removal of an auditor.
The partners may appoint on auditor or auditors where the designated
partners have failed to appoint them.
464 Business Laws
Where no auditor has been appointed, any auditor in office shall

be deemed to be re-appointed unless:
(a) the LLP agreement requires actual re-appointment, or
(b) the majority of partners have determined that he should not be re-
appointed and have given a notice to this effect to the LLP.
4. Holding of office by the Auditor– An auditor or auditors of on LLP
shall hold office in accordance with the terms of his or their appointment and
shall continue to hold such office till the period–
(a) the new auditors are appointed, or
(b) they are re-appointed.
5. Remuneration of an Auditor. The remuneration of an auditor
appointed by the limited liability partnership may be fixed by the designated
partners or by following the procedure as laid down in the limited liability
partnership agreement.
6. Removal or Resignation of an Auditor
(a) the partners of a limited liability partnership may remove an auditor
from office at any time by following the procedure as laid down in the
LLP agreement.
(b) where the limited liability partnership agreement does not provide for
removal of an auditor, consent of all the partners shall be required for
removal of the auditor from his office.
(c) An auditor of an LLP may resign his office by depositing a notice in
writing to that effect at the LLP’s registered office such notice is to be
accompanied by statement of circumstances connected with his
ceasing to hold office.
(d) where an auditor is unwilling to be re-appointed, he shall give a
notice in writing to that effect at the LLP’s registered office, not less
than 14 days before the end of the time allowed for appointing the
new auditor. Such notice is to be accompanied by the statement of the
circumstance connected with his ceasing to hold office.
(e) The auditor’s term comes to an end as on the date on which the notice
is deposited or on such later date as may be specified in the notice.
7. Powers and Duties of Auditors.
The auditors have the following powers and duties:
(a) Right of access at all times to the books and accounts of the LLP.
(b) Entitlement to require from the officers of the LLP such information
and explanation as may be for performance of his duties.
(c ) He has a duty to state in his report that whether in his opinion the
accounts give the requisite information and give true and fair view .
(d) The auditor has to make comments whether the profit and loss
account and balance sheet are in agreement with books of account
and returns.
(e) To enquire whether transactions representing merely book entries are

not prejudicial to the interests of the LLP.
8. Exemption. The Central Government may by notification in the
official Gazette, exempt any class or classes of limited liability partnership
from the requirements of the said rules.
9. Penalty. liability for non-compliance of above provisions is:
(a) LLP shall be liable for an amount which shall not be less than
R 25,000 but which may extend to R 5,00,000.
(b) Each designated Partner shall be liable for an amount which shall
not be less than R 10,000 but which may extend to R 1,00,000.
ANNUAL RETURN – SECTION 35

The following provisions relate to filing of annual return under section 35.
1. Period of Filing– Every limited liability partnership shall file an
annual return duly authenticated with the Registrar within 60 days of
closure of its financial year in Form 11 with such fee as may be prescribed.
2. Contents of Annual Return. It contains information regarding the
following :
(a) the name, and address of registered office of the LLP;
(b) the main business activities of the LLP;
(c) the summary of partners and designated partners including DPIN of
designated partners;
(d) number of individual(s) as partners and number of bodies corporate
as partners;
(e) obligation of each partner contribute and the contribution received;
(f) the particulars of penalties imposed, if any, on the LLP on designated
partner or partners other than designated partners;
(g) particulars of compounding of offences.
3. Certification of Annual Return
For on LLP having turnover upto 5 In other cases the annual return
crore rupees during the shall be accompanied with a
corresponding financial year or certificate from a C o m p a n y
contribution upto 50 lakh rupees Secretary in practice to the
shall be accompanied with a effect that he has verified the
certificate from a designated particulars from the books and
partner, other than the signatory to records of the LLP and found
the annual return, to the effect that them to be true and correct.
annual return contains true and fair
information.
466 Business Laws
4. Penalty. If the limited liability partnership fails to comply with the

provisions of this section there shall be fine for:
(a) Every LLP for an amount which shall not be less than R 25,000 but
which may extend to R 5,00,000.
(b) Each designated Partner for an amount which shall not be less
than R 10,000 but which may extend to R 1,00,000.
5. Inspection. The annual return filed by each limited liability
partnership with the Registrar shall be available for inspection by any person
in such manner and on payment of such fee as may be prescribed.
INSPECTION OF DOCUMENTS KEPT BY REGISTRAR– (SECTION 36)

The following documents filed with the Registrar shall be available for
inspection by any person in a manner with such fee as may be prescribed.
(a) incorporation document.
(b) names of partners with any changes.
(c) Statement of Account and Solvency.
(d) Annual Return.
PENALTY FOR FALSE STATEMENT – SECTION 37

If in any return, statement or other document required by or for the
purpose of any of the provisions of this Act, any person makes a statement:
(a) which is false in any material particular, knowing it to be false, or
(b) which omits any material fact knowing it to be material.
he shall be punishable with imprisonment for a term which may extend

to 2 years and shall also be liable to fine which may extend to R 5,00,000 but
which shall not be less than R 1,00,000.
POWER OF REGISTRAR TO OBTAIN INFORMATION – SECTION 38

1. In order to obtain such information as the Registrar may consider
necessary for the purpose of carrying out the provisions of this Act, the
Registrar may require any person including any present or former partner or
designated partner or employee of the LLP to answer any question or make
any declaration or supply any details of particulars in writing to him within a
reasonable period.
2. In case any person referred above does not answer such question or
makes such declaration or supply such details or particulars asked for by the
Registrar within a reasonable time or time given by the Registrar or when
the Registrar is not satisfied with the reply or declaration or details or
particulars provided by such person, the Registrar shall have power to
summons that person to appear before him or an inspector or any other
public office whom the Registrar may designate, to answer any such question
or make such declaration or supply such details, as the case may .
3. Any person who, without lawful excuse, fails to comply with any
summons or requisition of the Registrar under this section shall be
punishable with fine which shall not be less than R 2,000 but which may
extend to R 25,000.
COMPOUNDING OF OFFENCES – SECTION 39

Compounding an offence means forbearing from prosecution.
The Central Government may compound any offence under this Act
which is punishable with fine only, by collecting from a person reasonably
suspected of having committed the offence, a sum which may extend to the
amount of the maximum fine prescribed for the offence.
Intimation to Registrar – Where any offence is compounded intimation
shall be given by the LLP to the Registrar within 7 days from the date on
which the offence is so compounded. Before allowing for compounding an
offence Registrar may direct any partner or designated partner of the LLP to
file with Registrar such Return, Statement of Account and Solvency or other
document for which the offence was punishable with such fee and within such
time as may be specified.
DESTRUCTION OF OLD RECORDS – SECTION 40

The Registrar may destroy any document filed or registered with him in
physical form or in electronic form in accordance with such rules as are
prescribed below:
(a) Records to be preserved for 21 years
All papers, registers, refund orders and correspondence relating to the
LLP liquidation accounts.
(b) Records to be preserved for 5 years
(i) Copies of Government orders relating to LLP
(ii) Registered documents of LLP which have been fully wound up
and finally dissolved together with correspondence relating to
such LLP.
(iii) Papers relating to legal proceedings from the date of disposal of
the case and appeal, if any.
(iv) Copies of statistical returns furnished to Government.
(v) All correspondences including correspondences relating to
scrutiny of accounts, annual returns, prosecution reports to the
Central Government and the Tribunal and the correspondences
relating to complaints.
468 Business Laws
(c) Records to be preserved for 3 years

(i) All books, records and papers other than those specified above
and certain other specified documents including documents of
foreign limited liability partnerships which cease to have any
place of business in India.
(ii) Routine correspondence regarding payment of fees, additional
filing fees and correspondence about the return of documents.
(d) Records of foreign limited liability partnership– Which cease to
have any place of business in India shall be destroyed after expiry of 3 years
from the date such limited liability partnership cease to have any place of
business in India.
(e) Register of destroyed documents– It is to be maintained by
Registrar in two parts as per the form mentioned by the Act, wherein he shall
enter brief particulars of the records destroyed and shall certify the date of
mode of destruction.
ENFORCEMENT OF DUTY TO MAKE RETURNS ETC. – SECTION 41

1. ROC is empowered to take cognisance of any default by an LLP in
complying with any provisions of the LLP Act or any other law which
requires the filing of any return, document with the ROC. The section enjoins
the ROC to secure compliance of the filing requirement by specifically calling
upon the LLP concerned by a notice to make good the default and LLP has to
make good the default within 14 days of the service of notice.
2. If any document filed with ROC is found incomplete or the ROC
requires some amendment, then he can issue a notice to the concerned LLP
calling upon it to complete or amend and resubmit the document.
3. If for a period of 14 days from the service of notice, the LLP does not
take corrective action, the ROC may make an application to the Tribunal to
direct the LLP to make good this default.
4. LLP may also be required to pay the ROC’s cost of and incidental to his
application to the Tribunal complaining of the LLP’s default.
5. In the event of default by the LLP the LLP will face penalty initially
fined by the Act (which is the first offence). Additionally LLP may incur
general penalty under section 74 for failure to comply with ROC’s notice
(which is second offence) if LLP does not respond in 14 days. Going still
further, the LLP may also incur the penalty under section 73 for violating
Tribunals order (if so) (which is third offence). So LLP may face risk of
cumulative penalties and these penalties shall be payable by LLP.
REVIEW QUESTIONS
1. What is meant by Statement of Account and Solvency in an LLP ?
2. Discuss briefly the powers and duties of auditor of an LLP.

3. ‘Every LLP is required to get its accounts audited’. Critically examine the
statement.
4. Explain the provisions for appointment and removal of an auditor.
5. Can Central Government grant exemption to any class of LLPs from audit
requirement?
6. Discuss the provision of filing return of an LLP. [B.Com. (H), Delhi 2011]
7. Name the documents which are open for public inspection.
8. Discuss the power of the Registrar to obtain any information as required
under the Act from any partner or employee of the LLP.
9. Write short notes on
(a) Compounding of offences
(b) Destruction of old records.
10. Discuss the powers of ROC in securing compliance of filing requirement with
respect to any return or document by the LLP with ROC. What penalties may
be imposed on LLP for default in complying with the filing requirement?
11. Write a note on Annual Return of LLP. [B.Com. (H), Delhi, 2014]
12. Answer the following :
(i) Auditing of Accounts
(ii) Declaration of Insolvency of an LLP. [B.Com., Delhi, 2018]
36 Conversion to LLP
LEARNING OBJECTIVES
➥ Meaning of Unlisted Public Company
➥ Legal Provisions for Conversion to LLP
The concept of LLP provides the benefits of limited liability with

perpetual succession. To enable the existing firms, private companies and
unlisted public companies avail the benefits of LLP structure, they are
allowed to convert to an LLP in accordance with the provisions of the LLP
Act.
LEGAL PROVISIONS REGARDING CONVERSION TO LLP

The provisions have been discussed in the TABULAR FORM from
pages 479 to 489.
Notes : 1. Unlisted Public Company. Unlisted company means a company which
does not have any of its securities listed on any stock exchange. They are
registered as a public company and have minimum share capital, as may
be prescribed, and seven as minimum number of members. There is no
limit on maximum number of members. Its shares are not available for
trading to general public.
2. The Rules do not prescribe any minimum paid up capital. Therefore,
there is no requirement of minimum paid up capital at present.
Legal Provisions
Conversion to LLP Conversion from Firm into Conversion from Private Conversion from Unlisted
Limited Liability Partnership Company into LLP Public Company into LLP
Provisions of the Act A partnership firm may be A private company may be converted An unlisted public Company may
converted into a LLP in accordance into a LLP in accordance with the be converted into a LLP in
with the provisions of section 55 provisions of section 56 and the Third accordance with the provisions of
and the Second Schedule of the Schedule of the LLP Act, 2008. The section 57 and the Fourth Schedule
LLP Act, 2008. The provisions of provisions of conversion of private of the LLP Act, 2008. The
conversion of partnership firm to company to LLP are discussed below. provisions of conversion of unlisted
LLP are discussed below: public company to LLP are
discussed below.
Eligibility for A firm (registered or unregistered) A company may convert into a LLP if: A company may convert into a LLP
Conversion may apply to convert into a LLP (a) There is no security interest in if
only if all its partners and no one its assets subsisting or in force at (a) There is no security interest in
else becomes partners of the LLP. the time of application (all the its assets subsisting or in force
If any more partner is to be assets of the private company at the time of application.
inducted or any partner is to be must be free from encumbrance (b) All the shareholders of the
dropped that can be done after of any kind) and company and no one else
that LLP comes into being and in (b) All the shareholders of the becomes the partners of the
accordance with the LLP company and no one else becomes LLP. (If any shareholder is
agreement. the partners of the LLP. unwilling or not able to join
the conversion process. Then
company is to acquire his
shareholding by other
shareholders as per the
company’s AOA before the
company lodges the application
for conversion)
Documents to be Filed A firm may apply to convert into a A private company may apply to An unlisted public company may
for Conversion limited liability partnership by convert into a LLP by filing with the apply to convert into a LLP by
filing with the Registrar: Registrar filing with the Registrar.
1. A statement by all of its 1. A statement by all of its members 1. A statement by all of its
in Form 18 along with requisite fee members in Form 18 along with
partners in Form 17 along with
containing the following particulars. requisite fee containing the
requisite fee containing the
(i) The name and registration following particulars:
following particulars:
number of the company and (i) The name and registration
(i) the name and registration
(ii) The date on which the company number of the company and
number (if applicable) of the was incorporated
firm and (ii) The date on which the
Following documents have to be company was incorporated.
(ii) the date on which the firm attached with the form.
was registered under the (a) Statement of consent of all Following documents have to
be attached with the form.
Indian Partnership Act, 1932 shareholders.
or under any other Law if (b) Statement of Assets and (a) Statement of consent of all
applicable. shareholders.
Liabilities of the company duly
Following documents have to certified as true and correct by (b) Statement of Assets and
the auditor. Liabilities of the company duly
be attached with Form 17
(c) List of all the unsecured creditors certified as true and correct by
(a) Statement of consent of all the auditor.
along with their consent.
partners,
(d) Approval from any other (c) List of all the unsecured
(b) Statement of Assets and body/authority. creditors along with their
Liabilities of the firm duly consent
The Statement is to be signed by
certified as true and correct by
a designated partner who shall (d) Approval from any other
a practicing Chartered state that body/authority.
Accountant,
(a) All requirements of the LLP Act The Statement is to be signed
(c) Copy of acknowledgment of and the rules made have been by a designated partner who
latest income-tax return, complied with in respect of shall state that
(d) Approval from any body / conversion of the company into LLP. (a) All requirements of the LLP
authority if required, (b) All the partners of the LLP Act and the rules made have
comprise all the shareholders of been complied with in respect
(e) List of all the creditors along
the company and no one else. of conversion of the company
with their consent to the
into LLP.
conversion. (c) All approvals / clearance for
conversion have been obtained. (b) All the partners of the LLP
The statement is to be signed
comprise all the shareholders
by a designated partner who (d) Consent of all the unsecured
of the company and no one
shall state that creditors for conversion of the
else.
company has been obtained.
(a) All requirements of the LLP
(e) All the documents due for filing (c) All approvals / clearance for
Act and the rules made have conversion have been obtained.
including balance sheet and
complied with in respect of
annual return for t h e (d) Consent of all the unsecured
conversion of the firm into
immediately preceding financial creditors for conversion of the
LLP.
year have been filed under the company has been obtained.
(b) All partners of the firm are provisions of the Companies Act, (e) All the documents due for
partners of LLP. 2013. filing including balance that
(c) All approvals / clearance for (f) All information in this form and and annual return for the
conversion have been its attachment are correct and immediately preceding
obtained. complete. financial year have been filed
(d) Consent of all creditors of the The statement shall be certified under the provisions of the
firm have been obtained. by either a practicing Companies Act, 2013.
(e) All information in this Form (i) Company Secretary (f) All information in this form
and its attachment are correct (ii) Chartered Accountant and its attachment are correct
and complete. and complete.
(iii) Cost Accountant
The statement shall be that all requirements of the Act have The statement shall be certified
certified by a either a been complied with in respect of by either a practicing
practicing conversion. (i) Company Secretary
(i) Company Secretary or 2. Incorporation or document and (ii) Chartered Accountant
(ii) Chartered Accountant or statement referred to in section
(iii) Cost Accountant
11.
(iii) Cost Accountant that all requirements of the Act
that all requirements of the Act have been complied with in respect
have been complied with in respect of conversion.
of conversion of firm into LLP. 2. Incorporation document and
2. Incorporation document and statement referred to in Section 11.
statement referred to in Section
11.
Certification by (a ) Registration– On receiving (a ) Registration. On receiving the (a) Registration. On receiving

Registrar the documents, if ROC is documents, if ROC is satisfied he the documents, if ROC is
satisfied he shall register the shall register the documents and satisfied he shall register the
documents and issue a issue a certificate of registration documents and issue a
certificate of registration stating that the limited liability certificate of registration
stating that the limited partnership has come into stating that the limited
liability partnership has come existence on and from the date liability partnership has come
into existence and from the specified in the certificate. LLP into existence and from the
date specified in the shall within 15 days of the date specified in the certificate.
certificate. registration inform the Registrar LLP shall within 15 days of
LLP shall within 15 days of of Companies with which the the registration inform the
the registration inform the company was registered about Registrar of companies with
Registrar of Firms with which the conversion and of the which the company was
it was registered under the particulars of the LLP. registered about the
Indian Partnership Act (or (b) Refusal to Register. If conversion and of the
any other law) about the Registrar is not satisfied with particulars of the LLP.
conversion of film into LLP. information furnished by the (b) Refusal to Register. If
(b) Refusal to Register– If company, the Registrar may ask Registrar is not satisfied with
Registrar is not satisfied with for classification from the information furnished by the
information furnished by the company, if he is still not company, the Registrar may
firm. The Registrar may ask satisfied he can reject the ask for clarification from the
for clarification from the firm application for conversion. company if he is till not
if he is still not satisfied he The appeal may be made by the satisfied he can reject the
can reject the application for company before the Tribunal in case application for conversion.
conversion. of refusal of registration by the The appeal may be made by the
The appeal may be made by the Registrar. company before the Tribunal in
firm before the Tribunal in case of case of refusal of registration by
refusal of registration by the the Registrar.
Registrar.
Effects of Registration On and from the date of On and from the date of registration On and from the date of
registration specified in the specified in the certificate of registration specified in the
certificate of registration issued registration issued there shall be: certificate of registration issued
there shall be: (i) Existence of LLP– There there shall be
(i) Existence of LLP– There shall be a LLP by the name (i) Existence of LLP– There
shall be a LLP by the name specified in the certificate of shall be a LLP by the name
specified in the certificate of registration. specified in the certificate of
registration. (ii) Transfer of assets and registration.
(ii) Transfer of assets and liabilities– A l l tangible (ii) Transfer of assets and
liabilities– All tangible (movable and immovable) as liabilities– All tangible
(movable and immovable) as well as intangible property (movable and immovable) as
well as intangible property vested in the company, all well as intangible property
vested in the firm, all assets, assets, interests, rights, vested in the company, all
interests, rights, privileges, privileges, liabilities, assets, interests, rights,
liabilities, obligations obligations relating to the privileges, liabilities,
relating to the firm and the company and the whole of the obligations relating to the
whole of the undertaking of undertaking of the company company and the whole of
the firm shall be transferred shall be transferred to and the undertaking of the
to and shall vest in the LLP shall vest in the LLP company shall be transferred
automatically. automatically. to and shall vest in the LLP
(iii) Dissolution of firm. The (iii) Dissolution of company – automatically.
firm shall be deemed to be The company shall be deemed (iii) Dissolution of company–
dissolved and if registered it to be dissolved and removed The company shall be
shall be removed from the from the records The Registrar deemed to be dissolved and
records maintained under of Companies. removed from the records of
that Act. (iv) Registration in relation to the ROC.
(iv) Registration in relation to property– If any property is (iv) Registration in relation
property– If any property is registered with any authority, to p r o p e r t y – If any
registered with any the LLP shall as soon as property is registered with
authority, the LLP shall as possible, after the date of any authority, the LLP shall
soon as possible, after the registration, notify the relevant as soon as possible, after the
date of registration, notify authority of the conversion and date of registration, notify
the relevant authority of the of the particulars of the LLP. the relevant authority of the
conversion and of the (v) Pending proceedings– All conversion and of the
particulars of the LLP. proceedings by or against the particulars of the LLP.
(v) Pending proceedings– All company which are pending in (v) Pending proceedings– All
proceedings by or against the any Court or Tribunal or before proceedings by or against the
firm which are pending in any authority on the date of company which are pending
any Court or Tribunal or registration may be c ontinued, in any Court or Tribunal or
before any authority on the
before any authority on the completed and enforced by or date of registration may be
date of registration may be against the LLP. continued, completed and
continued, completed and (vi) Continuance of conviction, enforced by or against the
enforced by or against the ruling, order or judgement– LLP.
LLP. Any conviction, ruling, order or (vi) C o n t i n u a n c e of
(vi) Continuance of convic- judgement of any Court, conviction, ruling, order
tion, ruling, order or Tribunal or other authority in or judgement– Any
judgement– Any conviction, favour of or against the conviction, ruling, order or
ruling, order or judgement of company may be enforced by or judgement of any Court,
any Court, Tribunal or other against the LLP. Tribunal or other authority
authority in favour of or in favour of or against the
(vii) Existing agreements– Every
against the firm may be company may be enforced by
agreement to which the
enforced by or against the or against the LLP.
company was a party
LLP. (vii) Existing agreements–
immediately before the date as
(vii) Existing agreements– Every agreement to which
if:
Every agreement to which the company was a party
(a) the LLP were a party to
the firm was a party immediately before the date
such an agreement instead
immediately before the date of registration, shall have
of the company and
of registration, shall have effect as from that date as if:
effect as from that date as if (b) for any reference to the (a) the LLP were a party to
(a) the LLP were a party to company, there were such an agreement
such an agreement substituted in respect of instead of the company
instead of the firm and anything to be done on or and
(b) for any reference to the after the date of (b) for any reference to the
firm, there were registration a reference to company, there were
substituted in respect of the LLP. substituted in respect of
anything to be done on (viii) Existing contracts– All anything to be done on
or after the date of deeds, contracts, schemes, or after the date of
registration a reference bonds, agreements, registration a reference
to the LLP. applications, instruments and to the LLP.
(viii) Existing contracts– All arrangements subsisting (viii) Existing contracts– All
deeds, contracts, schemes, immediately before the date of deeds, contracts, schemes,
bonds, agreements, applica- registration relating to the bonds, agreements,
tions, instruments and company or to which the applications, instruments
arrangements subsisting company is a party, shall and arrangements subsisting
immediately before the date continue in force on and after immediately before the date
of registration relating to that date as is they relate to of registration relating to the
the firm or to which the firm the LLP and shall be company or to which the
is a party, shall continue in enforceable by or against the company is a party, relate to
force on and after that date LLP as if the LLP were named the LLP and shall be
as if they relate to the LLP therein or were a party thereto enforceable by or against the
and shall be enforceable by instead of the company. LLP as if the LLP were
or against the LLP as if the (ix) C o n t i n u a n c e of named therein or were a
LLP were named therein or employment– Every contract party thereto instead of the
were a party thereto instead of employment shall continue company.
of the firm. to be in force on after the date (ix) Continuance of employ-
(ix) C o n t i n u a n c e of of registration as if the LLP m e n t – Every contract of
e m p l o y m e n t – Every were the employer instead of employment shall continue
contract of employment the company. to be in force on after the
shall continue to be in force (x) E x i s t i n g a p p o i n t m e n t , date of registration as if the
or after the date of authority or power– LLP were the employer
registration as if the LLP instead of the company.
(a) Every appointment of the
were the employer instead of (x) Existing appointment,
company in any role or
the firm. authority or power–
capacity which is in force
(x) Existing appointment, immediately before the (a) Every appointment of
authority or power– date of registration shall the company in any role
(a) Every appointment of take effect and operate or capacity which is in
the firm in any role or from that date as if the force immediately before
capacity which is in LLP were appointed. the date of registration
force immediately (b) Any authority or power shall take effect and
before the date of conferred on the company operate from that date
registration shall take which is in force as if the LLP were
effect and operate from immediately before the appointed.
that date as if the LLP date of registration shall (b) Any authority or power
were appointed. take effect and operate conferred on the
(b) Any authority or power from that date as if it were company which is in
conferred on the firm which conferred on the LLP. force immediately before
is in force immediately (xi) Approval, permit or license– the date of registration
before the date of If any approval, permit or shall take effect and
registration shall take effect license has been issued to the operate from that date
and operate from that date company under any other Act as if it were conferred on
as if it were conferred on the before the date of registration the LLP.
LLP. then such approval, permit or (xi) Approval, permit or
license shall continue even license– If any approval,
(xi) Approval, permit or
after conversion of company to permit or license has been
license– If any approval,
LLP. Such continuance is issued to the company under
permit or license has been
however subject to the any other Act before the date
issued to the firm under any
provisions of the law under of registration then such
other Act before the date of
which the approval, permit or approval, permit or license
registration then such
license was issued. shall continue even after
approval, permit or license
shall continue even after conversion of company to
conversion of firm to LLP. LLP. Such continuance is
Such continuance is however however subject to the
subject to the provisions of provisions of the law under
the law under which the which the approval permit or
approval permit or license license was issued.
was issued.
(xii) P a r t n e r liable for
liabilities and obligations
of firm before
conversion– Partners of
the firm converted to LLP
continue to be personally
liable (jointly and severally
with the LLP) for the firm’s
liabilities and obligations
pertaining to the pre-
conversion period. (This
shows that a person cannot
escape from his liabilities by
reason of a mere change of
his legal status and if
partner is liable to an
unlimited extent he shall
remain so after conversion).
If the partner of the firm
personally discharge the firm’s
liability, he is entitled to be
indemnified by the LLP subject to
any agreement with the LLP.
Notice of conversion To keep all concerned parties The LLP shall ensure that for a The LLP shall ensure that for a
in correspondence informed of this transition the LLP period of 12 months commencing not period of 12 months commencing
shall ensure that for a period of 12 later than 14 days after the date of not later than 14 days after the
months commencing not later than registration, every official date of registration, every official
14 days after the date of correspondence of the LLP bears the correspondence of the LLP bears
registration, every official corres- following. the following.
pondence of the LLP bears the (a) a statement that it was as from (a) a statement that it was as
following: the date of registration, from the date of registration,
(a) a statement that it was as converted from a company into a converted from a company into
from the date of registration, LLP and a LLP and
converted from a firm into a (b) the name and registration (b) the name and registration
LLP and number of the company from number of the company from
(b) the name and registration which it was converted. which it was converted.
number (if any) of the firm
from which it was converted.
Penalty If any LLP contravenes with above Any LLP which contravenes the Any LLP which contravenes the
provision of notice of conversion it above provision of notice of above provision of notice of
shall be punishable with conversion shall be punishable with conversion of shall be punishable
(a) fine which shall not be less (a) fine which shall not be less than with
than 10,000 but which may
R R 10,000 but which may extend to (a) fine which shall not be less
extend to 1,00,000 and
R R 1,00,000 and than 10,000 but which may
R
(b) with further fine which shall (b) with a further fine which shall extend to 1,00,000 and
R
not be less than 50 but which

R not be less than 50 but which (b) with a further fine which shall
R
may extend to 500 for every

R may extend to 500 for every day
R not be less than 50 but which
R
day after the first day after after the first day after which the may extend to 500 for every
R
which the default continues. default continues. day after the first day after
which the default continues.
482 Business Laws
REVIEW QUESTIONS
1. Describe the procedure of conversion of a partnership firm into LLP.
[B.Com. (H), Delhi 2011, 2012, 2013, 2015]
2. State the provisions for conversion of a private company into LLP.
[B.Com. Delhi, 2017; B.Com. (H), 2013, 2016]
3. Discuss the steps to be undertaken for conversion of unlisted public company
into LLP.
4. Can a Registrar refuse the conversion to an LLP ? If so what is the remedy
available to the aggrieved party?
5. What is the effect on any approval permit or licence issued to a converting
entity on conversion to an LLP?
6. If a partner of firm or shareholder of a company refuses for conversion then
the entity can never be converted to LLP. Do you agree?
7. Explain the effects of registration, on conversion of
(a) a firm into LLP (b) a private company into LLP (c) an unlisted public
company into LLP.
8. Is there any legal requirement for the entity who has converted into LLP
regarding intimation to the concerned parties?
37 Taxation
LEARNING OBJECTIVES
➥ Eligibility to be assessed as a Firm
➥ Certain specific provisions of the Income Tax Act applicable to LLP.
The limited liability partnership Act, 2008 does not contain any
provisions regarding tax regime of an LLP. Hence the taxation scheme of an
LLP is governed by the provisions of the Income Tax Act, 1961. The Finance
Act, 2009 has made amendments to the Income Tax Law for taxation of LLPs.
The amendments seek to tax LLPs in the same manner as firms are currently
taxed. Accordingly all the provisions relating to the firm incorporated apply
to LLP.
The Finance Bill 2009 has proposed following regarding taxation
of LLPs
(a) LLPs to be taxed on the lines similar to general partnerships under
Indian Partnership Act, 1932 i.e., taxation in the hands of the entity
and exemption from tax in the hands of its partners.
(b) Consequent changes to be made in the Income Tax Act, 1961 like
(i) the word ‘partner’ to include within its meaning a partner of a
LLP.
(ii) the word ‘firm’ to include within its meaning a LLP.
(iii) the word ‘partnership’ to include within its meaning a LLP.
(c) The designated partner shall sign the income tax return of an LLP or
where such designated partner is not able to sign the return or where
there is no designated partner any partner shall sign the return.
(d) In case of liquidation of an LLP, every partner will be jointly and
severally liable for payment of tax unless he proves that non-recovery
cannot be attributed to any gross neglect, misfeasance or breach of
duty on his part.
(e) The conversion from firm to an LLP will have no tax implications if
the rights and obligations of the partners remain the same after
conversion and if there is no transfer of any asset or liability after
conversion.
484 Business Laws
(f) If there is a violation of these conditions the provision of section 45 of

Income – Tax Act shall apply.
(g) These amendments were made effective from 1 April 2010 i.e.,
assessment year 2010-11.
ELIGIBILITY TO BE ASSESSED AS A FIRM

For an LLP to be assessed as a firm under the provisions of the section
184 of the Income Tax Act, the following conditions are to be met.
1. The LLP is evidenced by an instrument i.e., there must be written
LLP Agreement.
2. The individual shares of the partners must be very clearly specified in
the agreement.
3. A certified copy of LLP agreement must accompany the Return of
Income of the LLP.
4. If during a financial year, a change takes place in the constitution of
the LLP or in the profit sharing ratio of the partners, a certified copy of the
revised LLP Agreement must be submitted along with the Return of Income
of the financial year.
5. There should not be any failure on the part of the LLP while attending
to notices given by the Income Tax officer for completion of the assessment of
the LLP.
Further, according to section 185 of the Income Tax Act, 1961 when
provisions of Section 184 is not complied with no deduction towards interest,
salary bonus, commission or remuneration, by whatever name called would
be allowed to the LLP’.
CERTAIN SPECIFIC PROVISIONS OF THE INCOME TAX ACT

APPLICABLE TO LLP
The scheme of taxation of LLPs is akin to taxation of partnership firms.
Certain specific features of taxing LLPs are discussed below. The references
below to Acts and Sections pertain to the Income Tax Act 1961.
1. Definitions
Under the Income Tax Act, taxability of LLPs and partners under the
LLP Act has been placed at par with general partnership firm by amending
the definition of the terms 'firms', 'partner' and 'partnership'
• The definitions 'firm' and 'partnership' are widened to include
an LLP as defined in the LLP Act and
• The definition 'partner' is widened to include a partner of an
LLP as defined in the LLP Act.
Taxation 485
2. Residential Status of LLP

In case a person being resident Its global income is taxable in India
In case of a non-resident only its income accruing in India or its
income deemed to have accrued in
India is taxable
According to Section 6(2), the LLP would be said to be a resident in India

in any previous year in every case except where during that year the control
and management of its affairs is situated wholly outside India (in such a
case LLP would be non-resident)
If the control and management of the affairs of the LLP is partly situated
India and partly outside India it is a resident.
It is not necessary that control and management of the LLP is situated in
India if the partners are resident in India as a major part of business may be
transacted from outside India so the control and management will be situated
outside India.
3. Tax Rates for Assessment year 2019-20

There is no difference in tax rates for resident and non-resident LLPs.
For income tax purposes, LLP is akin to a partnership firm. For the
assessment year 2019-20 the tax rates applicable to an LLP are as follows.
(a) Tax rate is 30% flat +4% health and education cess (HEC) =
31.2%. No surcharge is applicable.
For example, if income of an LLP is R 1,00,000 then whole income is
taxable. There is no exemption and tax would be
Tax = R 30,000 (30% of R 1,00,000)
Health and Education cess = R 1,200 (4% of R 30,000)
—————————————
Total = R 31,200 = (31.2% of R 1,00,000)

—————————————
—————————————
(b) Alternate Minimum Tax (AMT) – If income tax payable on the

total income of a LLP as computed under Income Tax Act is less than
18.5% of the adjusted total income (adjusted total income means
income as computed under normal provisions of the income Tax Act
as increased by the deductions claimed, if any under chapter VI – A
(c) or deduction u/s 10AA and u/s 35AD subject to certain conditions.),
then such adjusted total income is deemed to be the total income of
the LLP and the tax payable by the LLP on such total income is the
amount of income tax at the rate of 18.5% plus health and education
cess @ 4% = 19.24%
For example, if taxable income = R 10,00,000
Adjusted total income = R 50,00,000
486 Business Laws
Then,
Normal tax = 30% of R 10,00,000 = R 3,00,000
AMT on adjusted total income of R 50,00,000 @ 18.5% = R 9,25,000
So the tax payable would be R 9,25,000 plus cesses as the tax an
adjusted total income is higher than normal tax.
Excess AMT paid over regular income tax payable u/s 115 JC is
allowed to be carried forward upto 10 Assessment years to be set off
against regular income tax exceeding AMT u/s 115 JD. The credit for
tax (Tax Credit) paid by a person on account of AMT shall be allowed
to the extent of the excess AMT paid over regular income tax.
This tax credit shall be allowed to be carried forward upto 10th
assessment year immediately succeeding the assessment year for
which such credit becomes allowable. It shall be allowed to be set off
for an assessment year in which the regular income tax exceeds the
AMT to the extent of the excess of the regular income tax over the
AMT.
Like in above example AMT credit to be carried forward would be
Rs.6,25,000 (9,25,000-3,00,000) allowed to be set off, if regular income
tax exceeds AMT, for a period upto 10 assessment years.
(c) Surcharge – Surcharge is 12% of income tax if net income exceeds
R 1 crore. In case where surcharge is levied HEC will be levied on the
amount of (Income Tax + Surcharge)

(d) Dividend Distribution Tax (DDT) – DDT is payable by a company.
If a company declares or distributes dividends it shall pay dividend
distribution tax at the prescribed rate of 15/85 of the dividend. LLP is
not required to pay DDT as there is no declaration of dividend by it.
4. Remuneration to Partners
Remuneration payable to partners means any payment by way of
• Salary;
• Bonus;
• Commission or
• Remuneration by whatever name called
Such remuneration is allowed as a deduction to the firm and is taxable to
the partners. But such remuneration is taxable to the partners to the extent
deduction of remuneration was allowed to the LLP u/s 40(b). Share of profit
recieved from LLP is fully exempt in the hands of the partners.
eg. A partner was paid remuneration of Rs.2,40,000 and u/s 40(b)
deduction was allowed to LLP on account of such remuneration to the extent
of Rs.1,80,000, then only Rs.1,80,000 will be included in total income of the
partner, balance 60,000 may be treated as share of profit which is exempt.
Taxation 487
To avail the deduction of such remuneration the following

conditions under section 184 & 40(b) of the Income Tax Act need to be
satisfied.
(a) A certified copy of the LLP Agreement among the partners will have
to be filled with the return of income of the LLP.
(b) Remuneration paid should not relate to any period prior to the date of
LLP Agreement.
(c) Any remuneration if paid should be paid to a working partner (who is
an individual and not a corporate partner) and as per the LLP
Agreement (If LLP Agreement does not provide for remuneration & it
is paid then no deduction is allowed)
(d) Where there is a change in constitution or change in share of the
partners a certified copy of the revised LLP Agreement has to be filed
along with return of income.
Limits of remuneration allowed as a deduction u/s 40(b)

If conditions of remuneration payment are satisfied then
remuneration paid will be allowed as a deduction in the hands of the
LLP. The maximum deductible remuneration as per Income Tax Act
is
Book Profit Maximum deductible remuneration
on the first R 3,00,000 R1,50,000 or @ 90% of books profit
whichever is more
on the balance of book profit At the rate of 60%
E.g. Book Profit = R 10,00,000
Maximum deductible Remuneration
On 1st R 3,00,000 — R 2,70,000 (90% of 3,00,000 or 1,50,000
whichever is higher)
Balance of R 7,00,000 — R 4,20,000 (60% of Balance Book profit)
———————————————————
Total R 6,90,000 allowed as a deduction from the

———————————————————
———————————————————
Income of the LLP while

calculating tax.
Violation. If there is, on the part of the LLP any failure to comply with
any of the above conditions then LLP shall have no deduction in terms of any
payment of interest, salary, bonus, commission or remuneration (by
whatever name called).
5. Interest on Partners Contribution

Interest paid to partners of LLP would be allowed as a deduction to the
LLP if the following conditions are satisfied :
(a) Interest to be authorised by LLP Agreement and paid to a working
partner.
488 Business Laws
(b) It should not relate to any period prior to the date of LLP Agreement.
(c) The LLP should comply with conditions under section 184.
(d) Rate of interest not to exceed simple interest at the rate of 12% p.a.
(If interest payable exceeds 12% p.a. excess amount is not deductible)
Violation. If there is any violation of the above conditions the interest
paid would not be allowed as a deduction.
6. Capital contribution by a partner

Contribution of capital by a partner may consist of
• Tangible-movable/immovable property, or
• Intangible property, or
• Money, promissory notes, or
• Other agreements to contribute cash/property, and
• Contracts for services performed or to be performed.
Capital gain. When a partner introduces capital asset other than cash
then it has to be valued and accounted in the books of the LLP and the
gain/profit arising from the transfer of capital asset shall be taxable in the
hands of the partner.
For the purpose of computation of capital gain the amount recorded in the
books of account of the firm as the value of the capital asset shall be deemed
to be the full value of consideration received as a result of the transfer of the
capital asset.
For example, cost for Mr. X as a partner of the capital asset is R 10,00,000
but LLP records it at R 15,00,00 then there is a capital gain of R 5,00,000
which is taxable in the hands of Mr. X.
7. Withdrawal of Capital on dissolution or otherwise

Profit/gain arising from the transfer of capital asset by way of
distribution of capital asset on dissolution of LLP or otherwise shall be
chargeable to tax as the income of the LLP in the year in which transfer
takes place.
For the purpose of computation of capital gain the fair market value of
the asset on the date of such transfer shall be deemed to be the full value of
consideration received as a result of the transfer.
8. Conversion of Firm or Company to LLP Conversion of Firm

Conversion of firm
The conversion of firm to an LLP will have no tax implications provided:
(a) the rights and obligations of the partners remain the same after
conversion and
(b) there is no transfer of any Asset/Liability after conversion.
Taxation 489
Conversion of Company. There would be no capital gain on conversion

of a private limited company and an unlisted public company into LLP if the
following conditions are satisfied.
(a) All the assets and liabilities of the company immediately before the
conversion become the assets and liabilities of the LLP.
(b) All the shareholders of the company immediately before the
conversion become the partners of the LLP and their capital
contribution and profit sharing ratio in the LLP are in the same
proportion as their share holding in the company on the date of
conversion.
(c) The shareholders of the company do not receive any consideration or
benefit in any form or manner other than by way of share in profit
and capital contribution in the LLP.
(d) The aggregate of the profit sharing ratio of the shareholders of the
company in the LLP shall not be less than 50% at any time during the
period of 5 years from the date of conversion.
(e) The total sales, turnover or gross receipts in business of the company
in any of the 3 previous years preceding the previous year in which
the conversion takes place does not exceed R 60 lakhs; and
(f) No amount is paid, to any partner out of balance of accumulated
profit standing in the accounts of the company on the date of
conversion for a period of 3 years from the date of conversion.
If the above conditions are complied then the conversion of the company
into LLP would not be regarded as transfer and capital gains tax would not
be leviable.
9. Liability of Partners for Tax

Every partner of the LLP shall be jointly and severally liable for the
payment of any tax due from the LLP that cannot be recovered from the LLP.
The amount can be recovered from every person who was a partner at any
time in the period to which such income-tax accrues. A person shall not be
liable if he proves that non-recovery cannot be attributed to any gross
neglects, misfeasance or breach of duty on his part in relation to the affairs of
the LLP.
10. Procedure for Filing Return

Every LLP whether resident or non-resident is obligated to file its return
of income on the prescribed format by the due date which is till 31st July if
the accounts are not be audited and the due date is till 30 September if the
accounts are to be audited.
490 Business Laws
11. Authority for signature

The return of an LLP should be signed and verified by
• a designated partner or
• if designated partner is not able to sign the return or where there
is no designated partner by any other partner.
REVIEW QUESTIONS
1. There no provision for taxation of LLPs under the LLP Act. So how are the
LLPs taxed in India?
2. What are the requirements to be fulfilled by an LLP to be taxed as a firm?
3. What if the requirements under section 184 of the Income Tax Act are not
complied with by an LLP?
4. How is the residential status of an LLP determined?
5. Mention the taxes and rates of tax applicable to an LLP for the assessment
year 2013-2014.
6. Are there any exemptions or deductions available to an LLP? Explain.
7. What are the tax implications on conversion of a firm or company into an
LLP?
8. State the liabilities of partners for payment of any tax due from the LLP.
9. Name the authority for signing the return of an LLP.
10. State provisions regarding taxation of LLP.
[B.Com. Delhi, 2017; B.Com. (H), Delhi, 2015]

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BUSINESS LAWS

An Authentic Textbook for B.Com. (CBCS), University of Delhi

Bhushan Kumar Goyal

First Edition, 2013

It gives us immense pleasure and satisfaction to present the ninth edition

• It has been written in a simple language and in a systematic manner.

Bhushan Kumar Goyal

Duratioon : 3 Hrs. Marks : 100 Credit : 6

Course Leaning Outcomes

CO1: Understand basic aspects of contracts for making the agreements,

Unit II: Special Contracts

Unit III: The Sale of Goods Act, 1930

Unit V: The Information Technology Act 2000

THE INDIAN CONTRACT ACT, 1872

2. NATURE AND KINDS OF CONTRACTS 4—18

3. OFFER AND ACCEPTANCE 19—44

5. CAPACITY OF PARTIES 59—71

7. LEGALITY OF OBJECT AND CONSIDERATION 100—109

8. AGREEMENTS EXPRESSLY DECLARED VOID 110—123

9. CONTINGENT CONTRACTS 124—127

10. QUASI CONTRACTS OR CERTAIN RELATIONS

11. DISCHARGE OF CONTRACTS 136—155

12. REMEDIES FOR BREACH OF CONTRACT 156—176

13. CONTRACTS OF INDEMNITY AND GUARANTEE 177—198

14. BAILMENT AND PLEDGE 199—222

15. AGENCY 223—262

THE SALE OF GOODS ACT, 1930

16. CONTRACT OF SALE OF GOODS 263—281

17. CONDITIONS AND WARRANTIES 282—301

19. PERFORMANCE OF CONTRACT OF SALE 321—328

20. REMEDIES FOR BREACH OF CONTRACT OF SALE 329—343

21. AUCTION SALE (Only for B.Com.) 344—345

THE INFORMATION TECHNOLOGY ACT, 2000

22. OBJECTIVES, SCOPE AND DEFINITIONS 346—356

23. DIGITAL SIGNATURE AND ELECTRONIC

24. ELECTRONIC GOVERNANCE 369—374

25. ATTRIBUTION, ACKNOWLEDGEMENT AND

26. SECURE ELECTRONIC RECORDS AND

27. REGULATION OF CERTIFYING AUTHORITIES 382—393

28. ELECTRONIC SIGNATURE CERTIFICATE 394—397

29. DUTIES OF SUBSCRIBERS 398—400

30. PENALTIES, COMPENSATION, ADJUDICATION AND

31. OFFENCES UNDER THE IT ACT, 2000 410—424

LIMITED LIABILITY PARTNERSHIP ACT, 2008

33. INCORPORATION OF LIMITED LIABILITY

34. PARTNERS AND THEIR RELATIONS 447—460

35. FINANCIAL DISCLOSURE 461—469

36. CONVERSION TO LLP 470—482

37. TAXATION 483—490

Offer and Acceptance

500 as subscription to a fund started for rebuilding a mosque. But no steps

Capacity of the Parties

Legality of Object and Consideration

Agreements expressly declared void

Remedies for Brach of Contract

Bailment and Pledge

Contract of Sale of Goods

Conditions and Warranties

THE INFORMATION TECHNOLOGY ACT, 2000

Attribution, Acknowledgement and Despatch of Electronic Records

Penalties, Compensation, Adjudication and Appellate Tribunal

Offences under the IT Act, 2000

DEFINITION AND OBJECT OF LAW