Chapter 2

I. General Principles of a Contract of Sale : Ss. 4-11. II. Law relating to Conditions and Warranties : Ss. 12-
17.

I. GENERAL PRINCIPLES OF A CONTRACT OF SALE (Ss. 4-11)

A. "SALE" AND "AGREEMENT TO SELL Contract of sale of goods (S. 4(1)(2)]

A contract of sale of goods is a contract whereby the seller transfers, or agrees to transfer, the property
in goods, to the buyer for a price.

A contract of sale of goods includes both a sale (where property in the goods is transferred to the buyer)
and an agreement to sell (where property in the goods is yet to be transferred to the buyer).

Thus,

Contract of sale

Sale

Property in the goods is transferred to the buyer

Agreement to sell

Property in the goods will be transferred to the buyer when : the agreed time elapses

or

the agreed conditions are fulfilled

The contract of sale may be absolute or conditional. There may also be a contract of sale between one
part-owner and another part-owner or other part-owners.

Sale (S. 4(3)

When under a contract of sale, the property in the goods is transferred from the seller to the buyer, the
contract is called a sale. Thus, X agrees to buy a haystack which is on Ys land, with liberty to go on Ys
land to take it away. This is an example of a sale. (Wood v. Manley, 11 A & E 34)

Essentials of a Valid Sale: In order to constitute a valid sale, the following conditions must be satisfied :

1. All the requirements of a valid contract (under the Indian Contract Act) must be fulfilled.

2. There must be a transfer of property, i.e., transfer of the general property in goods, and not merely
special property.

3. The buyer must pay, or promise to pay, a price in money.

Except where specially required by the law, no particular form is necessary to constitute a valid contract
of sale. Such a contract can be made by mere proposal and acceptance. Neither payment of money nor
delivery of goods necessary. The agreement may be express, or it may be implied from the conduct of
the parties. Even in the case of an express agreement, the proposal or acceptance may be made by word
of mouth or in writing, or even partly in writing and partly by word of mouth.

In an English case (Draper & Son Ltd. v. Edward Turner and Son Ltd., 1965 I Q.B. 424) Lord Denning
observed : "The word 'sale' properly connotes the transfer of the absolute or general property in a thing,
for a price in money".

Thus, the essential requisite of a sale is that there should be an exchange of property for a price in
money. Exchanging some goods for some others would not be a sale. Again, money cannot be the price
of money; thus, changing a Government currency note for money would not be a sale.

Further, to constitute a valid sale, the buyer and the seller must be two different persons. However, one
co-owner can sell to another, and a partner may sell to his firm, and vice-versa.

In a case before the Gujarat High Court, a partnership firm was dissolved and the surplus assets,
including some goods, were divided amongst the partners. When the sales tax authorities sought to tax
this transaction, it was held that the same was not a sale. The partners themselves were the joint
owners of the goods and they could not be both sellers and buyers at the same time. Additionally, it was
also pointed out that no partner had paid any money as consideration for the goods allotted to him. The
transaction could thus not be regarded as a sale. (State of Gujarat v. Ramanlal & Co., AIR 1965 Guj 60)
Halsbury has defined sale as "the transfer, by mutual consent of the ownership of a thing from one
person to another for a money price".

In a sale, transfer of ownership must take place. Thus, in the case of the sale of a soft drink, with a sum
of money refundable on the empty bottle, it has been held that there is no intention in such a case to
transfer the ownership of the bottle also.

A customer who picks up goods in self-service shop is merely offering to buy them, and the sale is not
complete until they are paid for. (Pharmaceutical Society of Great Britain v. Boots, 1952 2 All E.R. 456)

In a sale, the parties agree to the transfer of property with full consent from both the sides. Therefore, if
property is compulsorily acquired under a statute, there can be no "sale" of such a property, although
consideration is payable to the owner of such a property. Expressions like "quasi-contract of sale" or
"compulsory purchase" often used to describe such transactions are thus misnomers.

The definition of sale of goods under Section 4 implies a consensual element between the parties in case
of a contract of sale of goods. In one case, a question arose as to whether the purchase of sugarcane
under certain central and state control orders amounted to a sale of goods. It has been held that though
under various statutory provisions, the price, supply and delivery was regulated, thereby impinging upon
the freedom to contract, it could not be said that the transaction in compliance with these provision
would not amount to a "sale" as the parties still had the freedom to enter or not enter into a contract
upon the statutory terms. (Salar Jung Sugar Mills Ltd. v. State of Mysore, AIR 1972 SC 87)

Agreement to sell

When the transfer of property in the goods is to take place at a future time, or subject to some
condition thereafter to be fulfilled, the contract is called an agreement to sell. Such agreement to sell
becomes a sale when the time elapses or the conditions are fulfilled, subject to which the property in
the goods is to be transferred.

So also, where the seller purports to effect a present sale of future goods, the contract operates as an
agreement to sell the goods : S. 6(3).
Agreement to Sell : An agreement to sell does not involve any transfer of the property in goods. As
stated above, in an agreement to sell, the arrangement is that the transfer of property in the goods is (i)
to take place at some future date, or (ii) subject to some condition to be fulfilled thereafter. An
agreement to sell becomes a sale when

(i) the stipulated time elapses; or

(ii) the stipulated conditions are fulfilled. Illustrative Examples of Sale and Agreement to Sell

Illustrate example of sale and agreement to sell

(a) X agrees to buy 50 tons of oil from Y's cisterns. Y has several cisterns, with more than 50 tons of
oil in them. This is merely an agreement to sell the oil. (White v. Wilks, 1813 5 Taunt. 176)

(b) X agrees to sell to Y 100 tons of soda nitrate, which is to arrive in England by a particular ship. This is
merely an agreement to sell at a future date, subject to the condition that the specified ship arrives in
England, and the further condition that it carries the specified cargo on board. (Johnson v. Macdonald,
1842 9 M. & W. 600)

(c) X agrees to buy from Y, a haystack lying on Y's land, with liberty to come to Y's land to take it
away. This is a case of a sale, and Y cannot revoke the licence given to X to pass over his land. (Wood
v. Manley. (seen earlier.)

(d) X agrees to lend an instrument to Y, on the terms that if it is damaged whilst in Y's possession, Y
must pay an agreed sum as its value and keep the instrument. This is a conditional sale, and if the
instrument is so damaged, X may recover the agreed sum as the price of the goods sold. (Bianchi v.
Nash, 1836 1 M. & W. 545)

(e) X supplies wine in casks to Y, a customer, upon the terms that the empty casks are to be
returned to him at Y's expense, within six months of the date of the invoice, or paid for at an agreed
price, at the option of X. This is not a conditional sale. As soon as the casks are empty, Y becomes a
bailee of those casks, with an option to buy the casks. It is only if he exercises this option, that the
sale takes place. (Manders v. Williams, 1849 4 Ex. 339)

(f) X grants to Y, the right to take the produce of certain trees for a specified period, for a "pattom"
(i.e., a rent payable in advance), According to the Kerala High Court, this is not a sale.
(Ravanichandiyli v. Thayyullathil, A.LR. 1965 Ker. 39)

(g) X, Y and Z, ex-partners of a dissolved firm, allot goods amongst themselves on the dissolution of
the partnership. The Gujarat High Court has held that this is not a sale. (State of Gujarat v. Ramanlal
Sankalchand, A.I.R. 1965 Guj. 60)

Sale and 'Agreement to Sell' Distinguished

There are eight important points of distinction between a sale and an agreement to sell, as follows:

1. Executed, executory: A sale is an executed contract, whereas an agreement to sell is an executory

contract. It follows therefore, that a sale is a contract plus conveyance, whereas an agreement to
sell is a contract pure and simple.

2. General and particular property : A sale effects a transfer of the general property in the goods to
the buyer; in other words, it creates a jus (right) in rem. An agreement to sell gives to either party a
remedy against the person and the general estate of the other, for any default in fulfilling his part of
the agreement; on other words, it creates a jus (right) in personam.

3. Remedies in case of breach of contract by the buyer : In an agreement to sell, in case of a breach
of contract by the buyer, the seller is entitled to damages, since ownership has not passed to buyer.
In a sale, since ownership has passed to the buyer, the seller is entitled to sue for the price of the
goods sold, even though the goods may still remain in the seller's possession

In other words, in a sale, if the buyer fails to pay for the goods, the seller may sue for the price. See
Sec. 55 (suit for price). But where there is merely an agreement to sell, and the buyer fails to accept
and pay for the goods, the seller can only sue for damages. See Sec. 56 (damages for non-
acceptance).

4. Remedies in case of breach of contract by the seller: If there is an agreement to sell, and the seller
commits a breach, the buyer has only a personal remedy against the seller, namely, a claim for
damages. The goods are still the property of the seller, and he can deal with them as he likes. But if
there is a sale, and the seller commits a breach, the buyer has not only a personal remedy against
the seller, but also the remedies which an owner has in respect of the goods themselves, such as a
suit for conversion or detinue. In many cases, he can also follow the goods in the hands of third
persons. The reason is that on a sale, the property in the goods passes to the buyer, and he becomes
the owner of the goods.

5. Right to re-sell : In an agreement to sell, since ownership has not passed to the buyer, the seller is
at liberty to sell the goods to third parties, and the buyer can only claim damages from the seller. In
a sale, since ownership has passed to the buyer, the seller will be guilty of conversion if he sells the
goods to third parties, and the buyer can sue and recover those goods as owner, even from a third
person.
6. Risk of loss : In an agreement to sell, since ownership does not pass to the buyer, if the goods are
destroyed by an accident, the loss will be the seller's, even though the goods happen to be in the
buyer's possession. In a sale, since ownership has passed to the buyer, even though the goods are
lost by an accident, while in the seller's possession, the loss will be the buyer's.

7. Effect of insolvency of the seller : In an agreement to sell, if the buyer who has paid for the goods
finds that the seller has become insolvent, the buyer's right would be to prove the amount he has
paid, in the seller's insolvency. In a sale, since ownership has passed to the buyer, if the seller
becomes insolvent, the buyer is entitled to recover the goods from the Official Assignee or Receiver,
as the case may be.

8. Effect of insolvency of the buyer : In an agreement to sell, if the buyer becomes insolvent without
paying for the goods, since ownership has not passed to the buyer, the seller may refuse to deliver
the goods, unless paid for. In a sale, since ownership has passed to the buyer, if the buyer becomes
insolvent without having paid for the goods, the seller must deliver the goods, unless he is entitled
to the right of lien or stoppage in transit over the goods, and will be entitled only to claim rateably
for the price due.

The difference between a sale and an agreement to sell can be summarised in a tabular form as
follows:

Sale Agreement to Sell

1. It is an executed contract, i.e., a 1. It is an executory contract, i.e., a contract plus conveyance.

contract pure and simple.

2. It effects a transfer of the general

property in the goods, and creates a right in rem

3. If the buyer commits a breach, the seller can sue for the price of the goods.

2. It does not effect a transfer of the general property in the goods; it merely creates a right in
personam.
4. If the seller commits a breach :

(a) The buyer has a personal remedy against the seller for damages.

3. If the buyer commits a breach, the seller can sue for damages.

(b) The buyer has all the remedies which an owner of goods has, e.g., a suit for conversion or
detinue.

4. If the seller commits a breach, the buyer has only a personal remedy against the seller for
damages.

(c) In some cases, the buyer can follow goods in the hands of third persons also.

5. If the seller wrongfully resells, he becomes guilty of conversion and the buyer can recover the
goods, even from a third person.

6. If the goods are lost by accident, whilst in the seller's possession, the loss will be that of the buyer.

7. If the seller becomes insolvent, the buyer is entitled to recover the goods from the Official
Assignee or Receiver

5. The seller may re-sell the goods to third persons; but in that case, the buyer can claim damages
from him.

6. If the goods are lost by accident, whilst in the buyer's possession, the loss will be that of the seller.

8. If the buyer becomes insolvent, the seller must deliver the goods and claim rateably for the price
due, unless he has a right of lien or stoppage in transit.
 7. If the seller becomes insolvent, the buyer has to prove the amount paid in the seller's insolvency.

8. If the buyer becomes insolvent, the sel ler may refuse to deliver the goods.

B. SALE DISTINGUISHED FROM OTHER FORMS OF AGREEMENTS

There are other types of agreements which resemble a sale, but are entirely different in their nature and
effect. The commonest are a contract of work and labour done, a hire-purchase agreement, a pledge
and a mortgage, all of which are briefly discussed below.

CONTRACT OF WORK AND LABOUR

Generally, a contract to make a chattel and deliver it when made, amounts to a contract of sale, but not
always. A contract of sale must be distinguished from a contract for work and labour done. A contract of
sale contemplates the delivery of a chattel. If the substance of the contract is the exercise of skill and the
delivery of the chattel is only incidental, it is a contract for work and labour done.

The distinction between the two often assumes importance in the context of liability to pay sales tax, for
if a transaction does not amount to a "sale", no sales tax would be payable in respect thereof.

Thus, A promises to paint a picture for B, A supplying the paint and the canvas, and B promises to pay
for the picture as a work of art. This would be a contract for work and labour, and not a sale. In such a
case, the substance of the contract is that skill and labour be exercised by A to make the portrait; it was
only ancillary to the contract that the paint and canvas (which would be of a small value) would also
pass from A to B. (Robinson v. Graves, 1935 1 K.B. 579)

X promises to procure the necessary material and make a set of false teeth for Y, and Y promises to pay
for them when ready. This is a contract for the sale of goods. (Lee v. Griffin, 1861, B. & S. 272)

In 1961, the Patna High Court had held that if a person carries on business as a photographer and sells
photos to his customers, it tantamounts to a sale of goods. But, in 1977, the Supreme Court has held
that when a photographer undertakes to take a photograph, develop negatives and thereafter supply
the prints to his customers, it is not a case of sale of goods. (Asst. Tax Officerv. B. C. Kame, AIR 1977 S. C.
1643)
Miss A wishes to buy a mink jacket from Mr. B. After having a look at several types of mink, she chooses
a particular colour and type of mink, and specifies a style for the jacket. This is a contract for a sale of
goods. (Marcel Furriers v. Tapper, 1953 All E.R. 15)

X promises to carve a block of marble belonging to Y into a beautiful statue. This is a contract for work,
and not a sale.

A promises to print for B one hundred copies of a book. B gives A the manuscript of the book and also
the paper and ink to be used for the printing. This is a contract for work and labour, and not a sale. (Clay
v. Yates, 1956 1 H. & N. 73)

B employs A to draw a conveyance on a stamp paper, the paper and the ink being furnished by A. This
would not be a sale, but a contract for work and labour. (Lee v. Griffin)

So also, when a tailor makes a coat out of the cloth supplied by his customer, it is a contract of work and
labour, although the tailor supplies his own lining. buttons, etc., in the process.

From the examples given above, it will be seen that where there is no sale, but merely a contract for
work and labour done, there is never a moment when the thing produced is, as a whole, the maker's
absolute property, even though the materials might have been earlier his own property. On the other
hand, where there is a sale, the maker would normally be entitled (in the absence of any patent,
copyright, etc.) to make several goods of that description, give one to the buyer to fulfill that particular
contract, and sell the rest to other persons.

The Supreme Court has (in Comm. of Sales Tax v. P. Premji, 1970 (2) S TC 287) explained the distinction
between a contract for work or service and a contract for sale of goods in the following words:

"The primary difference between a contract for work or service and a contract for sale of goods is that,
in the former, there is in the person performing work or rendering service, no property in the thing
produced as a whole, notwithstanding that a part, or even the whole, of the materials used by him may
have been his property. In the case of a contract for sale, the thing produced as a whole has individual
existence as the sole property of the party who produced it, at some time before delivery, and the
property therein passes only under the contract relating thereto".
HIRE-PURCHASE AGREEMENT

A hire-purchase agreement is a modern commercial transaction. In its usual form, it is a contract of

bailment coupled with an option to purchase. It is thus a contract of hire, terminable at the will of the
hirer. In India, it is governed by the Hire Purchase Act, 1972.

In hire-purchase agreement, A, the owner of goods, parts with the same to B, who agrees to make
certain stipulated periodical payments in respect thereof. Although there is delivery of the goods to B,
the ownership therein rests with A. Here, there is an irrevocable offer by A to sell the goods to B. But
there is no corresponding obligation to buy on the part of B. The hirer does not agree to buy the goods;
only an option is given to him to purchase the goods under certain conditions. Until these conditions are
fulfilled and the transaction results in a purchase, the ownership in the goods does not pass to the hirer,
and if in the meantime, the hirer sells or pledges the goods, the purchaser or pledgee does not get a
good title.

A hires a sewing machine, agreeing to pay a fixed amount of hire charges for the use of machine, with a
stipulation that in case A pays a certain amount

in cash at any time during that period, he would become the purchaser of the machine, provided he had
regularly paid such charges. This agreement is only an agreement for hire, and A does not become a
purchaser until the conditions stated above are fulfilled.

The main principle in the case of a hire-purchase agreement is that the purchaser has the option to
make a certain number of payments, and it is only after he pays a stipulated amount, that he becomes
the owner of the property, but he should also be quite free to stop paying the hire charges and to return
the property hired at any time he likes. Such a thing can never happen in a sale.

Thus, B hires a piano from A under an agreement that B should pay 1,000 a month as hire charges. The
further stipulation is that if he regularly pays such hire charges for twenty months, the piano becomes
his property at the end of the twenty months; but if B likes, he can return the piano at any time, say,
after using it for some months, and he need not pay any more. This is a hire-purchase agreement. If,
however, it is agreed that twenty months (socalled)"hire charges" must, in any case, be paid, and that
he cannot return the piano, the agreement is a sale (with the price being paid in installments), and not a
hire-purchase agreement. (Cole v. Nandlal, (1924) 26 Bom. L.R. 880)

Thus, the outstanding feature of a hire-purchase agreement is that the hirer should have a right to
terminate the agreement at his pleasure.
An agreement of hire-purchase is not one for sale, so as to pass ownership till all the installments are
paid off, but if there is a binding agreement to buy, it will amount to an agreement of sale, and the mere
fact that such an agreement is described as a 'hire-purchase' makes no difference. The terminology used
by the parties in such cases is not conclusive. Thus, some of the so-called "hire-purchase" agreements
may in fact be contracts of sale.

A contract of sale includes both a sale and an agreement to sell. But in an agreement to sell, there is no
immediate conveyance of the subject matter of the sale. A hire-purchase agreement does not become a
sale until the conditions are fulfilled. Under such an agreement, the seller or owner of the goods makes
an irrevocable offer for sale which, on fulfillment of the conditions of the agreement will be deemed to
be accepted by the hirer who then becomes the buyer. In such an agreement, the possession of the
goods is with the person who takes on hire, the ownership remaining with the owner.

Thus, the following are the three main points of distinction between an agreement to sell and a hire-
purchase agreement:

(i) A sale is governed by the Sale of Goods Act, 1930, whereas a hirepurchase is governed by the Hire
Purchase Act, 1972.

(ii) An agreement to sell is a contract of sale, but a hire-purchase agreement becomes a contract of sale,
only on the fulfillment of the stipulated conditions. Initially, it is merely an irrevocable offer for sale.

(ii) Again, in an agreement to sell, the conveyance of goods is to take place subsequently. Whether
under such an agreement, the ownership passes to the buyer or not, depends upon the terms of the
particular agreement. In a hire-purchase agreement, though the possession is with the hirer, the
ownership always remains with the seller.

(iv) Under an agreement to sell, the buyer can enter into a contract of resale. But the hirer cannot enter
into any such contract of re-sale; similarly, he cannot also pledge the goods.

(v) A person who hires goods cannot take the benefit of the implied conditions and warranties which are
available to a buyer under the Sale of Goods Act. However, the conditions implied under the Hire
Purchase Act, 1972, will come into the picture in the case of a hirepurchase.
(vi) Lastly, sales tax is not payable on a hire-purchase until it becomes a sale.

Problems

1. Helby allowed Brewster to take away a piano from Helby's shop on the following terms and
conditions:

Brewster should pay a fixed amount to Helby every month.

If Brewster paid 36 monthly installments on time, the piano would become his; until then, it would
continue to belong to Helby.

Brewster had the right to terminate the arrangement at any time by returning the piano to Helby.

After paying a few installments, Brewster pledged the piano to Matthews, who acted in good faith.
Helby sued Matthews to recover the piano. Will he succeed? Why?

Ans. : Yes. The above facts are identical to those of an old English case, Helby v. Matthews (1895 A C
471), where it was held that Brewster was in possession of the piano under a hire-purchase agreement
and had thus no right to create a pledge. Helby could, therefore, recover the instrument from
Matthews.

However, in a later English case, where the facts were almost identical to those in Helby v. Matthews,
the court held that the third party was not bound to return the instrument to the owner. It was open to
him to pay the balance of the installments due to the owner and thereby become the owner of the
goods. (Whiteley v. Hilt, (1918) 2 KB 808)

2. Alady took some furniture from the plaintiff, the price to be paid in two installments. It was agreed
that the plaintiff had the right to take back the furniture if any installment was not paid on time. Before
the second installment was paid, the lady sold the furniture to the defendant. The plaintiff sued the
defendant. Will he succeed?

Ans. : No; he will not succeed. The defendant had acquired a good title because the lady was in
possession of the furniture under a contract of sale, the price to be paid in installments. She did not
have the option to return the furniture, and thus, the transaction was not one of hire-purchase. (Lee v.
Butler, (1893) 2 Q B 398)
PLEDGE

A pledge is quite distinct from a contract of sale. When goods are delivered to the pledgee, the general
property in the goods is retained by the pledgor, and the pledgee merely has the right to sell the goods
if the agreed period expires and after giving notice to the pledgor. A pledge, therefore, lies outside the
scope of the Sale of Goods Act, and is governed by Ss. 172-179 of the Indian Contract Act, to which a
reference may be made.

MORTGAGE

One of the recognised types of mortgages is a mortgage by conditional sale. However, a true sale,
subject to a condition for re-sale to the original seller, can be distinguished from a mortgage. The
essence of a mortgage is the transfer of the general property from one person, called the mortgagor to
another called the mortgagee, in order to secure a debt. Whether a given transaction is a mortgage or a
sale is a question of fact, depending on the circumstances of the particular case.

Also, a mortgage is created on immovable property, and is governed by the Transfer of Property Act. A
sale, on the other hand, relates to goods (i.e., movable property), and is governed by the Sale of Goods
Act.

C. QUASI-CONTRACTS OF SALE

At times, one comes across transactions where there is no contract, and yet their effect is to pass
property in goods. This would result, for example, if B unlawfully converted A's goods and A sued him for
conversion. If the Court orders B to pay up the value of the goods, A gets this money, but thereby, the
property in those goods passes to B.

When one person has wrongfully obtained possession of goods of another person, the owner of the
goods may waive the tort and recover the value of the goods, as on a sale by himself to the person.
Similarly, a person who fraudulently induces another person to sell goods to a third person, whom he
knows to be insolvent, is liable on an implied contract to pay the price.
To take another example, suppose Yunlawfully converts goods belonging to X, and sells them to Z. X
sues Y and obtains a decree for 500, the value of the goods. As soon as Y satisfies this decree, Z obtains a
good title to the goods.

As seen earlier, when property is compulsorily acquired under a statute, the transaction is sometimes
referred to as a "quasi contract of sale". However, this expression is a misnomer, as there is no sale in
such a case as such a transaction can take place even without the consent of one of the parties.

D. SALE, HOW EFFECTED (Ss. 5-6)

A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer.
The contract may provide for the immediate delivery of the goods or immediate payment of the price
(or both) or for the delivery of payment by installments, or that the delivery or payment (or both) are to
be postponed.

Further, a contract of sale may be made in writing or by word of mouth (or partly in writing and partly by
word of mouth), or may even be implied from the conduct of the parties.

The goods which form the subject of a contract of sale may be either existing goods owned or possessed
by the seller or future goods. There may also be a contract for the sale of goods, the acquisition of which
by the seller depends upon a contingency which may or may not happen.

Where, under a contract of sale, the seller purports to effect a present sale of future goods, the contract
operates as an agreement to sell the goods.

Thus, A agrees to supply B with a specified quantity of vegetable seeds, and B agrees to sow these seeds
on his farm and sell the vegetables obtained therefrom to A at given price. This is an agreement for the
sale of goods by B to A. (Watts v. Friend - 1830 10 B. & C. 446)

CONTRACT OF SALE HOW MADE

A contract of sale may be made in any one of the following modes:

1. There may be immediate delivery of the goods.

OR

2. There may be immediate payment of price, but it may be agreed that the delivery is to be made at
some future date.

OR

3. There may be immediate delivery of the goods and also an immediate payment of the price.

Or

4. It may be agreed that the delivery or payment, or both, are to be made in particular installments.

OR

5. It may be agreed that the delivery or payment, or both, are to be made at some future date.

In short, in a contract of sale, three important elements are to be distinguished: (1) offer and
acceptance; (2) goods to be bought or sold; and (3) price. Needless to say, a contract of sale, like other
contracts, must be made with the free consent of parties competent to contract, and for a lawful object,
lawful consideration, etc. In other words, all the requirements of a valid contract must be fulfilled.

E. EFFECT OF DESTRUCTION OF GOODS (Ss. 7-8)

It is possible that goods contracted to be sold may perish or become nonexistent. Now, there are two
possibilities in such a case. The goods may have perished either before making the contract or before
sale but after the agreement to sell. The legal position becomes different in the two cases; S. 7 governs
the former case, while S. 8 governs the latter.

1. Effect of goods perishing before making the contract (S. 7)

S. 7 lays down that where there is a contract for the sale of specific goods, the contract is void, if the
goods, without the knowledge of the seller, have at the time when the contract was made, perished or
become so damaged as no longer to answer to their description in the contract.

Examples

(a) 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 contract is void.

(b) A sold to B, 600 tons of nitrate soda, expected to arrive by a certain ship, for a stated price. Unknown
to A, the goods had, before the contract was made, been destroyed by a flood, whilst lying at the port of
loading. The sale between A and B is void.

This rule can be explained both on the ground of mutual mistake and on the ground of impossibility of
performance. The rule applies even if the goods, without being actually destroyed, have become so
damaged as to be completely useless for the purpose for which they are generally used.

Moreover, it is to be remembered that S. 7 comes into play, not only when the goods have been
destroyed or so damaged as no longer to answer to their description, but also when the seller is
irretrievably deprived of them, as when they have been stolen or lawfully requisitioned by the
Government, or have, in some other way, been lost and cannot be traced.

In Barrow v. Phillips, (1929) 1 K.B. 547, A sold 90 bags of nuts to B, identified by marks and lying in a
named warehouse. Unknown to A, 50 bags were stolen at the time of the sale. A tendered delivery of 40
bags. The Court held that the sale was void, and B could not be compelled to take the remainder.

The same rule would apply when the goods have not actually perished, but have lost their commercial
value. Thus, in Asfar & Co. Ltd. v. Blundell (1896 1 QB 123), where a cargo of dates was sold, it turned
out that the dates were submerged under sewage water for two days, as a result of which they were
unsaleable as dates, although they could be used for making spirits. The seller came up with an
ingenuous argument: There was no total loss of the dates as they were still in existence, they had not
perished, and therefore, the buyer was obliged to accept and pay for them. Rejecting the argument,
Lord Esher observed that such an argument may commend itself to a body of chemists, - but not to
businessmen. "Dates" were the subject-matter of the contract, and not the mass of pulpy matter
impregnated with sewage and in a state of fermentation. It was therefore, held that the contract had
become void.
It is to be noted that the knowledge of the seller is the most important factor. The knowledge of the
buyer does not matter. On the other hand, if the seller, knowing that goods had perished agreed to sell
them to the buyer (who did not know this fact), he would be liable in damages, for having promised
something (for consideration) which he knew he could not perform. The same result would follow if it
appears from the facts and circumstances of the case that the seller ought to have known about the
destruction of the goods or where such destruction is due to the seller's own act or default. Of course, if
both buyer and seller knew that the goods had perished, the contract would be void.

SPECIFIC GOODS

It is to be remembered that the section applies only to specific goods, (which have been defined by S. 2
as "goods identified and agreed upon at the time a contract of sale is made"). In other words, the
section does not apply to unascertained goods. Thus, A agrees to sell to B 50 bales of Bengal cotton out
of 3,000 bales in his godown. The godown had, at the time of contract, been destroyed by fire unknown
to A. Here, the sale is not of specific goods, but of a certain quantity of unascertained goods. The
contract is not void, and A must obtain 50 bales of Bengal cotton from elsewhere, or pay damages for
the breach

it is also to be remembered that S. 7 applies both to sales as well as agreements to sell

In Couturier v. Hastie, (1856 5 H.L. Cas. 673), where a specific cargo of com was sold in England, while it
was thought to be at sea, and it turned out later that, unknown to the seller, before the sale, the corn
had been so badly damaged that it was impossible to bring it to England, and had, therefore, been sold
away by the captain of the ship at Tunis, the Court held, in the circumstances, that the sale in England
was void.

2. Effect of goods perishing before sale but after agreement to sell (S. 8)

S. 8 governs the case of goods which have perished before the sale, but after the agreement to sell. It
lays down that 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 to their
description in the agreement, before the risk passes to the buyer, the agreement is thereby avoided.

Examples
(a) A contracts to sell a horse to B, on the condition that B may keep it for eight days for trial, and that B
would be at liberty to return the horse to A at the expiry of eight days, if he did not find the horse
suitable. Through no fault of A, or B, the horse dies three days after it was given by A to B for trial. The
contract between A and B is avoided under S. 8.

(b) A contracts to sell to B, a specific parcel of wheat lying in a warehouse, and it is agreed that the
payment is to be made within seven days, and that the wheat is to remain the property of A in the
meantime. Before the seven days expire, the wheat is lawfully requisitioned by the Government. The
contract between A and B is avoided under S. 8.

(c) Bagrees to sell to . 20 tons of regent potatoes to be grown on B's land. B sows sufficient land to grow
more than 20 tons of such potatoes, but, without any fault or negligence on his part, a disease attacked
the crops and he was able to deliver only 8 tons. As this was an agreement to sell the crop grown on a
specific land, it can be regarded as a sale of specific goods. The agreement became void when the
disease attacked the crops, and neither party is liable if the performance becomes impossible. Thus, the
agreement became void and there was no liability on B to deliver the potatoes. (Howall . Coopland,
(1874) 1 QBD 258)

SCOPE OF S. 8

Sec. 8 deals with the case where the goods perish after the agreement to sell is made. The rule is based
on the ground of impossibility of performance.

As regards risk, the general rule is that the goods remain at the seller's risk until the property in the
goods is transferred to the buyer, but after the property therein is transferred to the buyer, the goods
are at the buyer's risk, whether delivery has been made or not.

This section differs from S. 7 in that it deals with a case where goods were in existence at the time the
contract was made, and were destroyed before the risk passed to the buyer without fault on either side.
It is thus clear that this section would apply only to agreements for sale, and not to executed contracts
of sale.

SPECIFIC GOODS
S. 8, like S. 7, applies only to the sale of specific goods. If the sale is of a certain quantity of
unascertained goods, the perishing of even the whole quantity of such goods in the possession of the
seller will not relieve him of his obligation to deliver.

F. THE PRICE (Ss. 9-11)

Price, as seen earlier, an essential ingredient of a contract of sale of goods. Ss. 9 and 10 make provisions
for ascertainment of the price of the goods which are sold.

In a contract of sale it is not necessary that the price should be fixed at the time of sale. It may be fixed
by the contract, or may be left to be fixed in an agreed manner, or may be determined by the course of
dealing between the parties. In the absence of any such provision, the buyer is bound to pay a
reasonable price to the seller. What is a reasonable price will, of course, depend on the circumstances of
each particular case: S. 9.

Thus, the following five possibilities exist as regards the ascertainment of the price of goods sold :

1. The price may be fixed by the contract itself, which is the most common method in business
transactions.

2. The parties may stipulate that the price shall be fixed in an agreed manner, as for instance, the market
price on a particular date or the manufacturer's price list on a given day.

3. The price may be fixed by the course of dealings between the parties, as for instance, the
manufacturing cost of the seller plus 10%.

4. Prices of some commodities may be fixed by the government or the relevant market authorities.

5. A reasonable price would be payable by the buyer if the price is not ascertained in any of the ways
given above.

It has been held that in cases where the price is to be calculated according to the weight or
measurement of goods but the property in the goods has passed to the buyer even before the goods are
weighed or measured, if the goods are accidentally destroyed before the price has been worked out, the
court may order the payment of an estimated price, going by such evidence as is available to the court.
(Martineau v. Kitching, (1872) L. R. QB 436)

When the price is to be fixed by the valuation of a third party, and such third party cannot, or does not
make such valuation, the agreement is thereby avoided. However, if the goods (or any part thereof)
have been delivered to, and appropriated by the buyer, he must pay the seller a reasonable price for
such goods. Further, if such a third party is prevented by the contracting parties from making a
valuation, the party who so prevents is liable to pay damages: S. 10.

It is presumed that such a third party would fix the price in a fair and reasonable manner. If, however,
the third party is guilty of fraud or negligence in the matter of price fixation and a loss is suffered by one
of the parties, he would be liable in damages to such a party. (Sutcliffe v. Thackrah, 1974 AC 727)

What is reasonable price is a question of fact, depending on the circumstances of the case. Where the
market price of the goods is ascertainable, this would be good evidence of what such reasonable price
would be between the parties. However, this would not be conclusive, because circumstances peculiar
to a particular case may make such price unreasonable between the parties to the contract.

Stipulations as to time of payment (S. 11)

Stipulations as to time of payment are not deemed to be of the essence of a contract of a sale. Whether
any other stipulation as to time is of the essence of the contract or not depends on the terms of the
contract : S. 11.

Stipulations regarding time in a contract fall into two classes :

(i) those relating to time of payment; and

(ii) those not relating to time of payment, e.g., time of delivery of goods,

S. 11 provides for stipulations relating to time of payment, and lays down the general rule that such
stipulations are not of the essence of a contract, unless a different intention appears from the contract.
In the second class of stipulations, time may be of the essence of the contract, on a proper construction
of the document. Generally, in mercantile transactions, this latter class of stipulation is of the essence of
the contract. Thus, if time is specified for delivery of goods or for doing any other act, delivery must be
made at the specified time. If A agrees to sell and deliver goods to B on a certain day, he must deliver
them on that day. If he fails to do so, B is entitled to put an end to the contract.

Martindale v. Smith, (1841 1 Q.B. 389): In this case, there was a sale of some stacks of oak on the seller's
ground. It was agreed that the stacks could remain there for four months, but the buyer should pay for
them within three months of the contract. When three months expired, the seller demanded the price,
which the buyer failed to pay. Later on, the buyer asked for further time, which the seller refused to
give, and said that as the buyer did not pay in time, he would not deliver the stacks. When subsequently
the buyer tendered the price, the seller refused to accept it, and sold away the stacks to a third party,
The buyer filed a suit against the seller. The Court held that the buyer was entitled to recover in an
action of trover.

Problems

1. A agreed to sell to B, an agreed quantity of cotton yarn, 100 pounds to be delivered every week,
beginning September of that year. The contract provided that failure to supply within the
stipulated time would render the contract liable to termination. No yarn was delivered in
September and Abegan delivering 50 pounds of yarn a week from October. During this period, B
kept on complaining and requested in writing for bigger deliveries. In March, B cancelled the
order. A sued him, arguing that he had no right to cancel the order. Will A's contention be
upheld?

Ans. : In this case, the time of delivery can be said to be the essence of the contract, and hence, a
condition. However, B, by his conduct in accepting late delivery and smaller quantities and by writing a
letter of request, had waived his right to cancel the contract. Thus, B will not be entitled to cancel the
order. Hartley v. Hymans, (1920) 3 KB 475)

2. The seller agreed to supply to the buyer, a chassis of a Rolls Royce car, latest by March 28. When
the chassis was not delivered on time, the buyer pressed for delivery after the time had expired. On
June 29, the buyer lost his patience and informed the seller that if the chassis was not delivered by
July 25, he would not accept it. Finally, the seller offered to deliver it on October 18, but the buyer
refused to accept delivery. Is the buyer entitled to reject the goods?

Ans. : Yes. Although the earlier agreed time of delivery, namely March 28, can be said to have been
waived by the buyer, he had given the seller reasonable notice when prescribing a new time for
delivery. Hence, he had the right to reject the chassis if it was not delivered by July 25. (Charles
Richards Ltd. v. Oppenhaim, (1950) 1 KB 616)
 Increase / Decrease in sales tax, customs duty or excise (S. 64-A)

Under S. 64-A, unless a different intention appears from the contract,

(a) if any sales tax, customs duty or excise is imposed or increased after the making of the contract,
the seller is entitled to add it to the contract price; and

(b) if any sales tax, customs duty or excise is decreased or remitted after the making of the contract,
the buyer can deduct such amount from the contract price.

II. LAW RELATING TO CONDITIONS AND WARRANTIES (SS. 12-17 & 62)

Often a contract of sale contains various terms and stipulations about the nature and quality of the
goods, and sometimes, also about their fitness for the particular purpose for which the buyer
requires such goods. Now, every such term is not of equal importance. Whereas some terms may be
so important that they constitute the core or the basis of the contract, some others may not be so
vital or important to the contract. If the contents of any particular statement or promise is put on
the same footing as the description of the thing contracted for, so that a failure to make it good is
deemed to be a total failure of the performance itself, it would amount to a condition. However, the
same contract may contain other auxiliary promises or undertakings of such a nature that their
breach is not intended to enable the parties to avoid the contract, but only to give a right to claim
damages; these are called warranties.

Conditions (S. 12(2)]

A condition is a stipulation essential to the main purpose of the contract, the breach of which gives
rise to right to treat the contract as repudiated. Thus, a condition is so essential that if it is broken,
the other party to the contract can treat the contract as broken, and move for its remedy.

Warranty (S. 12(3)]

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

Thus, if X sells food-stuff to y, it is an essential term of the contractthough it may not be expressly
stated- that the food will be fit for human consumption. So, if it is found to contain any poisonous
substance, Y will be entitled to reject the food and to repudiate the contract. This essential term is
called a condition.

On the other hand, if some auxiliary or minor term of the contract is broken, Y may be able to claim
compensation in respect of its breach, but not avoid the contract. Such an auxiliary term is called a
warranty. Thus, in the above example, if the contract stipulates that the foodstuff should be packed
in one-kilo boxes, but the seller packs it in half-kilo boxes, only an auxiliary term of the contract, a
warranty, is broken - and the buyer cannot repudiate the contract on this ground alone, although of
course, it is open to him to claim compensation for the loss suffered by him.

It must be remembered that an offer of a thing different from what was agreed to, is not a breach of
one term of the contract, but a total failure to perform the contract. As was remarked by Lord
Abinger in an English case, "If a man offers to buy peas of another, and he sends him beans, he does
not perform his contract; but that is not a warranty; there is no warranty that he should sell him
peas; the contract is to sell peas, and if he sends him anything else in their stead, it is a non-
performance of it." (Chanter v. Hopkins, (1838) 4 M & W 404)

Whether a particular stipulation is a condition or not, is to be gathered from a construction of the

contract as a whole. The Court is not to be guided by the terminology of the parties. In fact, S. 12
expressly clarifies that a stipulation may be a condition, though called a "warranty" in the contract.

CONDITION AND WARRANTY DISTINGUISHED

1. As to its being an essential ingredient: Contracts of sale are often made up of various statements
and promises on both sides, differing in character and in importance. The parties may regard some
of these as vital or essential, and others as subsidiary or collateral to the main purpose of the
contract. If the parties regard the term as essential - it is a condition; its failure discharges the
contract. If they do not regard it as essential, it is warranty; its failure can only give rise to a suit for
such damages as have been sustained by the failure of that particular term.
 In other words, a condition is a provision in a contract, which is so vital to the existence of the
contract, that a breach thereof gives a right to repudiate the contract. A warranty, on the other
hand, is a provision in a contract, which is not vital to the existence of the contract, but is collateral;
its breach gives a right to an action for damages, but does not give a right to repudiate the contract.

2. As to construction: Whether or not a stipulation is of the nature of a condition or a warranty

depends on the construction of the particular stipulation, and such a stipulation may be a condition,
notwithstanding that it is described as a warranty. It should also be noted that a contracting party is
entitled to exercise his right of claiming damages, even though the breach is sufficiently serious to
give rise to a right to repudiate, and in such a case, the condition is reduced to the level of a
warranty. (See S. 13, below.)

3. As to nature of remedy:A condition and a warranty resemble in this, that both have to be
performed by the promisor. A condition and a warranty are both obligations under a contract, a
breach of which entitles the other contracting party to damages. But in the case of a breach of a
condition, the buyer has the option of another and higher remedy, namely, that of treating the
contract as repudiated.

Thus, the distinction between them consists in the remedy available to the promisee in case of
breach. In the case of a breach of a condition, the contract may be repudiated; but in the case of a
breach of a warranty, the contract cannot be repudiated; it only gives rise to an action for damages.

The points of distinction between a condition, and a warranty may be summarised as follows:

Condition Warranty

1. A condition is an essential 1. A warranty is an auxiliary or ingredient of a contract. subsidiary or

collateral term of a contract.

2. Whether a particular stipulation is a condition or a warranty depends on the construction of that

stipulation. The terminology of the parties is not conclusive.

3. The breach of a condition gives a 3. The breach of a warranty does not right to the other party to treat
the give the other party a right to treat contract as repudiated. the contract as repudiated. It merely
gives him a right to claim damages.
S. 13 deals with the rights of a buyer on breach of any condition by the seller. It provides that when a
contract of sale is subject to any condition to be fulfilled by the seller, the buyer may

(1) waive the condition, or

(2) elect to treat the breach of the condition as a breach of warranty, - and not as a ground for treating
the contract as repudiated.

In other words, on a breach of a condition, the buyer may repudiate the contract; but he is not bound to
do so. He may not avail himself of this higher remedy of treating the contract as repudiated. He may
totally waive the condition, or he may elect to treat the breach of the condition as a breach of warranty.
If he does waive the condition, he cannot afterwards insist on its fulfillment.

Such waiver can also be implied by conduct, as for example, where the buyer exercises some right of a
proprietary nature over the goods, like reselling them without examining them, or directing delivery to
be made to third parties.

Thus, when the seller commits a breach of a condition, the buyer may exercise any one of the following
three options :

(i) He may reject the goods, and treat the contract as repudiated.

OR

(ii) He may accept the goods, and treat the breach of the condition as a breach of warranty, and claim
compensation for such breach of warranty.

OR

(iii) He may waive both the above rights, accept the goods, and pay for them.
It is further provided, that unless there is an express or implied contract to the contrary, the breach of
any condition to be fulfilled by the seller can only be treated as a breach of warranty, (and not as a
ground for rejecting the goods and treating the contract as repudiated) in one case, namely, where the
contract of sale is not severable, and the buyer has accepted the goods or part thereof.

Moreover, S. 13 expressly exempts any condition or warranty, the fulfillment of which is excused (i) by
law, or (ii) by reason of impossibility, or (ii) otherwise. This provision is specially made for covering cases
of non-fulfillment due to war, governmental restrictions, and the like.

Controls imposed by the Government after the contract is entered into often give rise to the question of
impossibility of performance. In such cases, one must see the terms of the contract and the usage
prevailing in the trade, Thus, in Brandt v. Morris & Co. Ltd. (19172 K.B. 784), the contract was for the
sale of aniline oil. After the contract was made, export of aniline oil was prohibited by the Government,
but either the buyer or the seller could have applied for a licence. However, only the buyer knew all the
facts necessary to make an application for such licence. In these circumstances, the Court held that the
obligation of applying for a licence lay on the buyer, and not on the seller.

In another case, after a contract of sale of cereals was entered into, war broke out, and under an Order
of Council, buying or selling cereals outside England, without a licence, was forbidden. In this case, the
Court held that the Order did not have the effect of putting an end to the contract. The Court observed
that it was the duty of the sellers to apply for a licence to enable them to perform the contract, and
there was no reason to suppose that such a licence would not be granted, if applied for. (Taylor & Co. v.
Landauer & Co., 1940 4 All E.R. 335)

If any illegality or impossibility continues for an indefinite period, there would be a frustration of the
contract (under S. 56 of the Indian Contract Act) if such illegality or impossibility is in existence when the
contract ought to have been performed. However, the contract would not be discharged if the illegality
does not subsist on the date of the performance. (A reference may be made to the decision of the
Supreme Court in Satyabarta Ghose v. Mugneeram Bangur, A.I.R. 1954 S.C.44)

Problems

1. A sells 12 cases of piece-goods to B on credit. B takes delivery of the goods, and a fortnight thereafter
sells and delivers the same to C, on receiving the price thereof. Both the said sales are by the same
sample. C, on opening the cases, finds that the goods are not in accordance with the sample. C at once
gives notice of rejection to B, and B gives notice to A. A files a suit against B for the price of goods. C also
files a suit for the refund of the price paid by him to B. B seeks your advice as regards both the suits.
Advise him.
Ans. : Here, C can reject the goods by virtue of S. 12 above. He will get his refund of the price. Now, as B
has accepted the goods, he cannot treat the contract as repudiated, as S. 13 expressly provides that this
cannot be done A's suit against B for the price of goods will be decreed. But in this suit, B should put up
a claim for damages sustained by him on account of the goods not being according to the sample. (See
S. 59.)

2. A seller had contracted to set up a power plant for the buyer with a capacity of 108 MW. The plant
was set up with a lower capacity, but the buyer started working with the power plant. Can the buyer
afterwards exercise his right to reject the plant?

Ans. : No. Although the capacity of the plant was a condition, by starting work with the power plant, the
buyer treated the breach of this condition as a breach of warranty. Hence, the buyer can only claim
damages; he cannot reject the plant and treat the contract as repudiated. (Svenska v. Handelsbanken v.
Indian Charge Chrome, AIR 1994 SC 626)

Legal position when condition is converted into a warranty

When, under S. 13, a condition is reduced to the status of a warranty, it is only from the angle of the
remedy available to the buyer. The condition remains a condition in the eyes of law; the more important
term is not converted into a less important term, as once a condition, it is always a condition. It is only
the remedy that changes. The right of rejecting is lost and the only remedy open to the buyer in such a
case is to sue for damages. (Wallis, Son & Wells v. Pratt, 1911 AC 394)

IMPLIED WARRANTIES IN A SALE (Ss. 14-17, 62 & 64 A)

Kinds of Warranties

Now, conditions and warranties are either express or implied. Secs. 14-17 deal with implied conditions
and warranties. S. 14 deals with the implied warranty as to title; S. 15 deals with warranties when the
sale is by description; S. 16 deals with implied warranty as to quality or fitness, and S. 17 enumerates
certain implied conditions in case of sale by sample.

As regards express conditions and warranties, no particular form of words is necessary to create a
condition or warranty. The question in such a case is what the parties intended, i.e. whether they
intended that a term or a stipulation should operate as a condition, entitling the buyer to treat the
contract as repudiated and to reject the goods if the stipulation is not fulfilled, or that it should operate
as a mere collateral contract or warranty, for the breach of which the remedy of the buyer would only
be an action for damages.

It is important to note that an express condition or warranty does not negate a condition or warranty
implied by the Act, unless it is inconsistent therewith. (S. 16(4)]

Warranty as to title (S. 14)

The 'warranty as to title covers :

(a) an implied nat seller has (or will have) the right to sell the goods;

(b) an implied warranty that the buyer will enjoy quiet possession of the goods; and

(c) an implied warranty that the goods are free from any charge or encumbrance not known to the
buyer.

(a) In a contract of sale, unless the circumstances of the contract are such as to show a different
intention, there is an implied condition on the part of the seller:

(i) in the case of a sale, - that he has a right to sell the goods; and

(ii) in the case of agreement to sell, - that he will have a right to sell the goods at the time when the
property is to pass.

This section, which is identical to S. 12 of the English Sale of Goods Act, makes the seller answerable
for his title to the goods which he sells. This condition is excluded only when the circumstances of
the contract show that a different intention was contemplated by the parties. Thus, it is open to the
parties to agree that the seller is dealing only with such interest as he has in the goods. Likewise, a
Sheriff who sells goods in the execution of a decree is not liable if he does not know that the goods
did not belong to the judgment debtor.
Rowland v. Divall, (1923) 2 K.B. 500.- In this case, the plaintiff bought a motor-car from the
defendant and used it for several months. After some months, it appeared that defendant had no
title to it, and the plaintiff was compelled to surrender it to the true owner. On the plaintiff suing the
defendant to recover the purchase money, it was held that, notwithstanding that the plaintiff had
used the car for some time, the consideration had totally failed, and he was entitled to recover the
purchase-money.

Nibett Ltd. v. Confectioner's Materials Co. Ltd., (1951) 3 K.B. 387 - A firm of confectioners agreed to
sell condensed milk in tins of a certain quality to the plaintiffs, who received the shipping documents
and paid the price. The goods arrived bearing a and, namely, "Nissly", which was an infringement of
a registered trademark of another manufacturer, (namely, Nestle) and were, therefore, detained by
the customs authorities. The buyer had no alternative but to remove the labels, and sell the tins
unlabelled at a much lower price. It was held that the seller had broken the implied condition
referred to in S. 14 of the Act. The buyer had thus the right to reject the goods or to recover
compensation for the loss caused by the sale at a reduced price.

(b) Likewise, unless the circumstances of the contract are such as to show a different intention,
there is an implied warranty that the buyer shall have and enjoy quiet possession of the goods.

It is to be noted that this is a warranty, and not a condition, and operates protect the buyer against
lawful acts of third persons and against the tortious acts of the seller himself.

(c) Lastly, unless the circumstances of the contract are such as to show a different intention, there is
an implied warranty that the goods are free from any charge or encumbrance in favour of any third
party, not declared or known to the buyer before or at the time the contract is made.

WARRANTY AS TO TITLE - S. 14 (above) enumerates one condition and two warranties, which are
collectively called "warranty as to title". This section enumerates the stipulations that are presumed
to be present in every contract of sale. The seller is presumed to give an undertaking that he has a
right to sell the goods, and this undertaking as to title is a condition, entitling the buyer to repudiate
the contract if the buyer's title is found to be defective. The other two undertakings, also implied in
a contract of sale, are warranties; and if they are broken, the buyer has only a right to claim
compensation. Thus, whereas clause (a) of S. 14 deals with an implied condition, clauses (b) and (c)
deal with implied warranties.

2. Sale by description (S. 15)

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. (S. 15)

In other words, if the seller has made a contract to sell peas, the buyer is not obliged to accept
beans.

Where copra cake was agreed to be sold, but the goods supplied were found to be adulterated with
castor beans, it was held that the goods did not correspond with the description. Likewise, in the
case of a sale of rape oil, if the oil supplied is a mixture of rape oil and hemp oil, this condition can
be said to be broken.

The principle underlying this section is that when a person contracts to sell goods, it is very
important that they must answer the specific description and must also be saleable or merchantable
under that description. Thus, where goods are supplied as being of a particular brand, the
undertaking is that they will bear the label of the manufacturer which is put on the goods of that
brand in the ordinary course of business, and there is no obligation on the purchaser to accept
goods which do not bear that label, even though the goods have been made by that particular
manufacturer.

The expression, "sale by description" covers two possibilities. Firstly, it covers cases where the buyer
has never seen the goods and enters into a sale contract on the basis of the "description" given to
him by the seller. Secondly, it may cover a ccase where the buyer has seen the goods, but he relies
not on what he has seen, but on what is stated to him and such deviation of the goods from the
description given to him is not apparent. Thus, in one case, the buyers saw a set of linen napkins and
table cloths which were described as belonging to the seventeenth century. After the sale, the
buyers discovered that they belonged to the eighteenth century. The court held that they were
entitled to reject the goods as the discrepancy between the description and the actual quality could
not be discovered by a casual examination of the goods. (Nicholson and Venn v. Smith Marriott,
(1947) 177 LT 189)

Shepherd v. Kain, (1821) 5 B & Add. 240.- X bought from Y, a ship advertised as copper-fastened to
be taken with all faults, without allowance for any defects whatsoever. The ship was only partly
copper-fastened, and not what was described in the trade as a copper-fastened ship. In the
circumstances, the Court held that X was entitled to reject the goods or recover damages, since the
goods did not correspond with the description.

X advertises a "new Singer car" for sale. On delivery, the buyer finds that it is not a new car. The
buyer is entitled to reject it. (Andrews Bros. Ltd. v. Singer and Co. Ltd., (1934) IK. B. 17)
On the same lines is the case of a sale of a second-hand reaping machine, which the seller professed
was only a year old. The buyer, on delivery, finds that it is a very old machine, which has been
mended several times. In such a case, the buyer may reject the machine. (Varley v. Whipp, (1900) 1
Q. B. 513)

X, at Calcutta, sells to Y, 20 bags of "waste silk", which is on its way to Calcutta. There is an implied
contract that the silk will be such as is known in the market as "waste silk". If it is not, Y can reject
the goods.

Where the buyer had contracted to buy staves of timber which were halfinch thick (for use in
making cement barrels) and the staves supplied were one-half to two-third inches thick, he was
entitled to reject the goods as they did not correspond with the description. The fact that the staves,
as supplied, could be used to make cement barrels did not make any difference. In the words of Lord
Buckmaster, "If the article they have purchased is not in fact the article that has been delivered,
they are entitled to reject it - even if it is the commercial equivalent of that which they have
bought." (Arocos v. Ronaason & Son, (1933) AC 470)

X agreed to sell to Y, tea in chests containing 80 kilos of tea. However, X tendered tea chests
containing 76 kilos of tea. Y can reject the goods. (Jormal Kasturchand v. Hasanali Khanbhai, AIR
1954, Sau. 79)

A agreed to sell "best quality toor dal" to B, who did not examine the dal. After the goods were
loaded on the train, they got drenched in rain. When the goods arrived at the destination, they no
longer answered the description, and could not be sold as "best quality toor dal". The goods could
not be said to be of merchantable quality. (Shivallingappa v. Balakrishna Chettiar, AIR 1962, Mad.
426)

Sale by description as well as by sample

If the sale is by sample as well as by description, it is not sufficient that the bulk of the goods
corresponds with the sample, if the goods do not also correspond with the description. (S. 15)

In other words, in such cases, the implied condition is that the goods shall not merely be according
to the sample, but must also correspond with the description. Thus, in Azemar v. Casella (1867 2 CP
431), there was a sale of "Long Staple Salem cotton" equal to the sample. The contract also provided
that if the goods were inferior in quality, a reasonable allowance would be made to the buyer. When
the goods arrived, it turned out that the cotton was not long staple Salem cotton, but what was
commonly referred to in the market "western Madras cotton". The court held that, despite the
allowance clause, in the contract (referred to above), the buyer was entitled to reject the cotton.
Refuting the argument that the allowance clause protected the seller, Justice Montague Smith
rightly asked the question whether a seller was protected if there was a sale of spirits with such an
allowance clause, the sample being brandy and the spirit that was delivered turned out to be rum?

3.Warranty as to quality or fitness (S. 16)

The third implied warranty in sale of goods is the warranty as to quality or fitness under S. 16. Now,
the ordinary rule is that, subject to the provisions of the Act and 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.

CAVEAT EMPTOR : The general principle of English law in regard to quality or fitness under a
contract of sale is that, except in the case of fraud, the buyer purchases at his own risk, unless there
is a condition or warranty. This is expressed by the maxim caveat emptor, which means that the
buyer must take care. The maxim applies to the purchase of specific things, (for example, a horse or
a picture) upon which the buyer can, and usually does, exercise his own judgment. It applies also,
whenever by usage or otherwise, it is a term of the contract, express or implied, that the buyer shall
not rely on the skill or judgment of the seller.

The rule of caveat emptor (-let the buyer beware-) owed its origin to the fact that in the olden days,
in England, most sales took place in the open market (market overt). At one time, its policy was
defended on the ground that it tended to minimise litigation, but the current trend, both of statute
law as well as case law, in India and in England, is to limit its scope.

In one English case, Wallis v. Russel, (1902 2 I. R.585), which centered around the sale of
unwholesome crabs, the Court observed : "Caveat emptor does not mean, in law or Latin, that the
buyer must take a chance; it means that he must take care. It applies to the purchase of specific
things; e.g., to a horse or a picture, upon which the buyer can, and usually does, exercise his own
judgment. It applies also whenever, by usage or otherwise, it is a term of the contract, express or
implied, that the buyer shall not rely on the skill or judgment of the seller." (Wallis v. Russel is
discussed later in this Chapter.)

In another English case, the defendant, a farmer, bought a carcass of a pig from a butcher, intending
to use it for a purpose other than eating. The plaintiff saw it and bought it from him. The plaintiff
bought it for consuming it as food, and it turned out that the carcass was unfit to eat. It was held
that the defendant, the farmer, was not liable, as there was no implied condition or warranty that
the carcass was fit for human consumption. (Burnby v. Bollett , 1847 16 M. & W. 644)
In another case, there was a sale of pigs "with all faults" in the market. It turned out that the pigs
were suffering from typhoid fever, and infected other pigs belonging to the buyer. The Court held
that, in the absence of any fraud on the part of the seller, the buyer had no remedy. (Goddard v.
Hobbs, 18784 App. Cases, 13)

Problem: A purchases from a grocer, Danish bacon and a tin of sardines. He eats some of the bacon
and his wife some of the sardines. Since the food. stuff was defective, both of them suffer from
food-poisoning, and have to spend money for medical treatment. Does A have any remedy against
the grocer?

Ans. : Yes, both the bacon and the sardines were not of a mercantile quality, and not fit for human
consumption. A can, therefore, recover damages from the grocer.

Section 16 of the Sale of Goods Act begins with the enunciation of the principle involved in the
maxim caveat emptor. It then proceeds to lay down two important exceptions to the principle. S. 16
provides that, subject to the provisions of the Act and 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
the goods supplied under a contract of sale, except in two cases, which form the two exceptions to
the rule.

Exception !

Where the buyer

(i) expressly or by implication, makes known to the seller the particular purpose for which the goods
are required, so as to show that the buyer relies on the seller's skill or judgment; and

(ii) the goods are of a description which the seller supplies in the course of his business
(whether he himself manufactures them or not,)

there is an implied condition that the goods shall be reasonably fit for such purpose.

There is, however, an exception to this exception, and in the following circumstances, the rule of
caveat emptor does apply:
In the case of a 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.

The purpose for which the goods are required may be made known to the seller either expressly or
by implication. The implication may arise from the very nature of the goods, e.g., buying a hotwater
bottle. The description of the goods may be such as to show that they are required for a particular
purpose. If a retail dealer in woollen goods sells underpants, he must know that they are required
for the obvious purpose of being worn next to skin. The seller being a dealer in the goods sold, there
is a presumption that the buyer relies on his skill or judgment. The seller is, therefore, liable if the
underpants cause skin disease.

Priest v. Last, (1903) 2 K.B. 148.- In this case, the plaintiff asked the defendant for a hot-water bottle
and inquired whether it would stand boiling water. The defendant sold to the plaintiff an American
rubber bottle, saying it would stand hot, but not boiling water. The bottle, which was purchased by
the plaintiff for his wife, burst and injured her, when it was filled with hot water. The Court held that
the defendant was liable, there being an implied condition that the bottle was fit for the purpose for
which it was meant.

In one case before the Privy Council, A filed a suit against B and C, claiming damages on the ground
that he had contracted dermatitis by reason of the underpants purchased by him from B and
manufactured by C. The disease was external and A's skin was normal. Sulphite was present in the
garment, and A alleged that this was the irritating chemical which caused the disease, and the
presence of this chemical was due to negligence of C, and also involved the breach of an implied
condition on the part of B. The Privy Council held that the defendants were liable. According to Privy
Council, the defects rendered the garment unfit to be worn just next to skin. According to their
Lordships, the term "merchantable", means that the article sold, if only meant for one particular use
in the ordinary course, is fit for that use. It does not mean that the thing is saleable in the market
simply because it looks right; it is not merchantable in that event if it has defects rendering it unfit
for its only proper use, but not apparent on ordinary examination. (Grant v. Australian Knitting Mills
Ltd-A.I.R. 1936 P.C. 34)
But where a person contracted dermatitis after wearing a tweed coat, because he was allergic and
his skin was abnormally sensitive, the seller could not be held liable in damages. (Griffiths v. Peter
Conway Ltd., 1939 1 All E. R. 685)

Where a public house sells a bottle of 'Stone's Ginger Wine", it is a sale of goods by description. If
the bottle breaks while opening due to a defect in the bottle, and the buyer is injured, he would be
entitled to damages as the goods were not of a merchantable quality. (Morelli, Fitch and Gibbons,
1928 2 KB 636)

Similarly, A went to B, a grocer and purchased a tin of "K" brand condensed milk. A consumed the
condensed milk and because of some defect in the milk, became seriously ill. Is A entitled to any
remedy in contract against B?

Yes, the milk was not reasonably fit for human consumption. B has committed a breach of warranty,
and A is entitled to damages.

The Mumbai High Court has held that the words "by implication" in Section 16 of the Act indicate
that the intimation of the purpose to the seller need not be expressed in words. It may be inferred
from the description of the goods given by the buyer to the seller, or from the circumstances of the
case. The buyer, however, must rely on the seller's skill and judgment. This was a case where the
buyer had purchased a radio-set, and the Court observed that the buyer in this case did rely on the
skill or judgment of the seller. The buyer purchased the radio-set for some specified purpose, and it
can easily be said that the vendor sold this radio-set for that specified purpose. It would, therefore,
have to be of a certain quality. If it is not of that quality and if it is not fit for such a purpose, the law
implies a promise from the vendor that he will supply to the purchaser an article of that quality and
one which is reasonably fit for the purpose for which it is required. The Court observed that the
seller's liability, in such cases, to supply goods that are reasonably fit, is an absolute one.

In one case, X bought milk from a milk dealer for family use. The "milk account book" supplied to X
contained a statement of the precautions to be taken to keep the milk pure. The milk, however,
contained the germs of typhoid fever, and X's wife became infected and died. This was held to
constitute a breach of condition and the milk dealer was ordered to pay damages. (Frost v Aylesbury
Dairy Co., 1905 I K. B. 608)

In Wallis v. Russel, (1902-2 1.R. 585), A went to a fishmonger and asked for "two nice fresh crabs".
The fishmonger told him that he had no live crabs, but that he had some boiled crabs, of which he
selected two and sold them to A. It turned out that the crabs were not fresh, and A became
seriously ill after eating them. The Court held that the fishmonger was liable in damages to A.
In Baldry v. Marshall, (1925 1 K. B. 260), the plaintiff wanted to buy a comfortable car suitable for
touring purposes. The defendants said that their "Budagatticar" would ideally suit the plaintiff's
purpose and showed him a specimen. The plaintiff then ordered such a car. The defendants supplied
the car with a guarantee for 12 months against defects in manufacture. At the same time, it was
expressly stipulated that the guarantee excluded any other guarantee or warranty, statutory or
otherwise. The car proved to be uncomfortable and not suited for touring purposes, and the plaintiff
sought to reject the car and to recover the price paid by him. It was held that the plaintif was
entitled to succeed. The term that the car should be comfortable and suitable for touring purposes
was not a warranty but a condition, and the terms of the contract did not exclude the condition.

Bristol Tramways Co. v. Fiat Motors Ltd., (1910) 2 K. B 831 - A contracted to buy, from Fiat Motors
Ltd., a Fiat motor omnibus which he had inspected and thereafter ordered the chassis of six more. A
explained orally to the Company that the same were required for heavy traffic on hilly roads. When
the cars were delivered to A, they broke down and were found unfit for the traffic specified. It was
held that there was a breach of warranty of fitness, A could, therefore, successfully sue Fiat Motors
for damages.

In Raghava Menon v. Kuttamppan Nair, the Kerala High Court was dealing with a case involving the
purchase of a wrist watch. In this case, Ahad purchased a wrist watch from B Company, along with a
Guarantee Certificate. The watch had been manufactured so well (!) that within three weeks of its
purchase, it stopped working. A, therefore, handed over his watch to B Company. Even when the
watch was returned to A, A was not satisfied with its working, and he, therefore, handed it back to
the Head Office of B Company. This office returned the watch to him later on, with an assurance that
the defects were set right. But within a week, once again the watch began to give trouble. A had,
therefore, to hand it over again to the Company, and in the background of these circumstances, he
filed a suit against the Company. The Court observed that when a layman purchases a watch of a
particular make from a reputable firm, which exclusively deals in such watches, the sale is governed
by the first exception of Section 16 of the Act, because in such a case, the purpose is only the
common purpose, and not any specific purpose. The seller knows this, and the purchaser, being only
a layman, relies on the seller's skill or judgment. Therefore, the watch company was held liable.

In another case, tinned salmon was sold by a grocer and provision merchant. As the fish was
poisonous, the buyer fell ill, and his wife, who also ate it, died of the poison. The Court held that the
buyer could recover damages, including, interestingly, an amount to compensate him for hiring
someone to perform the services which had formerly been rendered by his wife. (Jackson v. Watson
& Sons,- 1909 2 K.B. 193)
In another English case, there was a sale of a catapult to a boy. The catapult broke while being used,
and caused a loss to the boy's eye. The Court held that the catapult was not reasonably fit for the
purpose for which it was meant to be used, and the seller was liable to pay damages. (Godley v.
Percy, - 1960 1 All E.R. 36)

In Baretto v. Pruce, (A.I.R. 1939 Nag. 19), X contracted to make and deliver a set of false teeth to Y.
The teeth, when ready, did not fit into the mouth of Y. The Court held that Y was entitled to reject
the goods.

In another case, there was a sale of a boiler, and the seller was aware that it was required for the
manufacture of carbon paper. The boiler did not satisfy the requirements of the Indian Boilers Act.
In the circumstances, it was held that the buyer was entitled to recover damages. (Joseph Mayr v.
Phani Bhusan - 1938 2 Cal. 88)

In another interesting case, a firm of distillers agreed to supply to certain merchants in Africa,
whisky which would be coloured to resemble rum. Instead of using burnt sugar for the purpose, the
distillers used log-wood, with the result that this coloured whisky proved to be unsaleable, because
the natives thought that it was poisoned, especially when they discovered that their saliva became
red as blood when they consumed it. The House of Lords held that the distillers were liable in
damages to the merchants. (Macfarlane v. Taylor 1968 L.R. 1)

In this connection, S. 16(3) also provides that an implied warranty or condition as to quality or
fitness for a particular purpose may be annexed by the usage of trade.

Thus, in one case, it was proved that there was a trade usage to declare any sea-damage in cases of
sale of drugs by auction. The Court, therefore, held that this had the effect of creating a warranty
that drugs sold by auction without such declaration were free from sea-damage. (Jones v. Bowden -
1813 4 Taunt. 847)

Exception 11

The second exception to the general rule of caveat emptor is to be found in S. 16(2), which provides
that where goods are bought by description from a seller who deals in goods of that description
(whether he manufactures or produces such goods or not), there is an implied condition that the
goods are of merchantable quality.
The phrase "merchantable quality" is not defined in the Act, but is used as meaning that the article
is of such quality, and in such condition, that a reasonable man, acting reasonably, would accept it,
whether he buys it for his own use or for resale.

In England, the expression "merchantable quality" has been defined to mean that the goods shall be
fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable
to expect, having regard to any description applied to them, the price (if relevant) and all other
relevant circumstances. (S. 7(2) of the Supply of Goods (Implied Terms) Act, 1973)

The Madras High Court has observed, on the basis of English decisions, that goods are of
merchantable quality, if they are of such a quality and in such condition that a reasonable man
acting reasonably would, after a full examination, accept them under the circumstances of the case
in pursuance of the offer to buy them, whether he buys for his own use or to sell again.

Thus, in case of a sale of motor-horns, it was proved that several of them were dented (due to bad
packing), and the others were badly polished (due to careless workmanship) rendering all of them
unsaleable. The Court held that buyer was entitled to reject the whole lot. (Jackson v. Rotax Motor
& Cycle Co. Ltd., 1910 2 K. B.937)

However, S. 16(2) also provides that if in such a case, the buyer has examined the goods, there is no
implied warranty as regards defects which such examination ought to have revealed.

Thus, in case of a sale of vegetable glue in casks, the buyer, whilst examining the glue, was content
with looking at the outside of the casks. The glue was unmerchantable, due to a defect which the
buyer would have discovered if he had properly examined the glue. The Court held that the buyer
had no remedy. (Thornet and Fehrv. Bears & Sons - 1919 1 KB. 486)

Express conditions do not negative implied conditions

Lastly, S. 16(4) provides that an express condition or warranty does not negative a condition or
warranty implied by the Act, unless it is inconsistent therewith.

Thus, in one case, there was a sale of a motor-car for the purpose of being used as a touring car,
which purpose was known to the seller. When it was proved that the car was not reasonably fit for
being used as a touring car, it was held that the buyer was entitled to reject it, on the ground that
the requirement that the car should be reasonably fit for touring was a condition and not a
warranty. (Baldry v. Marshall, discussed above)

4.Sales by sample (S. 17)

A contract of sale by sample is one where there is a term in the contract, express or implied, to that
effect. Thus, if A sells goods to B on the term that "goods shall be equal in quality to the sample",
the sale is by sample, and the incidents mentioned below will attach to such a sale.

Implied conditions in a sale by sample

There are three implied conditions in a sale by sample, as follows:

(i) that the bulk shall correspond with the sample in quality:

(ii) that the buyer shall have a reasonable opportunity of comparing bulk with sample; and

(iii) that the goods shall be free from any defect, rendering them unmerchantable, which would not
be apparent on a reasonable examination of the sample.

Clause (ii) above is based on the English case, Lorymerv. Smith, (18221 B. & C. 1). In that case, there
was a sale by sample of two parcels of wheat, one containing 700 and the other 1,400 bushels.
When the buyer went to examine the bulk, the parcel with 700 bushels was shown to him, and the
seller refused to show the other parcel. The Court held that the buyer was entitled to rescind the
whole contract.

Clause (iii) above is actually an application of the general principle that the seller's duty to furnish
merchantable goods answering the description in the contract is paramount to any particular
condition or warranty. The seller cannot defend himself by saying that even the sample was faulty.

In one case, there was a sale by sample of mixed worsted coatings to be equal in quality and weight
to the samples. When delivered, it was found that the goods had a latent defect, due to which they
would not stand ordinary wear when made into coats, and were, therefore, not merchantable. The
same defect did appear in the sample also, but could not be detected on reasonable examination. In
the circumstances, it was held that the buyer was entitled to recover damages from the seller.
(James Drummond & Sons v. E. H. Van Ingen & Co., (1887) 12 App. cases 284)

It may be noted that where a part of the goods is equal to the sample and a part is inferior to the
sample, the buyer may reject the whole, or he may accept the whole, and claim damages for the
portion which is inferior to the sample. But, he cannot retain the part which is equal to the sample
and reject the other part, unless the contract is severable. Thus, A sells to B five parcels of "foreign
refined rape oil warranted only equal to samples". The samples consist of rape oil mixed with hemp
oil. The oil tendered corresponds with the samples, but it is not such as is known in the market as
"foreign refined rape oil." Here, it will be seen that B is entitled to reject the goods, since the rape oil
cannot be severed from hemp oil.

In case of doubt, evidence will be admitted by a Court of a usage of trade to show that a particular
sale was a sale by sample. A sale at which a specimen of the goods is exhibited is not necessarily sale
by sample, for it is possible that in a given case, the buyer relied only on the description, and did not
stipulate that the goods should conform to the specimen produced. In one case, it was observed
that where samples are analysed and transformed into a formula, the sale may still be a sale by
sample. (Lalchand v. Baijnath, (1937) 63 Cal. 736)

5. Exclusion of implied terms and conditions (S. 62)

Where any right, duty or liability would arise under a contract of sale by implication of law, the same
can be varied - or even negatived - by :

(a) an express agreement between the parties;

(b) the course of dealing between the parties; or

(c) usage, if such usage is binding on both the parties.

6. Implied terms regarding increase or decrease of taxes (S. 64A)

When, after making any contract for the sale or purchase of goods, there is imposition, increase,
decrease or remission of any duty of custom or excise on goods or any tax on the sale or purchase of
goods, the following rules are applicable, in the absence of an intention to the contrary :
 (a) If such tax is imposed or increased after the contract for sale, and if the seller is obliged to pay it,
he may add such tax to the contract price and recover it.

(b) If such tax is remitted or decreased after the cor of sale, the buyer is entitled to deduct the
difference from the contract price.

The legal incidents of various types of sale by a sample and by description (discussed above) can be
summarised as follows:

(a) Sale by sample (S. 17]

Where a sale is by sample, there is an implied condition that

(i) the bulk shall correspond with the sample in quality;

(ii ) the buyer shall have a reasonable opportunity of comparing the bulk with the sample; and

(iii) the goods shall be free from any defect rendering them unmerchantable, which would not be
apparent on reasonable examination of the sample.

(b) Sale by description (S. 15)

Where there is a sale of goods by description, there is an implied condition that the goods shall
correspond with the description.

(c) Sale by sample as well as description (S. 15)

If the sale is by sample as well as by description, the implied condition is that the goods shall correspond
both with the sample and description.

In case of breach of any of the above implied conditions the buyer may either (i) reject the goods, or (ii)
accept them and claim damages.
Chapter 3

EFFECTS ON THE CONTRACT (Ss. 18-30 & 63)

A. TRANSFER OF PROPERTY AS BETWEEN SELLER AND BUYER (Ss. 18-26)

PASSING OF PROPERTY — The first legal effect of a contract of sale is that property in the goods passes
from the seller to the buyer. It is to be remembered that the passing or transfer of property constitutes
the most important element in the law relating to contracts for the sale of goods. When it is said that
the property in the goods has passed to the buyer, it means that the goods have ceased to be the
property of the seller and have become the property of the buyer, i.e. the buyer has become the owner
thereof.

Transfer of property in the goods is, however, distinct from delivery of the goods. Property in goods may
pass from the seller to the buyer without delivery of the goods to the buyer, i.e., the goods may not
have yet come into the possession of the buyer. Similarly, the buyer may have physical possession of the
goods before the property has passed from the seller to him. Property in the goods is thus distinct from
possession of the goods.

This subject, namely, the passing of property as between the seller and the buyer, is of very great
importance in deciding the various rights and liabilities of the seller and the buyer. To take only one
instance, risk in the goods prima facie passes with the passing of the property from the seller to the
buyer.

RULES GOVERNING PASSING OF PROPERTY ss18_26

It may be noted that exactly when the property in the goods is to pass from the seller to the buyer
depends on the intention of the parties. This intention may, at times, be clearly expressed. If such
intention is not clear, it has to be gathered from the conduct of the parties and from the circumstances
of the case. Now, since parties may sometimes express their intentions obscurely, Courts in England
have evolved certain rules of construction to govern such sales. Similar rules have been adopted by the
Indian Sale of Goods Act. Thus, the rules contained in Sections 20 to 24 of this Act will apply, unless the
parties have agreed otherwise.
To understand clearly the rules as to passing of property, goods can be divided into three categories. In
other words, for the purpose of transfer of property as between seller and buyer, goods may be divided
into three classes :

(1) specific or ascertained goods;

(2) generic or unascertained goods; and

(3) goods sent on approval or on sale or return basis.

I. Passing or transfer of property in case of specific or ascertained goods (Ss. 19-22)

Unless a different intention appears, the following three rules are to be applied for ascertaining the
intention of the parties as to the time at which the property in the goods is to pass to the buyer : S. 19.

Rule 1 : Specific goods in a deliverable state (S. 20)

Where the contract is unconditional, (that is, not subject to any condition to be fulfilled by the parties)
and where specific goods are in a deliverable state (that is, they are in such a state that the buyer would,
under the contract, be bound to take delivery of them), – the property in the goods passes to the buyer
when the contract is made, and it is immaterial whether the time of payment of the price or the time of
delivery of the goods, or both, are postponed.

The three basic conditions to be fulfilled before this rule comes into play are :

(a) The sale must be one of specific goods.

(b) The goods must be in a deliverable state.

c) the contract must be unconditional

Thus, if one car out of a lot is sold, condition (a) above is not satisfied as the particular vehicle which is
sold is not identified. Even if the car is identified, but the seller has to paint the car before delivering it to
the buyer, condition (b) is not satisfied as the car is not in a deliverable state. Lastly, if it is the common
intention of the parties that property in the car should not pass until certain conditions are fulfilled,
condition (c) would not be satisfied.

Thus, A contracted, on 4th January, to buy a hay-stack which was on the seller's land, the price to be
paid on the 4th February. It was also agreed that the hay was to remain on the seller's land until the 1st
May, and that the hay should not be interfered with until the price was paid. The property in the
haystack passed on the making of the contract. If the stack is accidentally destroyed by fire, A, the
buyer, must bear the loss. (Tarling v. Baxter, (1927)

1. A agreed to buy a horse for 50,000 from B. Both parties understood the transaction to be a ready-
money bargain. A requests B to keep the horse for a week when he promises to take delivery and pay
50,000. Before the expiry of the week, the horse dies. Advise B.

This is a case of an unconditional contract for the sale of specific goods in a deliverable state. Therefore,
Sec. 20 applies and the property in the goods passes to the buyer, and along with it, the risk, when the
contract is made, though payment and delivery are both postponed. B is entitled to 500, the price of the
horse.

2. A purchases four gold bars in Mumbai for ready delivery from B. B sends the said gold bars with his
servant along with A's representative who calls for them at B's pedhi. On the way, the bars are weighed.
On the bars being deposited at A's Pedhi, one of the gold bars is found missing. A refuses to pay for the
missing bar. Advise B.

This is also a case of an unconditional contract for the sale of specific goods in a deliverable state.
Therefore, Sec. 20 applies, and the property in the goods passes to the buyer, and along with it, the risk,
when the contract is made. A must pay for the missing bar; B is entitled to the price of four bars.

Rule 2: Specific goods to be put into a deliverable state (S. 21)

When there is a contract for the sale of specific goods, and the seller is bound to do something to the
goods for the purpose of putting them into a deliverable state, – the property does not pass until such
thing is done and the buyer has notice thereof.
Thus, A agrees to sell the whole contents of a certain oil to B. It is agreed that the oil is to be put into
casks by A, and then B is to take them away. Some of the casks are filled in the presence of B, but before
any of them are removed or the remainder filled, the whole is accidentally destroyed by fire. B must
bear the loss of oil which had been put into the casks, and A that of the remainder. (Rugg v. Minett -
1809 11 East. 210)

X, a ship-builder, agrees to sell a ship lying in his yard to Y for an agreed price. The ship is yet to be
rigged and fitted for a voyage and the price is to be paid on delivery. The property in the ship and the
risk will pass to Y, only when the vessel is rigged and fitted, and notice thereof is given Y.

Rule 3: When seller has to do something to the goods to ascertain price (S. 22)

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 actor 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. (S. 22)

Thus, A sells a stack of bark to B at a certain price per ton, the bark to be weighed by the agents of A and
B. Part was weighed and taken away by B, but before anything more was done, a flood carried away the
remainder. Who bears the loss, A or B?

The ownership of the residue is not transferred to B until it has been weighed according to the contract,
and B has notice thereof. Hence, the loss of the remainder, carried away by flood, is to be born by A.

II. Passing or transfer of property in the case of generic or unascer. tained goods (Ss. 18 & 23)

In the case of generic or unascertained goods, the following two rules apply:

Rule 1: Goods must be ascertained (S. 18)

Where there is a contract for the sale of unascertained goods, no property in the goods passes to the
buyer, unless and until the goods are ascertained.
If A agrees to sell to B 20 tons of oil of a certain description in his cistem, and he has more than 20 tons
of oil of that description in his cistern, no property passes to B, until the 20 tons are separated from the
rest and they are appropriated to the contract.

It may be noted that S. 18 does not lay down that property in unascertained goods passes when the
goods are ascertained. Rather, it provides that no question of passing of property can arise unless and
until such goods are ascertained. Once such goods are ascertained, the intention of the parties would
have to be looked into. Seen from another angle, S. 18 makes it clear that, whatever be the intention of
the parties, property in unascertained goods cannot pass to the buyer.

Thus, for instance, where customers of a company purchased goods for future delivery, but the
company went into winding up before any specific or segregated parcels were ear-marked for specific
customers, the Privy Council held that the customers had not become owners of such non-allocated
goods, In R. Goldcorp Exchange Ltd., (1994) 2 All E R 806)

The goods are ascertained by appropriation. An appropriation means specifying exactly the goods to
which the contract is attached. Until appropriation, there is merely an agreement to sell. The agreement
to sell becomes a sale when the goods on which the contract is to operate are ascertained.

Thus, ascertainment is a process by which the identity of the particular goods to be delivered to a
particular customer is established. As observed by Justice Pearson, if the seller merely selects or sets
apart the goods which he hopes to use to fulfil the contract, it cannot be said that the goods have been
ascertained.

Thus, there will be no transfer of property in a contract of sale of shares, if the share numbers are not
specified.

Laurie v. Dudin, (1926) 1 K. B. 223 : The defendants, who were warehousemen, held 618
quarters of maize belonging to A, who sold 200 quarters thereof to B and gave him a delivery
order, which В lodged with the defendants. The defendants did not object to the order, nor did
they make acknowledgment to B of his title. Shortly afterwards, before any appropriation of the
200 quarters had taken place, A as unpaid vendor, put a stop on delivery In a suit by B against
the warehousemen, it was held that the mere giving of the delivery order by the vendor and the
handing of it to the defendants by the plaintiffs, was not sufficient to pass the property in the
200 quarters to the plaintiffs before severance from the bulk.

Rule 2: Sale of unascertained goods after appropriation (S. 23(1)]

Where unascertained or future goods are contracted to be sold by description, and goods of the
description in a deliverable state are unconditionally appropriated to the contract by mutual
assent, - the property in the goods thereupon passes to the buyer. It is immaterial whether the
appropriation is made by the seller with the buyer's consent or by the buyer with the seller's
consent. Nor does it matter whether consent is obtained beforehand or the act of appropriation
is ratified afterwards. The consent may be express or implied,

Thus, A, having a quantity of sugar in bulk more than sufficient to fill 20 hogsheads, contracts to
sell to B, 20 hogsheads of sugar. After the contract, A fills 20 hogsheads with the sugar, and gives
notice to B that the hogsheads are ready, and requires him to take them away. B says he will
take them as soon as he can. By this appropriation by A, and assent by B, the property in the
sugar passes to B. (Rodhe v. Thwaites E-1827 6 B. & C. 388)

B agrees to purchase from A, 50 maunds of rice, out of a larger quantity of rice in A's granary. It
is also agreed that B would send empty sacks for the rice and that A would fill up those sacks. B
sends the sacks and the rice is filled therein by A However, A then changes his mind and sells the
rice (with the sacks) to C. Here, the rice has become B's property, and therefore, A cannot sell it
to C. C will get no title to the goods.

X contracts to sell to Y, 20 litres of liquor out of a cask containing 100 litres. Until 20 litres are
separated or bottled, the property in the liquor does not pass to Y (Emperor v. Kuverji Kavasji -
1941 43 B.L.R. 95)

However, the appropriation of the goods to the contract would not itself be such as to pass the
property in the goods, if it appears, or if it can be inferred, that there was no actual intention to
pass the property.

Delivery to carrier (S. 23(2)]

Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or
other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer
and does not reserve the right of disposal, he is deemed to have unconditionally appropriated
the goods to the contract.

III. Passing or transfer of property in case of goods sont on approval or "on sale or return" (Ss. 24
& 63)

Under S. 24, when goods are delivered to the buyer on approval or "sale or return", or other
similar terms, the property therein passes to the buyer

(i) when he signifies his approval or acceptance to the seller or does any other act, adopting the
transaction; or
(ii) If he does not signify his approval or acceptance to the seller, but retains the goods without
giving notice of the rejection,

(a) If a time has been fixed for the return of the goods on the expiry of such time, and

(b) if no time has been fixed for the return of the goods on the expiry of a reasonable time.
(What is reasonable time is a question of fact: S. 63)

Problem: A delivers to B a gas-meter on 1st March, 2010, on a "sale or return" basis. B returns it
in October, 2010, but A refuses to take it back and sues B for the price. Will he succeed?

Ans. : Yes. The delay is unreasonable.

Genn v. Winkel (1912 107 L. T. 434): A delivers some diamonds to Bon sale or return, and B
delivers them to Con the like terms. C delivers them to D. and while they are in D's custody, they
are lost. As B cannot return the diamonds to A, he has, by dealing with them as above, adopted
the transaction, and is liable to A for the price.

Kirkhan v. Attenborough, (1897) 1 Q. B. 201 : A went to a jeweller and took on sale or return a
diamond ring. According to the terms of the agreement, A was entitled to return the ring in
three days if he was not satisfied with it; otherwise, he was to pay the jeweller for the same. On
the next day. A pledged the ring with a money-lender and absconded. The Court held that when
goods are delivered to the buyer on sale or return", the property therein passes to the buyer
(under S. 24) when he does an act adopting the transaction. The pledge was an act by A
adopting the transaction, and therefore, the property in the ring passed to him. The jeweller
cannot recover it from the money-lender.

As seen in the above case, when a person who has received goods on sale or return basis
pledges them, he thereby does an act adopting the transaction within the meaning of this
section, so that the property in the goods passes to him, and the original vendor cannot recover
them from the person with whom they have been pledged. The case, however, would be
different if it was specifically agreed that the property in the goods was to remain with the seller
till a particular date or till a particular act was done.

In cases where goods are delivered on a "sale or return" basis, if the subject matter perishes due
to an inevitable accident, as for instance, if a horse delivered on sale or return basis accidently
dies before the expiry of the prescribed period, the risk is to be borne by the original owner,
unless, of course, the horse's accident is due to a default of the provisional purchaser, for which
he had agreed to be liable under the contract

JANGAD SALES : At one time it was believed that the term jangad sale was equivalent to a sale
on sale or return basis. The Mumbai High Court has, however, observed that jangad does not
mean sale or return, and if goods are entrusted to another on jangad terms it only means that
the goods are given for approval. Therefore, a purchaser does not obtain a good title from a
broker who has received the goods on jangad terms, unless the consent of the owner has been
obtained. (Amritlal v. Bhagwandas - 1939 Bom. 454)

DOCTRINE OF 'REPUTED OWNERSHIP' : When a person who is in possession of goods creates, so

to say, a reputation of ownership, his ownership is called, in law, 'reputed ownership'. This
doctrine of reputed ownership does not apply to goods sent on "sale or return" basis. Where it
is a well-known custom of a particular trade for dealers to hold goods on sale or return, a person
so holding anything in the way of that trade is not a reputed owner, nor does he become so by
selling, or endeavouring to sell, the goods.

EFFECTS OF PASSING OF PROPERTY (Ss. 25-26)

RISK PASSES WITH PROPERTY : The above discussion has dealt with the law as to passing of
property. Now, assuming that the property has passed to the buyer, what are the effects of such
passing of property? The general rule is that when goods have become the property of the
buyer, he must bear any loss arising from their destruction or injury, whether delivery has been
made or not

But this rule, viz., that risk passes with property, is not an inflexible rule, but a prima facie one.
Risk is no test of passing of property. There is nothing to prevent the parties from contracting
that risk shall pass even before passing of property, or vice versa. There can be cases where risk
attaches though the property has not passed; this would be so if there is an agreement, express
or implied, between the parties or any usage of the particular trade to that effect. However, if
the buyer is to be saddled with the risk before the property vests in him, the inference must be
clear.

A few illustrations will clear this point:

1. M contracts to sell to N his stack of firewood standing on his (M's) premises, the firewood to
be allowed to remain on M's premises till a certain day, and not to be taken away till paid for.
Before payment and while the firewood is on M's premises, it is accidently destroyed by fire. N
must bear the loss.

The buyer must bear the loss in such a case, as this is an unconditional contract for the sale of
specific goods in a deliverable state. S. 20 applies in such a case, and the property and risk pass
on to the buyer, as soon as the contract is made, although both payment and delivery are
postponed.

2. X bids for 700 for a China vase at a sale by auction. After the bid, it is accidentally broken. If
the accident happens before the hammer falls, the loss falls on the seller; if thereafter, the loss
will be that of X, the buyer.
 3. T bought a horse for 1,000 from H, stipulating for five days' trial. The horse was delivered to T,
but before the expiration of the five days, the horse died without any default on the part of T. H
sued T for the recovery of 3 1,000. It was held that H could not recover. (Head v. Tatterstall ,
(1871) L.R. 7 Ex. 7)

This general rule (discussed above) is enunciated in S. 26 thus:

Unless otherwise agreed upon, 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.

However, if delivery has been delayed through the fault of either buyer or seller, the goods are
the risk of the party in default as regard any loss which might not have occurred but for such
default.

Further, the above rules do not affect the duties or liabilities of either seller or buyer as a bailee
of the other party. (S. 26)

In the following two cases laid down by S. 25 of the Act, the property in the goods does not pass
to the buyer, viz.

1. The property in goods, whether specific or unascertained, does not pass, if the seller reserves
a right of disposal of the goods: S. 25(1).

Where goods are shipped or delivered to a railway administration for carriage by railway, and by
the bill of lading or railway receipt, as the case may be, the goods are deliverable to the order of
the seller or his agent, the seller is prima facie deemed to reserve the right of disposal : S. 25(2).

2. Where the seller of goods draws on the buyer for the price, and transmits to the buyer the bill of
exchange together with the bill of lading (or, as the case may be, the railway receipt) to secure
acceptance or payment of the bill of exchange, the buyer is bound to return the bill of lading or
the railway receipt, if he does not honour the bill of exchange. If he wrongfully retains the bill of
lading or the railway receipt, the property in the goods does not pass to him: S. 25(3)

B. TRANSFER OF TITLE ON SALE (SS. 27-30)

Sections 27 to 30 lay down the law as to transfer of title on sale.

'NEMO DAT QUOD NON HABET' : The general rule is that the seller cannot give to the buyer of
goods, a better title to the goods than he has himself. This is expressed by the maxim, "Nemo dat
quod non habet": No one can give who has not. So, if a person acquires possession of property by
theft and sells it to another, the buyer acquires no title, though he may have acted honestly and may
have paid value for the goods. In such cases, the real owner of the goods is entitled to recover
possession of the goods without paying anything to the buyer. This may result in hardship to the
innocent buyer, but the rule is deemed necessary in the larger interests of society and for security of
the property

Thus, the general rule of law is that no man can transfer a better title to another than he himself
possesses. This is expressed by the maxim, Nemo dat quod non habet. A person, however innocent,
who buys goods from one who is not the owner, obtains no property in them whatsoever.

This general rule is recognised in S. 27 of the Act, which states as follows:

Where goods are sold by a person who is not the owner thereof, and who does not sell them under
the authority or with the consent of the owner, the buyer acquires no better title to the goods than
what the seller had.

Cases : A person finds a gold ring, and having been unable to trace its rightful owner, sells it to X,
who does not know that the ring was a lost one. Under these circumstances, the true owner is
entitled to recover the ring from X. (Farguharson Bros. v. King & Co., (1902) A.C. 325)

A horse is sold at a public auction. Unknown to the auctioneer and the buyer, the horse is a stolen
one. The true owner has a better title to it than the (innocent) buyer. (Lee v. Bayes, (1856) 18 C.B.
599)

Exceptions

To the rule that a seller of goods cannot give to the buyer a better title than he himself has over
them, there are nine important exceptions, as follows:

Exception 1: Sale with the consent or authority of the owner

Exception 2: Title by estoppel Exception 3: Sale by mercantile agent Exception 4 : Sale by one of
Joint owners

Exception 5: Sale by a person in possession under a voidable contract Exception 6: Sale by seller in
possession after sale

Exception 7: Sale by buyer in possession before property has vested in him

Exception 8: Sale by unpaid seller when he exercises his right of lien or stoppage in transit

Exception 9: Sale in market overt. Each of these is considered below in necessary details.

Exception 1 : Sale with the consent or authority of the owner (S. 27)

Even if a person is himself not the owner of the goods, he can sell such goods if so authorised by the
owner, or if the owner consents to such sale. In such cases, the sale is valid because it is with the
owner's full consent or authority

Exception 2: Title by estoppel (S. 27)

The second exception to the general rule that a person cannot pass a better title than he has occurs
in cases where the owner of the goods is, by his conduct, precluded or estopped from denying the
seller's authority to sell. S. 27, therefore, provides that where goods are sold by a person who is not
the owner thereof, and who does not sell them under the authority or with the consent of the
owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the
goods is by his conduct, precluded from denying the seller's authority to sell.

So, where the owner, by his words or conduct, causes the buyer to believe that the seller was the
owner of the goods or had the owner's authority to sell them, and induces him to buy them in that
belief, he cannot afterwards set up the seller's want of title or authority to sell. For instance, X is the
owner of certain goods, but he behaves in such a manner as to lead A to believe that Y is the owner
of those goods or that Yhas X's authority to sell them; consequently, A buys the goods from Y. Here,
X is precluded by his conduct from disputing A's title to the goods.

It is to be noted that estoppel may arise in different ways, e.g, if the owner stands by while the sale
takes place or if he actually assists the sale. However, mere carelessness of the owner will not raise
an estoppel against him.

Exception 3 : Sale by a mercantile agent (S. 27)

The third exception to the general rule mentioned above is to be found in the case of sale made by a
mercantile agent.
S. 2(9) defines the term thus: "Mercantile agent" means a mercantile agent, having, in the
customary 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.

S. 27 provides that where a mercantile agent is, with the consent of the owner, in possession of the
goods, or of a document of title to the goods, any sale made by him in the ordinary course of
business, shall be binding on the owner, provided that

(a) the buyer acts in good faith; and

(b) at the time of the contract of sale, the buyer has no notice that the seller has no authority to sell.

It will be seen that the following six conditions are essential to validate a sale by a mercantile agent
of goods belonging to a third party:

1. The sale must be a sale by a mercantile agent (as defined above). A warehousekeeper or a servant
or the wife of the seller are not mercantile agents.

2. The mercantile agent must be in possession of the goods or of a document of title to the goods.
(As to what is a "document of title to the goods", see S. 2.)

3. . Such possession should be with the consent of the true owner.

4. The sale must be made by him when acting in the ordinary course of business of a mercantile
agent.

5. The buyer must act in good faith.

6. At the time of the contract of sale, the buyer must have no notice that the seller had no authority
to sell.

Falks v. King, (1923) 1 K. B. 282: A entrusted a motor-car to a mercantile agent for sale, stipulating
that the car should not be sold below a certain price. The agent professed to agree to this, but
intended from the outset to sell the car at such price as he could obtain, and misappropriate the
proceeds. He sold it to B, who bought it in good faith, for less than the stipulated price and
absconded. Subsequently, B sold the car to C. A sues C to recover the car from him. Can C resist the
claim?

Under Sec. 27, the sale of the car by mercantile agent to B is valid, and the sale cannot be challenged
by A. It is to be noted that the intention of the mercantile agent to defraud the principal in no way
affects the purchaser, B.C, who subsequently purchases the car from B, acquires a good title, as he
stands in the shoes of B. Therefore, C can resist the claim of A.

Problem: A, the owner of a motor-bus, leaves the certificate of registration in the bus. (The
certificate is equivalent to a document of title.) B, the driver of the bus, procures, by forgery, its
alteration in his own name, and sells the bus to C, a bona fide purchaser for value. Is C entitled to
the bus?

Ans.: S. 27 confines the power of sale to mercantile agents only. B is not A's mercantile agent. Nor
does he have the consent of the owner. Therefore, is not entitled to the bus.

Exception 4: Sale by one of the joint owners (S. 28)

The next exception to the general rule, that a person cannot pass a better title than he has himself,
is where a sale is effected by one of joint owners. S. 28 govems such a case, and provides as follows:

If one of several joint owners of goods has the sole possession of such goods, with the permission of
the co-owners, the property in the goods is transferred to any person who buys them from such
joint owner in good faith, and has not, at the time of the contract of sale, notice that the seller has
no authority to sell.

Thus, if A and B are joint owners of certain goods, and B allows A to remain in exclusive possession
of the goods, A can make a valid sale of them to any one who buys such goods in good faith.

In order that S. 28 may apply, the following four conditions must be fulfilled:

1. The joint owner must have sole possession of the goods.

2. Such possession must be with the permission of the other coowner or co-owners.
3. The buyer must act in good faith.

4. At the time of the contract of sale, the buyer must have no notice that the co-owner had no
authority to sell.

Exception 5: Sale by a person in possession under a voidable contract (S. 29)

When the seller of goods has obtained possession thereof under a contract which is voidable under
Sec. 19 or Sec. 19A of the Contract Act, 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. (S. 29)

SCOPE OF S. 29: This is the fifth exception to the general rule that no person can pass a better title to
the goods than he himself possesses. This exception operates in favour of a bona fide sub-purchaser
of goods from one who is in possession of goods under a contract which is voidable at the option of
the vendor, but which fact is not known to the sub-purchaser. If, for example, the original seller has
been induced to sell by some misrepresentation on the part of the buyer, he is entitled to avoid the
contract, on discovering the misrepresentation, but this right exists only so long as no interests of
any third person have intervened. If therefore, before it be exercised, the purchaser has sold the
goods in question to a sub-purchaser, the latter, if acting bona fide, gets a good title.

In other words, if a bona fide purchaser buys goods from a person who has obtained their
possession from the original vendor under a voidable contract (e.g., by coercion, undue influence,
fraud, misrepresentation, etc.) he acquires a good the title, in spite of the seller's defect of title, if he
does so prior to of the contract by the original vendor

In order that S. 29 may apply, the following three conditions must be satisfied:

1. The seller must have obtained possession of the goods under a voidable contract.

2. Such a voidable contract must not have been rescinded at the time of the sale.

3. The buyer must have bought the goods —

(a) in good faith, and

(b) without notice of the seller's defect of title.

Thus, Z, by misrepresentation not amounting to cheating, induces Yto sell and deliver to him a
horse. Z sells the horse to X before Y has rescinded the contract. X buys the horse in good faith, and
without notice of Z's defective title. The property in the horse passes to X and Y cannot get the horse
back, although he is entitled to compensation from Z.

Higgons v. Burton, (1857) 26 LJ Ex. 342: A, by falsely representing that he is authorised by B to

purchase and take delivery of goods on B's behalf, obtains possession of goods from C. He re-sells
them to D. Now, in order that S. 29 should apply, the goods must be obtained in pursuance of a
contract. In the given problem, goods are delivered to A, not in pursuance of, but despite the
contract. He has obtained the goods by means of false pretences without any contract of sale to
himself. He acquires, and can give, no title whatever Therefore, D acquires no title as against C.

Exception 6 : Seller in possession after sale (S. 30(1)]

Where a person, having sold goods, continues or is in possession of the goods (or of the documents
of title to the goods) - the delivery or transfer by that person, or by a mercantile agent acting for
him, of the goods (or documents of title) under any sale, pledge or other disposition thereof to any
person receiving the same in good faith and without notice of the previous sale, has the same effect,
as if the person making the delivery or transfer had been expressly authorised by the owner of the
goods to make the same.

This exception operates in favour of a bona fide purchaser from a seller who continues in possession
of the goods after the sale. When a seller, after selling his goods, remains in possession thereof (or
of the documents of title) he (or his mercantile agent) may sell them to a third person, and if such
third person obtains delivery of the goods in good faith and without any notice of the previous sale,
he takes a good title, notwithstanding the fact that the property in the goods passed to the first
buyer.

Thus, A sells goods to B. B, for his own convenience, leaves the goods with A, who fraudulently sells
the goods to C, who buys them in good faith and without notice of the sale to B. C gets a good title
to the goods. The delivery of the goods by A to C has the same effect as if A was expressly
authorised by B to deliver the goods. The transaction would be equally valid if A pledged the goods
to C. (In such cases, B would, of course have a remedy against A.)
Problems

1. B buys goods from A on payment, but leaves the goods in the possession of A. A then pledges the
goods to C, who has no notice of the sale to B. Advise C.

Ans. : This case falls under S. 30(1). A seller left in possession of the goods sold may make a valid
pledge thereof, provided the pledgee acts in good faith and has no notice of the previous sale; see S.
30(1). Therefore, the pledge is valid, and C can enforce it

Exception 7 : Buyer in possession before property has vested in him (S. 30(2)]

Where a person having bought (or agreed to buy) goods obtains, with the consent of the seller,
possession of the goods (or the documents of title to the goods), the delivery of transfer by that
person (or by a mercantile agent acting for him) of the goods or documents of title, under any sale,
pledge or other disposition thereof, to any person receiving the same in good faith and without
notice of any lien or other right of the original seller in respect of the goods, has effect as if such lien
or right did not exist.

The exception operates in favour of a bona fide purchaser from a buyer who is in possession of the
goods, though the property in them has not passed to him. If a buyer obtains possession of the
goods, with the consent of the seller, before the property in them has passed to him, and then, he
sells, pledges or otherwise disposes of such goods to a third person, and if such third person obtains
delivery of the goods in good faith without any notice of any lien or other right of the original seller
over the goods, - he will get a good title to such goods.

Thus, X, a furniture dealer, delivered furniture to Y under an agreement of sale, whereby Ywas to
pay the price of the furniture in three installments, the furniture to become the property of Y on
payment of the last instalment. Before he had paid the last instalment, Ysold the furniture to Z, who
purchased it in good faith. X brought a suit against Z for the recovery of the furniture on the ground
that Z had no title to it.

Here, Y who has agreed to buy the furniture, obtains possession of the furniture with the consent of
X, the seller. Therefore, Z, who purchases the furniture from Yin good faith, gets a good title to it,
and X's suit will fail, provided Z has received the furniture without notice of any lien or other right of
Xin respect of such furniture.
Exception 8: Sale by unpaid seller when he exercises his right of lien or stoppage in transit (S. 54]

Under S. 54, an unpaid seller is authorised to resell the goods within a reasonable time if the buyer
does not pay or tender the price within a reasonable time :

(a) if the goods are of a perishable nature; or

(b) if the unpaid seller has given notice of his intention to resell to the buyer. (S. 54 is discussed at
length in Chapter 5.)

Exception 9 : Sale in market overt

Under English law, there is an additional exception in the case of a sale in market overt. "Market
overt" means an open, public and legally constituted market. For instance, in the city of London, all
shops are considered to be market overt for the purposes of their own trade, provided that goods
are sold in the ordinary hours of business on business days, and the whole transaction takes place in
an open part of the shop. When goods are sold in market overt, according to the usage of the
market, the buyer acquires a good title to the goods, provided he buys them in good faith and
without notice of any defector want of title on the part of the seller.

But the English law as to sale in market overt has no application in India. Even in England, the law as
to sales in market overt has long ceased to be of any general importance, in view of the large
number of limitations placed on such a sale. The rule is also not recognised in the United States.

PERFORMANCE OF THE CONTRACT

Chapter 4

(Ss. 31-44)

RULES AS TO DELIVERY (Ss. 31-44)

Sections 31 to 44 lay down certain rules relating to delivery of goods. The term "delivery" has been
defined in S.2, as meaning the voluntary transfer of possession from one person to another. This
definition is identical to the one contained in the English Sale of Goods Act. Pollock's definition is
similar; he defines the term as "voluntary dispossession in favour of another."

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. Unless otherwise agreed, delivery of the 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. (Ss. 31 & 32)

Delivery may be made by doing anything which has the effect of putting the goods in possession of
the buyer or of a person authorised to hold them on his behalf. A delivery of part of the goods, in
progress of the delivery of the whole, amounts to a delivery of the whole; but if such delivery is
made with an intention of severing it from the whole, it does not operate as a delivery of the whole.
(Ss. 33 & 34)

The seller is not bound to deliver goods until the buyer applies for delivery. Demand or tender of
delivery must be made at a reasonable hour. If no place is designated by the contract, the general
rule is that the goods sold are to be delivered at the place where they are at the time of sale (or
agreement to sell), and if the goods are not then in existence, at the place at which they are
manufactured or produced. (Ss. 35 & 36)

Where the seller has to give delivery by sending the goods to the buyer, he must do so within a
reasonable time, if no time is fixed. When the goods are in the hands of third person, there can be
no delivery to the buyer, unless the third person acknowledges that he holds them on the buyer's
behalf. The costs incidental to such delivery are, as a rule, to be borne by the seller. (S. 36)

Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by installments.
An agreement for delivery by installments, however, is frequently made expressly, and may also be
inferred (i) from the circumstances of the case, or (ii) from nature of the contract. (S. 38)

Where there is an agreement for delivery by installments which are to be separately paid for, and –
(1) the seller makes no delivery, or makes a defective delivery in respect of one or more
installments; or

(2) the buyer neglects or refuses to take delivery or to pay for one or more installments,

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. (S. 38)

Renter v. Sala, (1899) 48 L.J. 492: X buys from Y, 25 tons of pepper by October-November shipment.
Y shipped 20 tons in November and 5 tons in December. The question to be decided in this case was
whether X could reject the goods, and if so, to what extent. The Court held that the case was
governed by S. 38 of the Act, under which, unless otherwise agreed, the buyer of the goods is not
bound to accept delivery thereof by installments. Therefore, X is entitled to reject the entire pepper,
although a portion of it, viz., 20 tons, satisfied the terms of the contract.

Examples of delivery

1. A in France, places an order on B, a trader in Mumbai, for 100 bags of jute, and sends his (A's) ship
to Mumbai for transporting the jute bags. As soon as the jute is put on board A's ship, it constitutes
delivery to A.

2. X sells to Y, 100 bales of cotton which are in the possession of a warehouseman. X gives a Delivery
Order to the warehouseman, directing him to transfer the cotton to Y. The warehouseman
thereupon transfers the cotton to Y. This constitutes a delivery to Y.

3. Psells to Q 10 bags of toor dal, locked in P's godown. He gives to Q the key to the godown, so that
Q may take the bags. This is delivery of the dal to Q, as delivery of the key is a symbolic delivery of
the goods in the godowon.

4. X sells to Y, certain goods which are locked up in a steel trunk, but retains the key of the trunk
with him. There is no delivery of the goods to Y.
5. A ship arrives at the Mumbai harbour with cargo which is consigned to X, the buyer. The Captain
of the ship begins to unload the cargo, and delivers part of it to X in progress of the delivery of the
whole cargo. This is a delivery of the cargo to X for the purpose of passing the property in the entire
cargo to X.

6. X sells a stack of firewood to Y, to be paid for by Y on delivery. After the sale, with X's permission,
Y takes away some of the firewood. This does not operate as a delivery of the whole.

7. Psells 100 litres of linseed oil to Q, the oil remaining in P's cistems, After the sale, Q sells 80 litres
thereof to Rand requests P to deliver 80 litres thereof to R, which is done. This does not operate as a
delivery of the whole.

8. Xagrees to sell goods to Y, to be delivered in three installments in January, February and March,
and to be paid for within 14 days after delivery, it being agreed that all payments are to be made on
the due date, as a condition precedent to future deliveries. Y fails to pay within 14 days of the
delivery of the first instalment in January. X can refuse to make deliveries in February and March (E
Vale & Co. v. Blaina Iron Co. 1901, 6 C.C. 33)

9. X agrees to sell 10,000 bags of castor seeds to Y, to be shipped by steamer, with monthly
deliveries of 2,000 bags, payment terms being "cash on delivery". X shipped 1490 bags on 12th
December and 510 bags on 17th December. The buyer, however, refused to accept the goods, as
each delivery was less than 2,000 bags. The Court held that he was not entitled to do so, as 2,000
bags were shipped in December, as per the contract. (Simson v. Gorachand 1883 9 Cal. 473)

10. A agreed to sell 4,000 maunds of grass to B. The grass was to be supplied in wagons to be
provided by Bfrom time to time every month. Each wagonload was to be paid for separately. After
less than half the quantity was supplied, B did not send the wagons, although requested to do so by
A. It was held that the contract was one entire contract, and Bhad committed a breach thereof.
(Sriram v. Sagarmal, AIR 1975 Orr. 8)

Delivery of a wrong quantity (S. 37)

Delivery of a wrong quantity may be due to:

 (i) Short delivery, (ii) Excess delivery (iii) Mixed delivery

(i) Short delivery : In case the seller makes a short delivery, (i.e., he delivers a quantity of goods less
than what he had contracted to sell), the buyer may reject the goods which are delivered. If he
accepts them, he must pay for them at the contract rate: S. 37(1).

Thus X agrees to sell to Y, 100 kilos of basmati rice, but delivers only 90 kilos. Y weighs the rice and
accepts it. He cannot afterwards object to the short delivery, and must pay X for 90 kilos of rice at
the agreed rate.

Beck etc. v. Syzmanoski, (1924) A.C. 43 - A sells to B, 2.000 gross of "200 yards reels" of sewing cotton.
After taking delivery and paying for the goods, B finds that the length of the cotton per reel is less than
200 yards, the average shortage being about 6 per cent. This is a case of short delivery. B is entitled to
damages. He may also reject the goods.

(ii) Excess delivery : In case the seller makes a delivery in excess of contract quantity-the buyer may
reject the excess, or even the whole. If he accepts the whole, he must pay for the same at the contract
rate : S. 37(2).

A orders to B. two dozen bottles of wine. B sends 5 dozen. What are the rights and liabilities of A ?-This
is a case of delivery in excess of the contract quantity. A is entitled to reject the whole. Or, he may
accept 2 dozen, and reject the rest. But, if he accepts all the 5 dozen, he must pay for them at the
contract rate.

(iii) Mixed delivery : In case the seller makes a delivery of contract goods mixed with the other goods,
-the buyer may accept the goods which are in accordance with the contract and reject the rest, or he
may reject the whole : S. 37(3).

However, when the goods which are delivered are of the same description as those which were ordered,
but are of inferior quality, there is no mixture as contemplated by S. 37(3), and the buyer cannot reject
those only which are of inferior quality, and keep the rest; his option is to accept or reject all.

Moore & Co. v. Landauer & Co., (1921) 2 K.B.519 - A contracted to sell to B. 4,000 tons of pearl starch,
the starch to be packed in bags of 280 lbs. each. When the goods arrived, it was found that 3,000 tons
were in 280 lbs. bags and the remaining 1,000 were in 140 lbs. bags. Thereupon, B rejected the whole
consignment. A brought a suit against B for damages for nonacceptance. A also contended that B was, in
any event, bound to accept the 3,000 tons which were in 280 lbs. bags. Here, A has delivered goods to B,
mixed with other goods. B may, therefore, reject the whole consignment under S. 37(3).

Campbell & Co. v. Bullen & Gatenby, 1908 SC 490 --Xagreed to sell tins of canned fruit to y, the tins to be
packed in cans of 30 tins each. However, about half the agreed quantity was packed by X in cans
containing 24 tins each. It was held that Y was entitled to reject all the cans, including those which were
properly packed as per the contract. It is irrelevant that the market value of the consignment remained
the same.

Nicolson v. Bradfield Union, 1866 LR 1 Q B 620 - X agreed to sell a specified quantity of "Ruabon coal" to
Y. He sent one lot containing 15 tons of Ruabon coal and 7 tons of ordinary coal to Y. The entire lot can
be rejected by Y, as not being according to the contract.

Problem: A contracts with B to buy 100 tons of cane sugar. B delivers to A 75 tons of cane sugar and 25
tons of beet sugar. Advice B as to his rights. Would the answer be different if B delivers only 75 tons of
cane sugar?

Ans. : Where A contracts with B to buy 100 tons of cane sugar, but B delivers 75 tons of cane sugar and
25 tons of beet sugar, it is a case of mixed delivery, and A may either

(1) accept 75 tons of cane sugar which are in accordance with the contract, and reject 25 tons of beet
sugar which are of a different description; or

(2) reject the whole sugar.

If B delivers only 75 tons of cane sugar, it is a case of short delivery, and A may reject the sugar; but if he
accepts it, he will have to pay for it at the contract rate.

The above provisions are subject to any usage of trade, special agreements or course of dealing
between the parties : S. 37(4).

Delivery to carrier or wharfinger (S. 39)

S. 39 of the Act regulates the law when delivery of goods is made to a carrier or wharfinger. The section
can be summarised thus:

Delivery of goods by the seller to a carrier or wharfinger (whether named by the buyer or not) is prima
facie deemed to be delivery to the buyer. The seller must also make such a contract with the carrier (or
wharfinger) on behalf of the buyer, as is reasonable in the circumstances. If he fails to do so, and the
goods are lost or damaged in transit, the buyer can take a stand that delivery to the carrier (or
wharfinger) did not constitute a delivery to him (i.e., he can refuse to pay for the goods); alternately, he
may hold the seller responsible in damages. When the goods are to be transmitted by sea-route, the
seller has, as a rule, to give notice to the buyer to insure the same, and if he fails to do so, he has to take
the risk of the same during such sea-transit.

EFFECT OF DELIVERY TO CARRIER OR WHARFINGER - It is a wellsettled rule that where a tradesman

orders goods to be sent by carrier, though he does not name any particular carrier, the moment the
goods are delivered to the carrier, it operates as a delivery to the purchaser, and the same rule applies
to delivery to a wharfinger.

Thus, B at Agra, orders from A, who lives at Kolkata, three casks of oil to be sent to him by railway. A
sends three casks of oil without conforming to the rules which must be complied with in order to render
the railway company responsible for their safety. The goods do not reach B. There has not been
sufficient delivery to charge B for the price.

It is also well-settled that it is the seller's duty to do whatever is necessary to secure the responsibility of
the carrier for the safe delivery of the goods, and to put them into such a course of conveyance, so that
in the case of loss the buyer might have his remedy against the carrier. (Clarke v. Hutchins, (1811) 14
East, 475)

Examples

1. Psells R, certain specific goods which are locked up in a godown. P gives the key of the godown
in order that he may get the goods. This is a delivery.

2. Q sells to R, 80 maunds of sugar in the possession of a warehouseman, S. Q gives R an order to Sto

transfer the sugar to R, and S assents to such order and transfers the sugar in his books to R. This is a
delivery.
3. X, in Mumbai, orders 200 sacks of potatoes from Y, a merchant in Karachi, and sends his own ship
to Karachi for potatoes. The putting of potatoes on board the ship is a delivery to X.

4. M, in Ahmedabad, orders from N, residing in Kashmir, 500 woollen shawls, to be sent to him by
railway. N takes the shawls directed to M to the railway station, and leaves them there without
conforming to the rules which must be complied with in order to render the Railway Company
responsible for their safety. The goods do not reach M. There has not been a sufficient delivery to
charge M for the price.

THREE FORMS OF CONTRACT INVOLVING SEA TRANSIT - Very often, contracts of sale involve transit
of the goods by sea. The commonest forms of such contracts are (1) F.O.B. (2) C.LF. and (3) EX-SHIP.
The main features of these three types of contract are discussed below. It may also be noted that it
is open to the parties to vary the terms to suit their convenience, e.g., some c.i.f. terms may be
introduced in a f..b. contract, and so on. The main features of these contracts are considered below.

1) F.O.B. CONTRACT

Its meaning-It means "free on board". Many mercantile contracts are entered into on F.O.B. terms.
Under this kind of contract, the seller has to put the goods on board the ship at his own expense. As
soon as the goods are placed on board a ship and in proper charge of custody of the master of the
ship, the vendor ceases to be liable, and the purchaser is thenceforth liable.

Thus A, in Kolkata, orders goods from B, a merchant of London. The contract contains a stipulation
that B shall deliver the goods "f.o.b.". This would mean that B, the seller, is put the goods on board
at his own expense. As soon as the goods are put on board, the property and the risk passes to A,
the buyer. The goods are at A's risk, and he is responsible for the freight, and subsequent charges,
including insurance. But B, the seller, has in such a case to give such notice to A, the buyer, as may
enable A to insure the goods. If B fails to do so, the goods are deemed to be at his risk during the
transit, unless A, the buyer, has information about the shipment so as to enable him to insure the
goods.

Duties of the seller in a F.O.B. contract

1. The seller must deliver goods on board at his own expense.

 2. He must give notice of shipment to the buyer to enable him to insure goods. Failing to give such
a notice, the seller must take the risk during the voyage, unless the buyer waives notice or had it
from another source, sufficient to enable him to insure.

3. If prevented from shipping the goods by the buyer's failure to namea ship, the proper remedy for the
seller is to sue for damages for nonacceptance, and not for the price.

Duties of the buyer in a F.O.B. contract

1. The buyer cannot claim delivery of the goods before shipment.

2. He must apply for licences to export or import, if necessary.

Goods

1. When placed on board, the goods are deemed to be delivered, and the seller's liability ceases.

2. After being shipped, the 3. The property in the goods passes to the buyer when they are put on board
the ship

3.the property in the goods passes to the buyer when they are put on board the ship

It may be noted that similar rules also apply for FOR (Free on Rail) and F.O.T. (Free on truck) contracts.

(2) C.I.F. CONTRACT

Its meaning - "C.I.F." stands for "cost, insurance and freight. This type of contract is quite popular in
mercantile transactions. A contract on C.F. terms means a contract at a price to cover cost, insurance
and freight AC.I.F.contract is one in which the seller agrees to sell the goods at a price which is inclusive
of the cost of goods, insurance and freight.

Its features - The essential feature of a CJ.F. contract is that performance is satisfied by delivery of
documents, and not by actual delivery of goods. A C.I.F. contract is, however, not a mere sale of
documents, though the buyer has to pay against delivery of documents. It is a sale of goods which are
deliverable by means of documents, in other words, delivery of documents is only a symbolic delivery of
the goods.

Seller's duties under a C.L.F. contract

In the absence of any special provisions to the contrary, the seller is bound under such a contract, to do
the following:

1. The seller must make out an invoice of the goods sold. The invoice shows the cost of the goods.

2. The seller must ship, at the port of shipment, goods of the description contained in the contract. If the
goods shipped do not correspond with the contract description, there is a breach of contract when the
goods are shipped. The seller has to ship the goods at the place of shipment within the time named in
the contract or within a reasonable time.

3. The seller must procure a contract of affreightment (bill of lading) under which the goods will be
delivered at the destination contemplated by the contract. The bill of lading shows, inter alia,
the date of shipment and the freight.

4. The seller must arrange for an insurance upon the terms current in the trade, which insurance
would be available for the benefit of the buyer. If the goods are not covered by an effective policy,
there is a breach of the contract, even if the goods arrive safely.

5. Lastly, the seller must, with all reasonable despatch, send and tender to the buyer, these shipping
documents, namely, the invoice, bill of lading and policy of insurance, so that the buyer may obtain
delivery of the goods if they arrive, or recover for their loss if they are lost on the voyage. If no place
is named in the contract for the tender of the documents, they must prima facie be tendered at the
residence or place of business of the buyer.

Duties of the buyer

Under a C.I.F. contract, the seller has done his duty when he has tendered the necessary documents
to the buyer. The buyer is then bound to accept the documents if they are complete and regular,
and pay the price irrespective of the arrival of the goods. He is bound to do so even if the goods are
destroyed, for he has a remedy against the insurer of goods.

In such a contract, the buyer is also not entitled to inspect goods before payment. He is bound to
pay against the delivery of documents, whether the goods have arrived or not. In a C.I.F. contract,
the buyer may reject the goods if they are not in accordance with the contract, even though
property has passed to him.

If the goods are lost in transit or arrive in a damaged condition, the buyer has his remedy under the
policy of insurance or against the carrier under the contract contained in the bill of lading. Whether
in any particular case, a particular remedy is available to him or not depends, of course, on the
terms of the policy of insurance and the bill of lading.

This is often a vexed question. Ultimately, it is a question of intention in each case, depending upon
the terms of a contract. If the goods are not in accordance with the contract, the property does not
pass to the purchaser upon his taking up the documents, if he had not at that time an opportunity of
ascertaining whether the goods are in conformity with the contract; alternately, it can be said that
the property in the goods passes, subject to its being revested when the buyer exercises his right of
rejection.

The Supreme Court went into a detailed analysis of this question in Mahabir Commercial Co. Ltd. v.
C.I.T. (A.I.R. 1973 S.C.430). It observed in this case, that in all such transactions, the time and place
of appropriation are important elements for determining when the property in the goods passes to
the buyer.

In the case of C.I.F. contracts, the question whether the property in the goods has passed from the
seller to the buyer depends entirely on the question whether the seller has parted with the control
over the disposal of the goods, He may intend to do this if he endorses the bill of lading in favour of
the purchaser. But if he endorses the bill of lading in blank and hands it over to his agent for
delivery, with instructions that he should not hand it over until the goods are paid for, or where the
seller sends the bill of lading with the bill of exchange to secure payment, the seller has shown in
these cases, his intention to retain the disposal of the goods under his control, and therefore, until
the payment of the price or acceptance of the draft, the property in the goods does not pass to the
buyer.

In other words, under a C.I.F. contract, prima facie, the property in the goods passes, once the
documents are tendered by the seller to the buyer or his agent, as required under the contract. But
when the seller retains control over the goods by either obtaining a Bill of Lading in his name or to
his order, the property in the goods does not pass to the buyer, until the seller endorses the Bill to
the buyer and delivers the documents to him.

(3) EX-SHIP CONTRACT

Its incidents - In the case of a contract of sale 'ex-ship', the seller has to cause delivery to be made to
the buyer from a ship which has arrived at the port of delivery, and has reached the usual place of
delivery therein for the discharge of goods of the kind in question. The seller has, therefore, to pay
freight and to provide the buyer with an effective direction to the master of the ship to deliver.

In other words, an ex-ship contract is thus one in which delivery is made to the buyer from a ship
which has arrived at the port of delivery.

Seller's duties - The seller's duties are:

(i) To deliver the goods to the buyer after the arrival of the ship at the port of delivery at a
place here such goods are usually delivered.
(ii) To pay the freight, or otherwise to release the ship-owner's lien.
(iii) (ii) To furnish the buyer with an effective delivery order.

The buyer is not bound to pay the price of the goods until the above is done.

Goods - The goods are at seller's risk during the voyage. The seller is not bound to insure the goods
on the buyer's behalf.

The parties may, however, vary the conditions of the above shipping contract by express terms.

RULES AS TO ACCEPTANCE OF DELIVERY (Ss. 41-44)

When goods which are not previously examined by the buyer are delivered to him, he is not deemed
to have accepted them, unless and until he has had an reasonable opportunity of examining them
for the purpose of ascertaining whether they are in conformity with the contract. Unless otherwise
agreed, when the seller tenders delivery of the goods to the buyer, he is under a duty, if so
requested by the buyer, to afford the buyer a reasonable opportunity to examine the goods for the
purpose of ascertaining whether they are in conformity wit the contract.

As seen earlier, in the case of sale by sample, the buyer must have a reasonable opportunity of
comparing bulk of the goods delivered with the sample. (S. 17)

It has been held that if the seller does not allow the buyer to open the cases which contain the
goods, the buyer is not bound to accept them. Isherwood v. Whitmore, (1843) 11 M & W 347)

Unless the parties have agreed otherwise, the proper place of inspection of the goods is the place of
delivery. In one case, there was a fo.b.contract for the sale of Spanish walnuts to be shipped to
England. The buyer paid the price against the shipping documents which arrived before the walnuts.
When the consignment arrived, it was found that the walnuts were not in a satisfactory condition. It
was held, that the buyer had the right to reject the goods. They had not lost the right to examine the
goods and reject them if unsatisfactory. only because they had already paid the price. (Bragg v.
Villanova, (1923) 40 TLR 154)

If the buyer transports the goods from the place of delivery to some other place, his act amounts to
acceptance of the goods - as he failed to exercise his right of inspecting the goods at the place of
delivery. In one case involving the sale of coke, the goods were delivered to the buyers at Deptford,
from where they shipped it to France. The buyers could have examined the goods at Deptford, but
postponed such examination till the goods arrived in France. The court held that they could not
reject the goods, as they ought to have examined them at Deptford, which they had not Saunt v.
Belcher & Gibbons Ltd., (1920) 90 LJKB 541)

In one case, boots bought for use of the French army were delivered at a wharf in London and the
buyers redirected them to Lille for delivery to the French authorities, who discovered paper in the
soles of the boots, rendering them useless for military use. The buyers sued for refund of the price
paid by them. It was held that it could not be said, in the circumstances of the case, that the buyers
had sufficient opportunity of examining the goods at the wharf, and therefore, they were not
deemed to have accepted them. The buyers were therefore entitled to a refund of the price paid for
the goods. (Heilbutt v. Hickson, (1872) LR 7 CP 438)

The buyer is deemed to have accepted the goods when he intimates to the seller that he has
accepted them, or when the goods have been delivered to him and he does any act in relation to
them which is inconsistent with the ownership of the seller (e.g. resale), or when he retains the
goods after a lapse of reasonable time, without intimating the seller that he has rejected them : S.
42.
The buyer is not bound to return the rejected goods. Mere intimation of the rejection to the seller is
sufficient : S. 43.

The buyer is liable for the loss caused to the seller owing to the buyer's neglect or refusal to take
delivery of the goods when ndered by the seller. The seller, in such a case, is also entitled to a
reasonable charge for the care and custody of the goods : S. 44.

Buyer's duties in case of rejection (S. 43)

As stated above, unless otherwise agreed, where goods are delivered to the buyer and he refuses to
accept them, having the right so to do, he is not bound to return them to the seller; it is sufficient if
he intimates to the seller that he refuses to accept them : S. 43.

Buyer's liability for neglecting or refusing delivery (S. 44)

When the seller is ready and willing to deliver the goods and requests the buyer to take delivery,
and the buyer does not, within a reasonable time after such request, take delivery of the goods, he
is liable to the seller for:

(i) any loss occasioned by his neglect or refusal to take delivery; and

(ii) a reasonable charge for the care and custody of the goods : S. 44.

Where the neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract,
the seller does not lose all his other rights, i.e., he may sue for the price or for damages: Proviso to S.
44.

Chapter 5

RIGHTS OF AN UNPAID SELLER AGAINST THE GOODS (Ss. 45-54)

"Unpaid seller" defined (S.45)

The seller of goods is deemed to be an "unpaid seller":

(a) when the whole of the price has not been paid or tendered; or

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

The term "seller" includes any person who is in the position of a seller, e.g.,

(i) an agent of the seller to whom the bill of lading has been indorsed; or

(ii) a consignor (or agent) who has himself paid, or is directly responsible for the price

It is clear, from what is stated above, that the seller who is partly unpaid is also covered by the term
"unpaid seller". So also, the seller will be considered unpaid, if he has accepted a bill of exchange (or
other negotiable instrument), and the buyer either fails to honour it at maturity or becomes
insolvent during its currency. On the other hand, if the buyer has tendered the full price, and the
seller has refused to accept it, the seller cannot be said to be an unpaid seller.

His rights (S. 46)

S. 46 enumerates the rights of an unpaid vendor of goods. It lays down that, notwithstanding that
the property in the goods may have passed to the buyer, the unpaid seller of goods has the
following three rights: (1) A lien on the goods; (2) A right of stopping the goods in transit; and (3) A
right of re-sale.

Where, however, the property in the goods has not passed to the buyer, S. 46 gives one more
remedy to an unpaid vendor. It lays down that where the property in 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.

The rights of an unpaid seller can be summarized thus : A. Where property in the goods has passed :
 1. Lien 2. Stoppage in transit 3. Resale.

B. Where property in the goods has not passed : 1. Lien SHT TRADA 2. Stoppage in transit 3. Resale 4.
Withholding of delivery.

1. UNPAID SELLER'S LIEN (SS. 47-49)

LIEN WHEN EXERCISED (Ss. 47-48)

The unpaid seller of goods, who is in possession of the goods, is entitled to retain their possession until
payment or tender of the price, in the following three cases:

(i) Where the goods have been sold without any stipulation as to credit;

(ii) Where the goods have been sold on credit, but the term of the credit has expired;

(ii) Where the buyer becomes insolvent: S. 47(1).

The seller may exercise his right of lien even if he is in possession of the goods as an agent or bailee for
the buyer : S. 47(2).

Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the
remainder, unless the part delivery has been made under such circumstances as to show an agreement
to waive the lien : S. 48.

LIEN UNDER S. 47 - The lien of an unpaid seller is a right to retain possession of the goods until payment
or tender of the price. The lien depends on actual possession, and not on title, and is not affected if the
seller has parted with a document capable of transferring title. So, when the seller retains actual
possession, his lien is not lost by his having given a bill of lading or a delivery order to the buyer.

Thus, Awas the owner of specific goods, lying in N's warehouse and held by Non A's account. A sold
those goods to B, and took a bill of exchange from B for the price and handed B a delivery order
addressed to N. B re-sold the goods to C and gave C a delivery order; but before C could obtain
possession of the goods, B became insolvent. Discuss the rights of A and C.
In these circumstances, A can exercise his right of lien over the goods, and even re-sell them if he wants
to. As regards C, he can sue B for damages.

Further, the unpaid seller's lien extends to the whole of the goods in his possession. He is not bound to
deliver a part of the goods on payment of a proportionate part of the price.

Moreover, it is also clarified that the unpaid seller may exercise his lien even if he had agreed to hold the
goods as an agent or bailee for the buyer. In other words, it is sufficient if he has physical and actual
possession, whatever be the character of his possession, even as an agent or bailee for the buyer.

It is also to be remembered that the lien extends only to the price. It does not extend to other claims,
like warehouse charges or other charges for keeping the goods. For such expenses, the seller has only a
personal remedy against the buyer.

Lastly, the unpaid seller is entitled to a lien only in the following three cases:

1. No stipulation as to credit : Where goods are sold, and nothing is said as to the time of delivery or the
time of payment, the seller is entitled to retain possession until the price is paid, although the property
in the goods may have passed to the buyer. Thus, on 1st January, A sells to B certain goods in A's
warehouse, and receives from B a bill payable on the 1st March. The goods are kept at B's request in A's
warehouse, and B pays rent for the same. B deals with the goods as his own, and sells part of them
which are delivered to a sub-buyer. B then becomes insolvent, and the bill is subsequently dishonoured.
A is entitled to exercise his lien in respect of the goods which remain in his warehouse.

2. Goods sold on credit : In case of goods sold on credit, the seller will have no lien unless the period of
credit has expired without payment of the price. The seller can, however, exercise this right even within
the period of credit if the buyer becomes insolvent within the period.

3. Insolvency of the buyer : In case of insolvency of the buyer, the lien is exercisable, irrespective of
whether any period of credit has been given or not.

Under S. 2 of the Act, the buyer is deemed to be "insolvent", if he ceases to pay his debts in the ordinary
course of business, or if he cannot pay his debts as and when they become due. It is not necessary that
he should have been adjudicated insolvent by a court of law. It is also not necessary that he should have
committed "an act of insolvency" under the Insolvency Acts.
However, if the buyer is facing some temporary financial problems, the seller would not be justified in
treating him as an insolvent. It should appear from his own admission or other sufficient proof that he
would not be able to pay the price of the goods within a reasonable time.

LIEN WHEN LOST (S. 49)

The unpaid vendor's lien is lost, in the following three cases:

1. Delivery to a carrier or other bailee : The lien is lost if the seller delivers the goods to a carrier
or other bailee for transmission to the buyer, without reserving the right of disposal.

2. Lawful possession by the buyer or his agent: Lawful possession by the buyer or his agent also
terminates the lien. The word "lawful" shows that the possession of the buyer or his agent must not
be obtained tortiously (i.e., by committing a tort).

3. Waiver of lien : The lien may be lost by waiver, which may be either express or implied.

(a) Express waiver : Where the contract of sale provides in express terms that the seller will not be
entitled to retain possession until payment of the price, the case is one of express waiver.

(b) Implied waiver: The lien is waived by implication:

(i) when the goods have been sold on credit,- during the currency of the credit; but the lien revives
on the expiry of the period of the credit;

(ii) when the seller takes a bill for the price payable at a future dayduring the currency of the bill; but
the lien revives if the bill is dishonoured;

(iii) if the seller assents to a sub-sale (See Sec. 53);

(iv) if the seller parts with the documents of title, so as to exclude his title by estoppel under the
provisions of Sec. 27;
(v) if the seller transfers his document of title, so as to exclude his lien; (See Sec. 53(1), Proviso);

(vi) if the seller wrongfully refuses to deliver the goods, such a refusal amounting to repudiation of
the contract;

(vii) if the seller claims to keep the goods upon some other grounds.

As the lien exists only for receiving payment of the price, it is extinguished either on payment or
tender of the price. But merely obtaining a decree for price of the goods does not destroy the lien.
The lien is, however, lost on the decree being satisfied. In short, the seller is entitled to a lien until
payment or tender of the price. A tender of the price, therefore, puts an end to the lien, even if the
seller declines to receive the money.

Case: At the request of the buyer, goods were sent by the sellers to the shipping agent of the buyer,
and were put on board the ship by those agents. Subsequently, some packing defect was noticed,
whereupon the goods were unloaded and sent back to the sellers for re-packing. While the sellers
were re-packing the goods, the buyer became insolvent. The trustee in bankruptcy demanded the
goods, which the sellers refused to give, except upon payment.

The Court held that the sellers had lost their lien by delivering goods to the shipping agents (despite
the fact that they had received them back for repacking) and that their refusal to deliver goods was
wrongful in law. (Valpy v. Gibson, 1847 4 C.B. 837)

2. RIGHT OF STOPPAGE IN TRANSIT (Ss. 50-52)

The second important right of an unpaid seller of goods is the right of stoppage (of goods) in transit.

RIGHT WHEN EXERCISED (S. 50)

When the buyer of goods becomes insolvent, the unpaid seller who has parted with the possession
of the goods has the right of stopping them in transit, that is to say, he may resume possession of
the goods as long as they are in the course of transit, and may retain them until payment or tender
of the price.
WHEN RIGHT ARISES — It is to be noted that the right of stoppage in transit arises when the seller's
lien is lost, i.e., when the goods have gone out of his possession. It thus deals with an intermediate
stage when the goods have gone out of the actual possession of the seller but have not come into
the possession of the buyer. The right consists in stopping the goods while they are in the
possession of a carrier or lodged at any place in the course of transmission to the buyer, in resuming
possession thereof, and retaining them until the price is or tendered.

CONDITIONS FOR EXERCISE OF THIS RIGHT In order that the right of stopping the goods in transitu
(i.e. stoppage in transit) may be exercised, the following four conditions must be satisfied:

1. The seller must be unpaid - The price must have been unpaid either wholly or in part; the fact that
credit is given is immaterial.

2. The buyer must have become insolvent - S. 2 lays down that a person is said to be insolvent, if he
has ceased to pay his debts or cannot pay his debts as and when they become due, whether he has
committed an act of insolvency or not. However, it is the insolvency of the buyer (and not that of the
seller) that brings the right of stoppage into play.

Thus A, sells his goods to B, and delivers the same to a carrier for the purposes of transmission to B.
A obtains possession of the goods whilst they are in transit, even though Bhas not become insolvent.
Is A entitled to do so? In the circumstances, Ais not entitled to obtain possession of the goods whilst
they are in transit, because B has not become insolvent.

Lyons v. Hoffnung, 15 App. Cas. 319, PC The buyer at Sydney instructed the seller to send the goods
when packed and marked to a named wharf in Sydney. He said that the goods were going with him.
Receipts were given by the shipowners describing the seller as the shipper, the buyer as the
consignee, and K as the place of destination. The buyer became insolvent after the goods left Sydney
and before they arrived at K. It was held that the seller could stop the goods in transitu, he having
clearly handed the goods to the shipper for transit.

Knights v. Wiffen, (1870) 5 Q. B. 660 — A sells B 80 maunds of grain out of a larger quantity. B sells
60 maunds out of these (the goods not yet being ascertained) to C. C, having a delivery order from
B, forwards it to A, who informs C that he will send the grain in due course. B subsequently becomes
insolvent. Can A refuse delivery of 60 maunds of grain to C? By informing C that he (A) will send the
grain in due course, A had recognised the title of B, the sub-buyer, and therefore, A is estopped from
exercising the lien which he has waived. He cannot refuse delivery of 60 maunds of grain to C.
3. The goods must be in transitu — Thirdly, the seller must have parted with the possession of the
goods, and the buyer must not have acquired it.

The essential features of the right is that the goods should be, at the relevant time, in transit, i.e. in
the possession of a middleman or of some person intervening between the seller, who has parted
with, and the buyer, who has not yet received, the goods. The transit begins the moment the goods
are delivered by the seller to a carrier to be carried to the buyer. The transit ends when the goods
have come into the hands of the buyer or of someone who receives them on his behalf.

4. The fourth and the last condition is that the seller must not have been prevented by any other
provision of this Act from exercising the right. So, if the buyer has in the meantime (having obtained
possession of the bill of lading or other document of title to the goods) assigned the same for value
to a bona fide purchaser, the right would be lost. (See Secs. 30(2) and 53(1)]

Cases

Rash Behari v. Narayan, 50 Cal. 399 - A in Mumbai sold and consigned 500 bales of cotton to B at
Kolkata, and sent him the bill of lading. A, being still unpaid, B became insolvent, and while the
goods were on the way, B assigned the bill of lading to C.

The Court held that a bill of lading is a document of title to goods; if the assignment of the same to C
was for consideration, and if C was not aware at that time of B's insolvency, C got a good title to the
goods, and A, though he was an unpaid seller, could not stop the goods in transit.

G.I.P. Rly. Co. v. Hammandas, 14 Bom-57 - A sold 250 bags of sugar to B and consigned them to B by
railway. B received the railway receipt and transferred it to C. Soon thereafter, B became insolvent
and failed to pay the price to A. C went to railway goodsshed, paid the freight and loaded 70 bags in
a cart. But before remaining bags were given to be loaded, a telegram from A was received stopping
the whole consignment. As the cart with 70 bags had not left the railway compound, the railway
authorities unloaded the 70 bags and refused to deliver these as well as the remaining (unloaded)
bags to C. The Court held that the Railway Company had no right to stop the goods on behalf of the
seller, merely because the cart had not left the railway compound.

C could, therefore, take the 70 bags, though not the remaining 180 bags (which were still not
delivered to him.)
STOPPAGE IN TRANSIT HOW EFFECTED (S. 52) Stoppage in transit can be effected in the following
two ways:

1. by taking actual possession of the goods; or

2. by giving notice of his claim to the carrier or other bailee in whose possession the goods are.

Such notice may be given

(a) to the person in actual possession of the goods, or

(b) to his principal. (In case the notice is given to the principal, it must be given at such time and in
such circumstances that the principal, by exercise of reasonable diligence, can communicate it to his
servant or agent in time to prevent the delivery to the buyer.)

When notice is given, the carrier or other bailee must re-deliver the goods

to the seller, who must bear the expenses of such redelivery : S. 52(2).

DURATION OF TRANSIT (S. 51) Goods when said to be "in transit” [S. 51(1)]

S. 51(1) lays down as to when goods are said to be in transit (transitu). It provides 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 other bailee.

In order to form a clear notion of the meaning of the term transit, two points should be noted. First
of all, the goods may be in transit, although they are no longer with the person to whom the seller
had entrusted them for transmission. As long as the goods have not reached their destination, it is
immaterial how many agents' hands they have passed through.

Secondly, the term does not necessarily imply that the goods are in motion. Thus, if the goods are
deposited in a warehouse with a person who holds them merely as an agent to forward them
further on, they are as much in transit as if they were actually moving. As rightly pointed out by
Cairns, L.J. in an English case, the essential feature of a transit is that the goods should be in the
possession of a middleman. (Schotmans v. Lancashire & Yorkshire Rly. Co., 1867 2 Ch. App. 332)
 When transit comes to an end

There are three cases in which the right of stoppage in transit terminates. 1. If the buyer or his agent
obtains delivery of the goods before the arrival at the appointed destination, the transit is at an end:
S. 51(2).

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 bailee for the buyer (or his agent)- the transit is at an end, and it is immaterial
that a further destination for the goods may have been indicated by the buyer: S. 51(3).

If, however, the goods are rejected by the buyer, and the carrier (or other bailee) continues in
possession of such goods, the transit is not deemed to be at an end, even if the seller has refused to
receive them back: S. 51(4).

When the goods are delivered to a ship chartered by the buyer, it will depend on the circumstances
of the particular case, whether they are in the possession of the master as a carrier or as an agent of
the buyer : S. 51(5).

2. 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 : S. 51(6).

The use of the words "carrier or other bailee" makes it clear that the word "transit" does not
necessarily mean that the goods should be in motion all the time; goods continue to be in transit
even when they are deposited with a bailee (e.g., a warehouseman) at any place in the course of
transmission to the buyer.

3.Lastly, where part delivery of the goods has been made to the buyer (or his agent), the remainder of
the goods may be stopped in transit, unless such part delivery has been given in such circumstances as
to show an agreement to give up possession of the whole of the goods : S. 51(7).

Lien Stoppage in transit 1. It is a right to retain possession. 1. It is a right to regain possession. 2. The
seller should be in posses- 2. The seller should have parted with sion of the goods. possession, but
the buyer should not have acquired possession of the goods. 3. The right of lien can be exercised 3.
The right of stoppage in transit even if the buyer is not insolvent can be exercised only if the buyer is
insolvent. ends, the right of stoppage in transit begins.
4. When the right of lien

3. RIGHT OF RE-SALE (S. 54(2) & (3)] S.

The third right of an unpaid seller of goods is that of re-sale, contained in 54(2) and S. 54(3) of the
Act.

The unpaid seller may re-sell the goods (within a reasonable time) if the buyer does not pay or
tender the price within a reasonable period, in the followingtwo cases:

(i) if the goods are of a perishable nature; or

(ii) if 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 term "perishable" is not defined in the Act. However, apart from its usual connotation in the
physical sense, as for instance, in the case of vegetables or flowers, it would also cover cases where
the goods become unmerchantable in a commercial sense, e.g. when cement gets so drenched with
water that it cannot be sold as "cement".

If any loss is occasioned by such breach of contract (and subsequent resale), the unpaid seller may
claim damages from the buyer. But, if any profit is incurred by such re-sale, the buyer is not entitled
to such profit. The person buying the goods on such re-sale acquires a good title to the goods, even
if there is a default on the part of the unpaid seller to give notice to the buyer (as stated above).

The following five propositions relating to an unpaid seller's right of resale may be noted:

(i) Before the seller exercises his right of re-sale, he should give notice to the buyer of his intention
to sell; in case of perishable goods, such notice is not necessary.

(ii) The unpaid seller can, after giving due notice to the buyer and, if the latter does not, within
a reasonable time, pay or tender the price, resell the goods within a reasonable time; he can
hold the buyer responsible for breach of contract for any loss occasioned to him as a result
 of the re-sale. If any profits arise from the resale, the seller is entitled to keep them, for law
does not put a premium upon the default of the buyer

(iii) Except in the case of perishable goods, if the seller does not give notice, he has no right to claim
damages for loss on resale from the buyer, and is under an obligation to pay over the profits, if any,
arising from the re-sale.

(iv) Whether or not the requisite notice is given, the purchaser from the seller gets an absolute and
a clear title.

(v) As in the case of a statutory right of re-sale, so in the case of a resale under a contract, the seller
must give notice to the buyer of his intention to do so, and re-sell after the lapse of a reasonable
time.

It is also provided that the exercise of the right of lien or stoppage in transit puts the vendor in the
same position as though he had never parted with the goods, but that does not rescind the contract,
unless the vendor reserves a right of re-sale in case the buyer makes default. In the latter case, he
can rescind the contract and also claim damages, if any.

Reasonable time - What is "reasonable time" is a question of fact in each case. Thus, if a re-sale is
carried on in an unusually hurried manner, without proper advertisement, such a re-sale would not
be valid. (Buchanan v. Audale, (1875) 15 B.L.R. 276)

Other remedies not barred - It may be noted that S. 54 does not deprive an unpaid seller of any
other remedy which he may have at law, e.g., in certain cases, he may be entitled to rescind the
contract under the Indian Contract Act.

EFFECT OF SUB-SALE OR PLEDGE BY BUYER (S.53)

It may also be noted that the seller's right of lien or stoppage in transit is not affected by any sale,
pledge or other disposition of the goods by the buyer, unless the seller has assented to it.
It is to be noted, however, that if a document of title to goods has been issued or lawfully
transferred to any person as the buyer or owner of the goods, and that person transfers the
document to a bona fide purchaser for value, then,

(1) if such last mentioned transfer was by way of sale,- the unpaid seller's right of lien or stoppage in
transit is defeated; and

(2) if such last mentioned transfer was by way of pledge - the unpaid seller's right of lien or stoppage
in transit can only be exercised subject to the rights of the pledgee.

Thus, A sells and consigns goods to B for the value of 12,000. B assigns the bill of lading for these
goods to C to secure the sum of 5,000 due from him to C upon a general balance of account. B
becomes insolvent. What are the rights of C? It is clear that, under S. 53, a transfer of a document of
title by way of pledge to secure a balance of account, or any other existing debt, will prevail over the
rights of an unpaid seller. Therefore, A is not entitled to stop the goods in transit, except on
payment or tender to C of 5,000.

The unpaid seller may, however, require the pledgee to have the amount secured by the pledge
satisfied in the first instance, as far as possible, out of any other goods or securities of the buyer in
the hands of the pledgee and available against the buyer.

Problems

1. X, sells 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 Railway
Receipt for cash to Z, who is not aware of Y's insolvency. Can X stop the goods in transit?

Ans.: No. Since Z has taken the Railway Receipt in good faith and for consideration, S. 53 applies,
and he gets a good title. X's right of stoppage in transit is defeated, and he cannot, therefore, stop
the goods in transit.

2. In Problem 1 (above), if Z knows that B ins vent, can X stop the goods in transit?

Ans. : Yes, The assignment from Y to Z cannot be said to be in good faith, and S. 53 will, therefore,
not apply.X will be entitled to stop the goods in transit.
EFFECT OF A SUB-SALE OR PLEDGE BY A BUYER

1. Unless the seller gives his assent, a sub-sale or pledge of the goods sold by a buyer before he has
paid the price, does not affect the seller's right of lien or stoppage in transit. The seller's assent must
be such as would show that he intends to give up his right against the goods. The mere receipt of
the information of a sub-sale or pledge does not amount to assent of the seller.

2. The seller's right of lien or stoppage in transit is, however, defeated when the buyer, after the
issue or lawful transfer of the documents of title to goods to him, transfers such documents by way
of sale to another person, who also takes them in good faith and for consideration. In such a case, if
the transfer is by way of pledge, the seller's right of lien or stoppage in transit can only be exercised
subject to the rights of the pledgee.

3. The pledge may be to secure an advance made specifically upon the document of title, or may be
to secure an antecedent debt.

A transfer of a document of title by way of pledge to secure a balance of account, or any other
existing debt, will prevail over the rights of an unpaid seller. But the facts connected with the
transfer must show that it was agreed that such debt should be the consideration. The pledge of a
document of title specifically for a definite sum does not, of itself, and without any agreement,
entitle the pledgee to hold the goods against the unpaid seller in respect of the pledgee's general
balance of accounts against the buyer, even if the pledgee is the buyer's factor.

4. The transfer of a document of title, in order to affect the unpaid seller's right, must be to a person
who takes it "in good faith". A thing is deemed to be done in good faith if it is in fact done honestly,
whether it is done negligently or not. Though knowledge of insolvency indicates absence of good
faith, knowledge that the goods have not been paid for does not necessarily show want of good
faith.

4. When the seller has stopped the goods in transit, the burden is cast upon the second buyer to
prove that when the document of title was assigned to him, he was acting in good faith and that
he gave consideration for the goods.
Chapter 6

SUITS FOR BREACH OF CONTRACT OF SALE (Ss. 55-61)

REMEDIES FOR BREACH OF CONTRACT — Ss. 55 to 61 of the Act deal with remedies for breach of a
contract of sale, either by the seller or by the buyer.

When the buyer wrongfully refuses or neglects to accept delivery or to pay for the goods, the seller
is entitled to sue for damages for non-acceptance of delivery, or for the price, if delivery of the
goods is taken by the buyer, or if the contract provides for payment of the price on a certain day,
though the delivery is to be taken at a future date. Likewise, the buyer can claim damages from the
seller for non-delivery, or can sue for specific performance of the contract in the case of specific or
ascertained goods.

When there is a repudiation of the contract before the due date of delivery, the aggrieved party can
rescind the contract and sue for damages, or treat the contract as subsisting till such date and have
his remedies under the contract. In certain cases, both the seller and the buyer are entitled to claim
interest or special damages, as the case may be.

REMEDIES FOR BREACH OF CONTRACT (Ss. 55-59 & 61)

The Act has given the following four remedies for breach of a contract of sale:

1. A suit for the price by the seller against the buyer : S. 55.

2. A suit by the seller against the buyer for damages for non-acceptance of the goods: S. 56; and by
the buyer against the seller for damages for non-delivery of the goods : S. 57.

3. A suit for specific performance by the buyer against the seller: S. 58 4. A suit by the buyer against
the seller for breach of warranty: S. 59.

1.Suit for price (S.55)

Where, under a contract of sale, the property in the goods has passed to the buyer, and the buyer
wrongfully neglects or refuses to pay for the goods according to the terms of the contract,- the seller
may sue him for the price of the goods : S. 55(1).

Problem: A sold to B 130 shares. B did not pay the price thereof. B, however, sold 30 of those shares
to a third party, and pledged the remaining 100 shares to D. Is A entitled to a decree against B for
the unpaid purchase money? Can A sue D to recover the documents, as also for damages?

Ans.: As the property in the shares has passed to B. A is entitled to a decree against B for the unpaid
purchase-money in respect of 130 shares: S. 55(1). D, being a bona fide transferee for value, A
cannot recover the documents from, or damages against, D.

Moreover, 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 : S. 55(2).

2. Suit for damages (Ss. 56-57)

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue
him for damages for nonacceptance : S. 56.

Similarly, if the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may
sue the seller for damages for non-delivery: S. 57.

Interest by way of damages and special damages (S. 61)

S. 61 of the Act gives a right to a buyer or seller to recover interest or special damages. It lays down
that this Act does not affect the right of the seller or the buyer to recover interest or special
damages in any case where interest or special damages may be recoverable, under the law, or to
recover the money paid where the consideration for its payment has failed.

The Court may award interest at such rate as it thinks fit on the amount of the price
(a)to the seller - in a suit by him for the amount of the pricefrom the date of the tender of the goods
or from the date on which the price was payable;

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

SCOPE OF S. 61 – It will be seen that S. 61 of the Act preserves the right of a party to a contract of
sale to recover special damages, that is to say, damages, "which the parties knew, when they made
the contract, to be likely to result from the breach of" (S. 73 of the Indian Contract Act). Thus, where
the breach of a contract has occasioned a special loss which was in contemplation of both the
parties at the time they made the contract, the party who suffers by the breach is entitled to claim
special damages from the other party.

3. Suit for specific performance (S.58)

The buyer can also sue the seller for specific performance of the contract to sell. S. 58 of the Act
provides that, subject to the provisions of the Specific Relief Act, in any suit for a 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. The decree may be
unconditional, or upon such terms and conditions as to damages, payment of the price or otherwise,
as the Court may deem just, and the application of the plaintiff may be made at any time before the
decree.

4. Suit for breach of warranty (S. 59)

S. 59 provides for the buyer's remedies on breach of warranty by the seller. The buyer may, in such a
case, sue the seller for damages for breach of warranty.

As seen earlier (Ch. 2), a breach of warranty, as distinguished from a breach of condition, does not
entitle the buyer to reject the goods. His only remedy is that prescribed by S. 59, whereunder he
may

(a) set up against the seller, the breach of warranty in diminution or extinction of the price; or
(b) sue the seller for damages for breach of warranty. Problems

Problem

1. A contracts to buy, from Fiat Motors Ltd., a Fiat omnibus which he has inspected, and thereafter
orders the chassis of six more. A explains orally to the Company that the cars are required for heavy
traffic on hilly roads. When the cars are delivered to A, they break down and, are found unfit for the
traffic specified. What is the remedy available to A ? It will be seen that there is a clear breach of
warranty of fitnesses. A may sue Fiat Motors Ltd. for damages under S. 59. (Bristol Tramways Co. v.
Fiat Motors, (1910) 2 K. B. 831)

2. A sells sulphuric acid to B, as commercially free from arsenic. Buses it to make the glucose, which
he sells to a brewer and the brewer uses it to make beer. The persons who drink this beer get
poisoned. Consequently, the brewer sues B and recovers damages from him. B files a suit against A
for breach of warranty and for the value of other goods of B which were spoilt by the sulphuric acid,
as also for the damages which he had to pay to the brewer, and further damages for the injury to
the goodwill of his business. A proves in the Court that he was not aware of the purpose for which
the acid was required. Will B succeed, and if so, to what extent?

In the above circumstances, B can recover from A, the price of the acid and the value of his other
goods which might have been spoilt by it, but not the damages which he had to pay to the brewer or
damages for the injury to the goodwill of his business. (Bostock & Co. Ltd. v. Nicholson & Sons Ltd.,
(1904) 1 K. B. 725)

3. A, a grocer, sells tinned salmon to B. It turns out that the salmon is unfit for human consumption
and his wife is thereby poisoned and dies. Can B recover anything from A?

Yes. B can recover reasonable expenses for the medical attendance of his wife, and of the funeral,
and also a reasonable sum for the loss of his wife's services. (Jackson v. Watson and Sons, 1909 2 K.
B. 193)

REPUDIATION OF CONTRACT OF SALE BEFORE THE DATE OF DELIVERY (S. 60)

S. 60 deals with anticipatory breach of contract of sale, and provides as follows:

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

Roper v. Johnson, (1873) L.R. 8 C.P. 167 - A agrees on 30th January to sell and deliver goods to Bon
31st August. On 10th June, B intimates to A that he will not pay for and take delivery of the goods.
Here, A may treat the contract as subsisting and wait till the date of delivery, in which case, he holds
B liable for all the consequences of non-performance, if B fails to take delivery on 31st August. Or,
he may elect to rescind the contract and immediately sue for damages, even before the date of
delivery.

It is also to be remembered that, in anticipatory breach of contract, where the other party elects to
treat the contract as subsisting, the contract is kept alive for the benefit of both the parties. And, in
such a case, the other party remains subject to all his own obligations and liabilities under it, and
enables the party in default, not only to complete the contract if so advised, notwithstanding his
previous repudiation, but also to take advantage of any supervening circumstances which would
justify him in declining to complete it. But where the other party elects to treat contract as
rescinded, he is absolved from all obligations and liabilities under it, and can have recourse to
remedial rights arising upon a breach of contract.

MEASURE OF DAMAGES — The measure of damages in the case of anticipatory breach of a contract
of sale depends on the option exercised by the non-defaulting party. If he treats the contract as
"open" and waits until the date of delivery, the damages will be the difference between contract
price and the market price on the day when the goods ought to have been delivered or accepted, as
the case may be. If, on the other hand, he treats the contract as repudiated, he can recover the
difference between the contract price and the market price on the date of repudiation. In other
words, the measure of damages, in both cases, is the loss or damage directly and naturally resulting
in the usual course of things from the breach.

As stated above, in such cases, the non-defaulting party has two options. He can treat the refusal of
the defaulting party as a breach, and immediately sue for damages. Alternately, he can keep the
contract "open", and wait till the day of performance, and thereafter, if the promise remains
unfulfilled, sue for breach of the contract. However, by keeping the contract open, he also takes the
risk of a supervening impossibility or illegality setting in and excusing the other party from
performing his obligations.

Chapter 7
AUCTION SALES (S. 64)

Auction sales are a special type of sale of goods. S. 64 governs such sales.

In an auction sale, the sale is complete when the auctioneer announces it by the fall of the hammer
or any other customary manner. Until that is done, a bidder can retract his offer.

A bidder is at liberty to withdraw his bid at any time before it is finally accepted by the auctioneer.
The bid is merely an offer, and it becomes irrecoverable only when its acceptance is announced by
the auctioneer. In short, the bidder can retract his bid till the hammer falls, or until a similar
announcement is made. So also, the auctioneer is not bound to sell the articles advertised to the
highest bidder, except when the sale is without reserve, nor is he bound to hold the auction sale on
the day advertised; his advertisement is not an offer, but a mere invitation to offer.

It is, however, open to the seller to notify that the auction sale will be subject to a reserve or upset
price.

A reserve price is the minimum price fixed by the seller to avoid sales at an unrealistically low price.
Thus, it is the minimum price below which the goods will not to be sold in any case. The reserve
price may or may not be announced at the auction.

The concept of a reserve price is to be distinguished from an upset price. The latter is announced as
the lowest price from which bidding is required to start, to ensure that the goods will not be sold
below that price.

It has been held that a condition in an auction sale that "bidding once made shall not be withdrawn"
is not enforceable. Thus, in Champalal v. Jaigopal, (45 Mad. 799), A attended an auction sale of
furniture and made a bid of 500 for a piano, but withdrew the same before the fall of the hammer.
One of the conditions of the sale, which A had read, stated that bidding once made could not be
withdrawn. The Court held that such a condition in an auction sale is not enforceable. A was,
therefore, held entitled to withdraw the bid, irrespective of the announcement that biddings once
made could not be withdrawn.

When goods are sold in separate lots, each lot is prima facie deemed to be the subject of a separate
contract of sale. This rule may, however, be excluded by clear evidence of a contrary intention.
As a general rule, the seller (or any person on his behalf) cannot bid at an auction sale, unless the
right to do so has been expressly reserved and notified. The auctioneer is also prevented from
knowingly taking such a bid from the seller. If this rule is contravened, the buyer can treat the
contract as fraudulent. In case of pretended bidding on the part of the seller to raise the price, the
buyer can treat the sale as voidable.

It is also to be noted that even when the seller has expressly reserved the right to bid at the auction,
either personally or by anyone on his behalf, only one person can bid on his behalf. If the seller
employs more than one person to bid on his behalf, it would amount to fraud. The reason is that
only one person is necessary to protect the property, and if more than one is so employed, the only
intention could be to enhance the price and this would render the sale void. [Thornet v. Haines,
(1846) 15 M & W 367]

Although S. 64 of the Act prescribes that, in such cases, only one person can bid on behalf of the
seller, it does not lay down that such a person can bid only once.

It is to be noted that where an auctioneer, disclosing the fact that he is acting as an agent, but not
disclosing the name of his principal, sells specific goods, he does not warrant his principal's title to
the goods. Thus, in Benton v. Campbell Parker & Co. (1925) 2 K.B. 410, A purchased a piano at a
public auction. Unknown to the auctioneer and A, the piano was stolen property. The question arose
whether the true owner had any claim against A The Court held, on the ground stated above, that A
obtained no title against the true owner, who could recover the piano from A.

From what is stated above, it will be seen that 4 types of auctions are contemplated by the Act,
namely, -

(a) auction sale without reserve price;

(b) auction sale with a reserve price;

(c) auction sale where the seller reserves

(d) auction sale where it is declared beforehand that the highest bidder will be entitled to the goods.
the right to bid;
IMPLIED WARRANTIES IN AN AUCTION SALE

When an auctioneer sells goods, he impliedly undertakes the following four obligations:

1. He warrants his authority to sell.

2. He warrants that he knows of no defect in his principal's title.

3. He undertakes to give possession against the price paid into his hands.

4. He undertakes that such possession will not be disturbed by his principal or by himself.

KNOCK-OUT AGREEMENT - Under S. 23 of the Contract Act, there is nothing necessarily unlawful in a
bona fide agreement between two persons not to bid against each other at an auction sale
(commonly known as a knockout agreement). It is open to two or more persons to form a "ring",
and agree amongst themselves not to bid against each other, and to divide the property purchased
by one, among themselves. Such an agreement would be legal, even though its effect may be to
depress the price. Such an agreement would, however, be void, if it goes further by resorting to a
secret artifice for the purpose of defrauding a third person, i.e., if the case falls under the category
of agreements which are void on the ground that their object is fraudulent. In short, an agreement
between two or more persons not to bid against each other at an auction, even if amounting to a
"knock-out", is not per se illegal and does not invalidate the sale. The seller may protect himself by a
reserve price if he so desires.

"Bid rigging" and "collusive bidding" are now hit by the Competition Act, 2002.

DUTCH AUCTION - This is a variation of a regular auction, which is, in a way just the reverse of a
normal auction. In a Dutch auction, the auctioneer starts at a high price, and keeps on reducing the
price gradually according to the buyers' responses. Such an auction is not common in India.

Indian partnership act

THE NATURE OF PARTNERSHIP

Chapter 2

(Ss. 4-8 & 58)

The Chapter deals mainly with the definition, characteristics and the general concept of partnership.
How a partnership differs from other entities like a company, HUF, Co-ownership, club, trade
association, etc. is also discussed in this Chapter.

DEFINITION (Ss. 4, 7-8, 43 & 58)

'Partnership' (S.4)

*Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all : S. 4.

In Story on Partnership, the term is defined as a voluntary contract between two or more
competent persons, to place their money, effects, labour and skill, or some or all of them, in lawful
commerce or business, with the understanding that there shall be a communion of the profits
thereof between them.

Halsbury defines a partnership as "the relation which subsists between persons carrying on a
business in common with a view to profits".

Partners', 'Firm', 'Firm name' (S.4 & S. 58)

Persons who have entered into partnership with one another are called individually partners and
collectively 'a firm", and the name under which their business is carried on is called the "firm
name" : S. 4.

Afirm name cannot contain any of the following words, namely, 'Crown', 'Emperor', 'Empress',
'Empire', 'Imperial', 'King', 'Queen', 'Royal', or words expressing or implying the sanction, approval or
patronage of the Government : S. 58.
WHETHER A FIRM IS A LEGAL ENTITY – According to the English Partnership Act, a firm is only a
compendious (i.e., abridged) name, or an alias, that is, an assumed name, for all partners, and is not
a legal entity.

Although the Indian Partnership Act partially accepts the practical or commercial notion of the firm,
in India also, a firm is not a separate, legal entity.

In this connection, it is important to distinguish between the mercantile notion and the legal notion
of a firm. Businessmen and accountants are apt to look upon a firm in the same light as lawyers
regard a company, namely, a separate and distinct legal entity, i.e., a body which is distinct from the
members composing it and having rights and liabilities distinct from those of its members.

This, however, is not the legal notion of a firm. The law does not, except for very limited purposes,
recognise a firm as an entity which is distinct from the members who constitute the firm. The firm
has no legal recognition, as the law looks to the partners composing the firm, and not the firm itself.
This nonrecognition of a firm (in the mercantile sense of the word) is one of the most marked
differences between a partnership and a company.

DIFFERENCE BETWEEN PARTNERSHIP AND FIRM -- If one carefully studies the definition of
"partnership and "firm, it will be found that they plainly show that there is a distinction between a
partnership and a firm. Partnership is merely an abstract relation between certain persons under
certain circumstances. It is an abstract thing. But a firm is something concrete. It is a collective name
for all the partners. Partnership may be styled as the invisible tie binding the partners together. The
firm is the visible body (collective group) of those partners who are thus bound together.

MINIMUM AND MAXIMUM NUMBER OF PARTNERS - It is obvious that at least two persons are
necessary to constitute a partnership. However, the law also lays down a maximum figure, beyond
which the partnership would become illegal. This maximum number is fixed at not more than 100,
as may be prescribed from time to time. (Sec. 464, Companies Act, 2013)

DATE OF COMMENCEMENT OF A PARTNERSHIP The date of commencement of a partnership is

important and must be agreed to by all the partners. Such a date is usually reflected in the
Partnership Deed itself. In one case, the date of commencement of the partnership was left blank in
the agreement. In expectation of the partnership, the plaintiff advanced some money and sought to
recover it from the firm. The court held that there was no partnership as the date of
commencement thereof was not agreed upon. (Sharadprasad Gokul Prashad v. N. S. Bohra AIR 1937
Nag 68)
Partnership at will [Ss. 7 & 43(1)]

Where no provision is made by contract between the partners (i) for the duration of their
partnership, or (ii) for the determination (i.e., termination) of their partnership,- the partnership is a
"partnership at will: S. 7.

Thus, there are two cases when a partnership is not at will. One is where the Deed makes a
provision for the duration of the partnership; the other is where there is a provision for the
termination of the partnership. In the words of Wanchoo J. of the Supreme Court (in K. T. Chettiar v.
EM. P. Chettiar, A. I. R. 1961 S. C. 1225):

"Section 7 contemplates two exceptions to a partnership at will. The first exception is where there is
a provision for the duration of the partnership; the second exception is where there is a provision
for the determination of partnership; in either of these cases, the partnership is not at will."

It has been held that a provision as regards the retirement of a partner cannot be regarded as a
provision for termination of the partnership within the meaning of S. 7 of the Act. (Iqbalnath v.
Rameshwamath, A. I. R. 1976 BOM. 405)

Moreover, if a partnership, which was originally for a fixed term, is continued after the expiry of the
term, it would be regarded as a partnership at will. (Gulab Singh v. Guttulal, 1970, M. P. L. J. 389)

Problem: A, B and C signed a Partnership Deed, under which the goodwill and the trade mark were
to remain vested in all of them. One of the clauses provided that if any one of them was not willing
to carry on the business, he could get out, and receive 10,000 as his share of the goodwill and
trademark, in addition to the amounts to his credit in the business. The business would then be
carried on by the remaining two partners, and the goodwill and trade-mark would then vest in such
two partners. One of the partners gave notice of dissolution, saying that this was a partnership at
will. How would you decide the case?

Ans. : This is not a partnership at will. According to the Madras High Court, it can be said that the
parties only intended a sensible business agreement. The Court observed that there would be no
sense left in several provisions of the agreement if any of the partners could put an end to the firm
at his will, so long as the other two were alive. The partnership specifically provided for survival of
the trade-mark and goodwill, and these provisions could not be implemented if the partners could
dissolve the firm at will. (Nissan Ahmed v. Nashua Bi, (1970) M.L.J. 512)

S. 43(1) declares how a partnership at will can be dissolved, and provides that such a firm may be
dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve
the firm.

The Kolkata High Court has held that a provision in a partnership deed for retirement of a partner is
not inconsistent with a partnership-at-will, though the firm is constituted by only two partners.
(Vora v. Sheth, AI.R. 1973 Cal. 279)

Particular partnership (S. 8)

A person may become a partner with another person in particular adventures or undertakings. Such
a partnership is called a particular partnership: Sec. 8.

According to the Report of the Special Committee, S. 8 is intended to meet the common practice of
establishing particular partnerships, a practice which finds favour with Indian firms with numerous
branches.

In cases of particular partnerships, the agreement generally refers to a specific adventure or

business, as for instance, when two persons enter into a partnership to buy a plot of land and sell it
for a profit.

Thus, it has been held that if two or more persons agree to enter into a partnership for carrying on
forward contracts with a particular person, such a partnership will be a particular partnership"
under S. 8, and will stand dissolved after such contracts are carried out. (Parekh v. Mahadeodas,
A.I.R. 1959 S.C. 781)

In Karmali Abdulla v. Vara Karimji Jiwani (17 B.C.R. 103), two merchants decided to do business in
sugar to be shipped from Mauritius to Hong Kong. Purchases were to be made jointly at Mauritius.
The preamble to the agreement declared that the purpose was to do business in partnership.
Unfortunately, the very first consignment of sugar proved to be a failure and resulted in a heavy
loss. The question before the Court was whether one of them was liable on a bill (in connection with
the consignment), drawn by the other partner who became insolvent. The Court held that this was a
particular partnership, a partnership of a limited character", and therefore, the (solvent) partner
was liable.

In another case, the defendants were doing business in partnership of buying and selling potatoes.
The acting partner entered into an agreement with the plaintiff for a joint venture of buying a
shipload of potatoes and of sharing the profits of its resale. The venture resulted in a loss and the
other partner disowned liability as regards the transaction. This was held to be a particular
partnership, a partnership of a single venture". (Manu v. D. Arey, (1968) 2 All E.R. 172)

ESSENTIAL ELEMENTS OF PARTNERSHIP

There are four important elements of a partnership: 1. There must be an association of two or more
persons to carry on a business, 2. There must be an agreement entered into by all such persons. 3.
The agreement must be to share the profits of a business. 4. The business must be carried on by all
or any of such persons acting for all.

All the above elements must be present before a group of persons can be held to be partners. The
first element involves the idea of an association of persons, the second relates to the voluntary
contractual nature of partnership, the third indicates the motive (viz. acquisition of gain) and the
fourth introduces an element of agency into the concept of partnership. Each of these elements are
discussed below in their necessary details.

1. There must be an association of two or more persons to carry on a business - A group of persons
with no legal relations inter se, i.e., no mutual rights and liabilities between themselves would not
be a partnership.

(The legal connotation of the term "business" is discussed below.)

2. There must be an agreement entered into by all such persons - This requirement emphasises
the fact that partnership can only arise as a result of an agreement, express or implied,
between two or more persons. There must be an agreement entered into by all the partners.
Partnership is thus created by a contract; it does not arise by the operation of law. Joint
ownership may arise by the operation of law, but not partnership. Thus, on the death of a
person, his children may inherit the family property jointly with the family business and may
share the profits of the business equally; but they are not, for that reason, partners.
The contract, which is the foundation of partnership, must itself be founded on good faith, and must
be for a lawful object and purpose, and between competent persons. In short, it is subject to the
ordinary incidents and attributes of contracts under Ss. 1 to 75 of the Indian Contract Act.

3. The agreement must be to share the profits of a business - The object of the agreement or
contract is to carry on a business. And the business which the partners carry on must, of course, be
legal. However, the mere fact that several persons own something in common which produces
returns, and that such persons divide those returns according to their respective interests, does not
make them partners. For instance, A and B are co-owners of a house let to a tenant. A and B divide
the net rent between themselves. A and B are not partners, because receiving the rent of a house
let to a tenant is not a business.

The term business has been defined in S. 2) to include every trade, occupation and profession. This
definition, which has been adopted from the English Act, is very general and affords very little
assistance when dealing with border-line cases. Underhill has also criticised this definition as being
rather vague. It is submitted that in arriving at a conclusion as to when a person can be said to carry
on a business, each case must be decided on its own merits, and the only practical guide seems to
be the dictum of James L. J., when he observed in Smith v. Anderson) that this word is to be
understood in any sense in which any man of business would use the word. Broadly speaking, it
refers to any activity which, if successful, would result in profit.

Business may be temporary or permanent (i.e., indefinite). But it must be in existence. An

agreement to carry on business at a future time does not Reuben, A.I.R. 1946 Oudh, 68)

The sharing of profits is an essential element of a partnership agreement. The members of religious
or charitable societies and clubs are not partners, as the idea of sharing, or even making, profits, is
not involved in such associations.

An agreement to share profits is essential, but it should be noted that an agreement to share the
losses is not essential. Where nothing is said as to sharing of losses, it is implied that the partners
will also share the losses in the same proportion as the profits. It may, however, be agreed that, as
between the partners, any one or more of them shall not be liable for losses.

The essential motive in making a partnership agreement is the making of profits, and this has been
clearly brought out in the definition.

The term profits refers to net profits, that is to say, the excess of returns over advances, or in other
words, the excess of what is obtained over the cost of obtaining it. The English Partnership Act
expressly provides that sharing gross returns will not constitute a partnership. Thus, in one English
case, the owner of a theatre allowed a travelling manager and his company to use the building,
scenery, appliances, etc., in consideration of receiving half the money obtained from the spectators.
The Court observed that this did not make the owner answerable as a partner of the travelling
manager. (Lyon v. Knowles, 1863, 3 B & S 556)

It has been held by the Calcutta High Court that if, in an agreement of partnership, one of the parties
to the agreement is to be in complete charge of the business, and who alone is to provide the funds
and be liable for the loss, the agreement is not an agreement of partnership.

4. The last element is that the business must be carried on by all or by any of the persons concerned,
acting for all - This shows that the persons or the group who conduct the business do so as agents
for all the persons in the group, and are, therefore, liable to account to all. Thus, the relation of
principal and agent amongst the partners, i.e., mutual agency, is the true test of partnership. In fact,
it has been expressly provided by S. 18 that “subject to the provisions of this Act, a partner is the
agent of the firm for the purposes of the business of the firm".

The principle of agency is the essence of a partnership. A partner is both a principal and an agent.
While the relation between partners inter se is that of principals, they are agents of the firm and of
one another in relation to third parties for the purposes of the business of the firm. Thus, each
partner is regarded as an agent of the other partners, and as such, a partner, acting in the course of
the business of the firm, can bind his co-partners. But in order to bind his copartners, it is necessary
for the partner acting on behalf of the firm, to contract in the firm name or in any other manner
expressing or implying an intention to bind his co-partners. A partner contracting in his own name
can create only a personal liability, and not the collective liability of the firm. The mere fact that
money borrowed by a partner in his own name on security belonging to him personally, has been
used for the purpose of the firm, with the knowledge of his partners, does not render them liable.

The true test, therefore, in determing whether a partnership exists, is to see whether the relation of
principal and agent exists between the parties, and not merely whether the parties share the profits,
or whether the business is carried on for the benefit of all. It is this relation of agency which
distinguishes a partnership from a simple co-ownership on the one hand and an agreement to share
profits on the other. And this relation is to be gathered from the real intention of the parties and the
circumstances of the case.

Following the principles laid down in Cox v. Hickman (1860 8 H.L.C. 268), S. 6 of the Act provides that
in determining whether a group of persons is or is not a firm, or whether a person is or is not a
partner in a firm, regard is to be had to the real relation between the parties, as shown by all
relevant facts taken together. (Cox v. Hickman is discussed later in this Chapter)
 Illustrations

1. A and B buy 100 bales of cotton, which they agree to sell on their joint account. A and B are
partners in respect of such cotton.

2. A and B buy 100 bales of cotton, agreeing to share the cotton between them. A and B are not
partners.

3. A and B agree to work together as carpenters. A is to receive all the profits and pay a salary to B. A
and B are not partners.

4. A and B enter into a "partnership agreement” whereby A is to have no share in either the profits
or the loss of the business. A and B are not partners. 5. A and B are joint owners of a ship. This, by
itself, does not make them partners.

6. X and Y agree that X will carry passengers in his cars from Bangalore to Ooty, and Y will pay X 20
per kilometer. The cost of repairing and replacing the cars have to be shared by both, and the
money received from the passengers is to be equally divided between X and Y. In the circumstances,
X and Y are not partners. (Green v. Beesley, (1835) 2 Bing. N C 108)

7. A agrees with B, a goldsmith, to buy gold and furnish this gold to B, who would convert it into
ornaments. These ornaments would be sold, and A and B would share the resulting profit or loss. A
and B are partners.

A partnership deed provides that all the other partners must work under the control and directions
of one of the partners, A. Further, they cannot accept any business without A's consent and cannot
pledge the firm's interest or raise a loan without the consent of A. This is a partnership, and merely
because one partner has a greater degree of control and more powers than the others, it does not
mean that the business entity is not a partnership (K.D. Kamath v. C.I.T., Mysore, (1971) 2 SCC 873)

PARTNERSHIP AND CO-OWNERS DISTINGUISHED — Very much akin to partnership is the legal concept
of co-ownership. The distinction between the two is important. Now, partners enjoy common rights
over, and interest in, the firm's property; all co-owners of property are, however, not partners.
Coownership, therefore, though an incident of partnership, must be distinguished from it. Co-ownership
of any property does not, in itself, constitute a partnership between the co-owners, whether they share
any profits arising from it or not. Thus, A and B are co-owners of a house let to a tenant. A and B divide
the rents between themselves. B contends that A is his partner. Will he succeed? No. В will not succeed.
A and B are not partners, but co-owners. But, if A and B use that house as a hotel, they would become
partners in the business of running a hotel.

Similarly, co-owners of a ship are not necessarily partners. If, however, they employ the ship in trade or
adventure on their joint account, they would become partners in such trade.

The main points of difference between co-ownership and partnership are stated by Lindley thus:

1. Co-ownership is not necessarily the result of agreement; partnership is always the result of
agreement.

2. Co-ownership does not necessarily involve community of profits or of loss; partnership does.

3. One co-owner may transfer his interest without the consent of the other, a partner cannot do so.

4. One co-owner is not the real or implied agent of the other, partners are agents of one another.

5. One co-owner has no lien on the thing owned in common for outlays or expenses, nor for what may
be due from the others as their share of a common debt; a partner has such a lien.

6. A co-owner is primarily entitled only to partition, though he can have the property sold and get a
share of the proceeds. Partners are not entitled to partition, but when the partnership is wound up, they
are entitled to have the property sold and the proceeds divided.

7. As co-ownership does not necessarily exist for the sake of gain, and as partnership exists for no other
purpose, the remedies by way of account and otherwise which one co-owner has against the others are,
in many important respects, different from, and less extensive than those which one partner has against
his co-partners.

"PARTNERSHIP' AND 'COMPANY' DISTINGUISHED

Whereas a company is a distinct juristic entity , separate and distinct from its shareholders, a firm is
nothing but an aggregation of its partners. The following are the main points of distinction between the
two:
1. A partnership or a firm is not a distinct legal person, but is made up of the persons composing it. A
company is a distinct legal person.

2. The creation of a company involves elaborate legal formalities in accordance with the provisions of
the Companies Act. But the creation of a partnership is purely a matter of agreement between the
partners. (Such an agreement need not even be in writing, except where the law requires it to be so, as
for instance, in Maharashtra.)

4. Each partner is prima facie the agent of the others, and can bind them by his contract made in the
course of the partnership business. Shareholders in a company are not the agents of one another.

3. In a firm, a partner cannot transfer his interest without the consent of other partners. Shares in a
company (especially, in a public company) are freely transferable.

5. Each partner is liable in full for the debts of the firm. The liability of the shareholders of a company is
limited by shares or by guarantee.

6. A partner cannot contract with his firm. A shareholder in a company can contract with the company.

7. Partners may make any private arrangements among themselves. Arrangements in regard to
companies are more restricted by law.

8. In a trade partnership, the maximum number of members is twenty, and in a banking partnership,
ten. In a public limited company, the minimum number of members is seven, the maximum unlimited. In
a private company, the minimum number of shareholders is two, the maximum being fifty (not counting
employees and ex-employees).

9. The death or retirement of a partner dissolves the partnership. But a company, having a separate
legal existence, goes on, irrespective of the death or retirement of a member (or even of all its
members).

10. Whereas the property of a firm may be the common property of the partners, the property of a
company belongs to the company, and not to its members.
11. Restrictions contained in a partnership deed will not affect third parties, who are not aware of such
restrictions. On the other hand, restrictions in the Memorandum Articles of a company affect third
parties also.

12. A company, being a distinct entity, can sue and be sued in its own name. Since a firm has no legal
existence, it cannot do so. Although Order XXX of the Civil Procedure Code, 1908, allows a partnership
firm to sue and be sued, this is only a procedural rule, and a firm cannot be regarded as a legal entity
which is separate an listinct from its partners.

13. If a decree is passed by a Court against a firm, it can be executed against the partners, jointly or
severally. A creditor of a company, on the other hand, can proceed only against the company, and not
against its members.

14. Registration of a firm is optional, whereas a company has to be registered (In Maharashtra, however,
registration of a firm is more or less compulsory. This is discussed in a later Chapter.)

15. A firm, having no separate legal existence, cannot be a shareholder of a company. A company, on
the other hand, can be a shareholder of another

PARTNERSHIP AND SERVICE DISTINGUISHED - Explanation 2 to S. 6 expressly provides that the receipt of
a share of the profits of a business, or of a payment which is contingent upon the earning of profits, or
which varies with the profits earned by a business, by a servant or an agent as remuneration, does not,
of itself, make such a servant or agent a partner with the other persons carrying on the business.

However, it is not always easy to draw a line between a partnership and a payment of a salary by way of
a share of profit. In one case, X carried on, in his own name, the business of loading and unloading
wagons for a company. He appointed Yto manage the business, and it was agreed between them that y
would be paid 75% of the net profits as remuneration, and that X would retain the balance 25%. It was
also agreed that X would not be liable for any loss. On these facts, the Calcutta High Court held that the
relationship between X and Y was not that of partners, but one of principal and agent. (Munshi Abdul
Latiff v. Gopeswar Chattoraj, 1932 56 Cal. L.J. 172)

It is also possible for Y, both to receive a share of the profits of X's business and also to bear a share of
losses and yet, under the agreement between the parties, to be in the position of a servant as regards X,
and not a partner of X. (Walker v. Hirsch, 1884 27 Ch. Div. 460)
On the other hand, two persons would be held to be partners, even if one of them is in receipt of a fixed
salary in lieu of a share of profits, if their intention to be partners is otherwise apparent from the facts
and circumstances of the case.

PARTNERSHIP AND CLUB DISTINGUISHED - It is rather hard to find any common features between a club
and a partnership. In the nineteenth century, views were put forth that members of a club were liable as
partners, but it is difficult to see how this could be so, as not a single element of the contract of
partnership is present between the members of a club.

A club is entirely different from a partnership. Clubs are not associations for gain and, unlike partners,
members of a club are not liable for acts of the other members. In Re. St. James' Club, it was held that
the Committee of a club has no authority to pledge the personal credit of the members.

It is to be noted that no member of a club is liable to a creditor of the club, unless he himself has also
assented to such contract. Whereas there is no limit (generally speaking) to a partner's liability, in clubs,
no member becomes liable to pay any money beyond the subscription amount required to be paid
under the rules and regulations of the club. Unlike partners, members of a club have no implied
authority to bind other members of the club.

PARTNERSHIP AND TRADE ASSOCIATIONS DISTINGUISHED - A partnership is also to be distinguished

from a trade association. Mutual agency, which is an essential ingredient of a partnership, does not exist
in a trade association.

In one case, an association of cloth dealers, getting quotas of cloth allotted to it, and then distributing
the quotas to its member firms, was held not to be a partnership. This was so despite the fact that the
profits made by the Association by re-selling the cloth were divided amongst the members. There was
no mutual agency, and no partnership in the circumstances. (Bhawnilal Lachchi Ram v. Badri Lal,
A.I.R.1964 M.P.F153)

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP (Ss. 5-6)

Sections 5 & 6 of the Act lay down certain rules for determining the existence of partnership. S. 5 lays
down that the relation of partnership arises from contract, and not from status. It also provides that the
members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist
husband and wife carrying on business as such, are not partners in such business. Further, in
determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a
firm, regard is to be had to the real relation between the parties, as shown by all relevant facts taken
together. (S. 6)

It is to be noted that the use of the word "partner" or "partnership is not conclusive. By using such
words, parties cannot create a "partnership where, in law, none exists. Likewise, even if the parties
deliberately avoid using the terminology of partnership, their agreement may amount to a partnership
in the eyes of the law. Thus, it has been held that an agreement for a so-called loan", which actually
gives the lender the powers of a partner, may make such "lender liable as a partner for liabilities
incurred by the firm.

As seen earlier, one of the essential ingredients of partnership is that there must be a contract between
two or more persons. A partnership is the result of a voluntary agreement. It is created by an act of
parties. All the rules relating to the creation of a valid and enforceable contract are applicable to it. But a
Hindu joint family firm is not a result of an agreement or contract voluntarily entered into by persons,
but one which arises by the operation of law. The moment a child is born into the trading family, by the
mere fact of its birth, it becomes a member of the trading firm. By its status as a coparcener, it becomes
a member of the firm. As partnership springs from contract, and not out of status, it follows that a Hindu
joint family firm is not a partnership. Such a firm is governed by Hindu law.

If, however, some members of a Hindu family enter into a partnership with other persons who are not
members of that family, the relationship between the parties will be governed by the provisions of the
Partnership Act, and not by the rules of Hindu Law. But the position in Mahommedan law is quite
different. Under Mahommedan law, there is no family trading partnership, such as the one which exists
under Hindu law, and any partnership transaction between two Mahommedan brothers will be
governed by the contract between them.

At one time, the opinion prevailed that sharing the profits of a business was not only evidence, but
conclusive evidence, of a partnership. S. 6 is a denial of this erroneous opinion, and a confirmation of
the ruling in the English case, Cox v. Hickman, (1860 8 H.L.C. 258), which gave the Court full freedom to
arrive at the real intention of the parties, by considering all the relevant documents, facts and
circumstances.

In Cox v. Hickman (above), the creditors of A entered into an arrangement with A under which A's
business was to be conducted under their supervision and superintendence. It was also agreed that,
ultimately, their debts were to be paid off from the profits of the business. The Court held that this did
not make them partners, even though they may have got a share of the profits, and even though they
supervised the business. The real test is that the business was not done on their behalf, or, as the Court
observed, "the real ground of liability is that the trade has been carried on by persons acting on his
behalf"

As observed by the Privy Council in another English case, "It appears to be now established that
although a right to participate in the profits of trade is a strong test of partnership, yet whether that
relation does or does not exist must depend on the real intention and conduct of the parties." (Mollow
March & Co. v. The Court of Wards, 4 P C 419)

The law on the point was ably summed up by Jessel, M. R. in Ross v. Parkins (1875 LR 20 Equ. 331),
where he stated that mere participation in profits does afford cogent evidence of partnership. However,
as now settled by

THE NATURE OF PARTNERSHIP

cases like Cox v. Hickman and Mollow March & Co. v. Court of Wards, this is only a presumption - and
whether the relation of partnership does or does not exist must depend on the whole contract between
the parties. The simple element of participation in profits is not conclusive.

WHO ARE NOT PARTNERS (Ss. 5-6)

Ss. 5 and 6 lay down that certain persons are not to be deemed to be partners. As seen above, it is
expressly provided (by S. 6) that in determining whether a group of persons is or is not a firm, or
whether a person is or is not a partnerin a firm, regard shall be had to the real relation between the
parties, as shown by all relevant facts taken together.

It is expressly laid down that in the following cases, there is no partnership: 1. The members of a Hindu
undivided family carrying on a family business as such are not partners: S. 5

2. A Burmese Buddhist husband and wife carrying on business as such are not partners: S. 5

3. The sharing of profits or gross returns arising from property by persons holding a joint or common
interest in that property does not, itself make such persons partners : S. 6, Expl. 1.
4. The receipt by a person of a share of the profits of a business, or of a payment contingent upon the
earning of profits, or varying with the profits earned by a business, does not, of itself, make him a
partner with the person carrying on the business, and in particular, the receipt of such share or payment

(a) by a lender of money to persons engaged, or about to engage in any business;

(b) by a servant or agent as remuneration;

(c) by the widow or child of a deceased partner, as annuity, or

(d) by a previous owner (or part-owner) of the business, as consideration for the sale of the goodwill (or
share thereof), does not, of itself, make the receiver a partner with the persons carrying on the business:
S. 6, Expln. 2.

PERSONS WHO MAY SHARE IN THE PROFITS WITHOUT BEING LIABLE AS PARTNERS Explanations 1 and 2
to Sec. 6 of the Act (above) lay down that the participation by a person in the profits of a business, either
by receiving a share therein, or a payment dependent upon, or varying with, the profits, is not enough,
of itself, to warrant the inference that such a person is a partner with those who are engaged in carrying
on the business. The receipt by a person of a share of the profits of a business is prima facie evidence
that he is a partner, but this is not a conclusive test. Clauses (a) to (d) of Explanation 2 (seen above) state
the particular cases of persons who share in profits of a business without being liable as partners.

Chapter 3

RELATIONS OF PARTNERS TO ONE ANOTHER (Ss. 9-17 & S. 25)

Chapter 3 of the Act contains well-established rules setting out the mutual rights, duties and liabilities of
partners inter se. The provisions of this Chapter assume special importance at the time of settling
accounts between the partners, and will be discussed under the following four heads :

A. General (Ss. 11, 16, 36, 53, 54 and 55) B. Rights of a partner (Ss. 12 and 13) C. Duties and liabilities of a
partner (Ss. 9, 10, 12, 13, 16 and 25) D. Property of the firm and its application (Ss. 14 and 15)
A. GENERAL (Ss. 11, 16, 36, 53, 54 and 55)

The mutual rights and duties of the partners of a firm may be determined by contract between the
partners, and such a contract may be express or may be implied by a course of dealing. Such a contract
may be varied by consent of all the partners, and such consent may likewise be express or may be
implied by a course of dealing. (S. 11)

S. 11 is analogous to S. 19 of the English Partnership Act. As observed by Lord Langdale in England v.

Curling, (1844, 8 Bear. 129):

"With respect to a partnership agreement, it is to be observed, that all parties being competent to act as
they please, they may put an end to or vary it at any moment; a partnership agreement is, therefore,
open to variation from day to day, and the terms of such variations may not only be evidenced by
writing, but also by the conduct of the parties in relation to the agreement and to their mode of
conducting their business; when, therefore, there is a variation and alteration of the terms of a
partnership, it does not follow that there was not a binding agreement at first. Partners, if they please,
may, in the course of the partnership, daily come to a new arrangement for the purpose of having some
addition or alteration in the terms on which they carry on business, provided those additions or
alterations be made with the unanimous concurrence of all the partners".

S. 11 is based on the well-established principle that, as far as possible, partners must have freedom to
arrange their internal affairs. And, it is clarified the written contract can also be varied with the consent,
express or implied, all the partners. Thus, where the partners have, for several years, followed particular
mode of valuing their assets or adjusting the Profit and Loss Account, that of a that mode would prevail
over what might be provided in their original agreement, and this would be case of implied consent.

Agreements in restraint of trade

The rule of law with regard to an agreement in restraint of trade is laid down in S. 27 of the Indian
Contract Act. It provides 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 only restriction permitted is in the
case of sale of goodwill. Even in that case, the specified limits imposed by the restriction must be
reasonable.

However, in the case of a partnership, an agreement in restraint of trade is valid to a certain extent.
Thus, a contract between the partners may validly provide that a partner shall not carry on any business
other than that of the firm while he is partner. (S. 11)
No partner can, however, carry on any business, which is likely to compete with the business of the
partnership, except with the express consent of the other partners. If a partner fails to obtain such
consent, and carries on any business of the same nature as, and competing with, that of the firm, he
must account for and pay to the firm all profits made by him in that business : S. 16(b).

Not only during the continuance of the firm, but also after dissolution of the firm, and during winding
up, a partner may be prohibited and restrained from carrying on a competing business in the name of
the firm or from using the property of the firm : S. 53.

In addition to the above, the Act lays down three more exceptions to the general rule contained in Sec.
27 of the Contract Act, to the effect that all agreements in restraint of trade are void, as follows:

1. It is open to partners to agree that in the event of any one of them ceasing to be a partner, he should
not carry on any business similar to that of the firm within a specified area or for a specified period. Such
an agreement would not be void as being in restraint of trade, if the restriction imposed is reasonable :
Sec. 36(2).

2. So also, partners may, upon or in anticipation of the dissolution of the firm, make an agreement that
some or all of them will not carry on a business similar to that of the firm within a specified period or
within specified local limits. Such an agreement is also valid if the restrictions imposed are reasonable:
Sec. 54.

3. Similarly, any partner may, upon the sale of the goodwill of a firm, make an agreement with
the buyer that such partner will not carry on any business similar to that of the firm within
specified local limits. Such an agreement is also valid if the restrictions imposed are
reasonable: Sec. 55(3).

RELATIONS OF PARTNERS TO ONE ANOTHER

B. RIGHTS OF A PARTNER (Ss. 12 and 13)

the mutual right and duties of the partner of a firm depend upon the of Discuss the rights and duties
partners towards each other and towards third parties.

The mutual rights and duties of the partners of a firm particular terms of their partnership deed.
Subject to such confers the following rights on a partner: 1. Right to take part in the business (S.
12(a)] 2. Right to have access to the books (S 12(d)] 3. Right to profits (S. 13(b)] 4. Majority rights (S.
12(c)] 5. Right to interest (S. 13(c) and (d)] 6. Right to indemnity (S. 13(e)] 7. No right to
remuneration (S. 13(a)] Each of these rights is briefly discussed below.

1. Right to take part in the business (S. 12(a)]

Every partner has the right to take part in the conduct of the business of the firm. If, therefore, a
partner is wrongly prevented from taking part in the firm's business, he can obtain an injunction
from the Court against the erring partners.

However, this right is subject to a contract between the partners. Thus, it is quite usual to provide,
in the partnership deed, for an exclusion of this right as regards some of the partners.

2. Right to have access to the books (S. 12(d)]

Subject to a contract between the partners, every partner has a right to have access to, and inspect
and copy, any of the books of the firm. A partner need not exercise this right personally, but may
have the accounts inspected by his agent, as for instance, by his accountant.

In one English case, a sleeping partner wished to sell his interest to the other partners. He,
therefore, authorised a valuer to inspect the accounts and to ascertain the value of his interest. The
other partners objected, and the Court held that they could not have any objection, unless, of
course, there was reasonable ground for objecting, as for instance, for the protection of trade
secrets. (Bevan v. Webb, 1900-3 All E.R. Rep. 206)

3.Right to profits [S. 13(b)]

Subject to a contract to the contrary between the partners, partners are entitled to share equally in
the profits earned by the firm. In such a case, they are likewise also liable to contribute equally to
the losses sustained by the firm.

This rule is, however, a rule of presumption which, in practice, is constantly superseded by express
agreement, or even a continued usage of the firm.
Thus, several partnership deeds provide that, as between the partners, any one or more of them will
not be liable to bear the losses of the firm,

4. Majority Rights (S. 12(c)]

As every partner has a right to take part in the business of the firm (S. 12(a), above), this could give
rise to a difference of opinion between the partners. Such difference of opinion may relate to

(a) an ordinary matter, or (b) a fundamental matter.

As regards differences of opinion on ordinary matters connected with the business of the firm (as for
instance, taking an apprentice or appointing or dismissing an employee), such matters can be
decided by a majority of the partners. However, every partner has the right to express his opinion
before the matter is decided. All matters arising in connection with the carrying on of the agreed
business of the firm would fall in this category.

If there is no majority because the partners are equally divided, those who are against the change
will prevail, i.e., the status quo would be maintained. (Donaldson v. Wilson, 1833, 149 E.R. 432)

However, where the difference of opinion relates to matters of fundamental importance, the
consent of all the partners will be necessary, Questions relating to any alteration of, or addition to
the business of the firm, or the admission of a new partner, are fundamental matters, and therefore,
fall in this category,

It may, however, be noted that even where the view of the majority binds the firm, such partners
must act in good faith and for the common advantage of the firm. The majority powers cannot be
exercised in a capricious or mala fide manner or merely to injure a co-partner. Thus, the majority of
partners cannot drag the minority into a new field of business, as for instance, by converting a
business of life insurance into a business of marine insurance.

5. Right to interest (S. 13(c) and (d)]

 If a partner has advanced, for the purposes of the business of the firm, a sum of money over and
above the capital which he has agreed to subscribe, he is entitled to interest on such amount (at the
rate of six per cent per annum).

However, unless otherwise agreed, partners are not entitled to any interest on their contributions to
the capital, i.e., the capital subscribed by the partner. In cases where the Partnership Deed confers a
right to receive interest on such subscribed capital, the interest can be paid only out of the profits of
the firm.

Right to indemnity (S. 13(e)

S. 13(e) of the Act provides a dual indemnity to a partner. It lays down that the firm must indemnify a
partner in respect of payments made and liabilities incurred by him

(i) in the ordinary and proper conduct of the business, and

(ii) in doing such act, in an emergency, for protecting the firm from loss. as would have been done by a
person of ordinary prudence in his own case, and under similar circumstances.

The first indemnity is based on the general rule of an agent's right to be indemnified in respect of lawful
acts done by him in the exercise of his authority. (S. 222 of the Indian Contract Act)

The second indemnity covers outgoings which are in the nature of emergency or salvage expenses
incurred by a partner personally on behalf of the firm in circumstances of emergency. Thus, in a mining
business, a partner may incur expenses to sink a new shaft immediately to reach unexhausted minerals.

7. No right to remuneration (S. 13(a)]

Under S. 13(a), a partner is not entitled to receive any remuneration for taking part in the conduct of the
business of the firm. In other words, it may be presumed that the work done by him for the firm is
gratuitous in nature. It is, of course, possible to have a clause in the Partnership Deed, providing for
remuneration to the working partners. However, in the absence of such a provision, no partner is
entitled to any salary or other remuneration.
The Courts have sometimes carved out exceptions to this rule. Thus, for instance, when one partner is
guilty of wilful neglect, and the entire burden of the work is shouldered by the other partner, the latter
may make a valid claim to be compensated for the extra work done by him. Thus, in Airey v. Barham
(1861 54 E.R. 768), following a quarrel between the two partners, only one of them attended to the
business of the firm, and the Court held that he was entitled to an extra allowance for having managed
the business without any assistance from the other partner.

C. DUTIES AND LIABILITIES OF A PARTNER (Ss. 9, 10, 12, 13, 16 & 25)

The duties and liabilities of a partner of a particular firm may be culled from the partnership deed. The
Partnership Act, however, imposes the nine duties and liabilities on a partner:

1. Duty of good faith and common advantage (S. 9) 2. Duty to render true accounts and full
information (S. 9) 3. Duty to indemnify for fraud (S. 10) 4. Duty to act with due diligence (S. 12)
5. Duty to indemnify for wilful neglect (S.13) 6. Duty to contribute to the losses (S. 13) 7. Duty
regarding proper use of property (S. 16)

8. Duty not to compete (S. 16)

9. Joint and several liability for acts of the firm (S. 25) Each of these duties is briefly discussed below.

1. Duty of good faith and common advantage (S. 9)

S. 9 lays down the paramount duty of good faith of partners. It provides that partners are bound

(a) to carry on the business of the firm to the greatest common advantage; and

(b) to be just and faithful to each other.

This duty is very widely and generally worded. In practice, it means that all the endeavours of a
partner must be directed towards securing maximum profit for the firm. A partner should not make
personal profits at the expense of the firm. Thus, where a partner was authorised to sell property of
a firm for 60,000, and he sold it for a much higher price and concealed the excess price, it was held
that he was bound to share it with his co-partner. (Dunne v. English, 18 Eq. 524)
This is a fundamental duty imposed upon partners by the Act, and cannot be excluded by a mutual
agreement to the contrary.

This duty also introduces the element of a fiduciary obligation on a partner. Commenting on this
fiduciary relationship, Bacon V.C. observed in Helmore Smith, (1886) 35 Ch. D. 436) as follows:

"If fiduciary relationship means anything, I cannot conceive a stronger case of fiduciary relations
than that which exists between partners. Their mutual confidence is the life blood of the concern. It
is because they trust one another that they are partners in the first place; it is because they continue
to trust one another that the business goes on."

Thus, a partner cannot make a secret profit at the expense of the firm. In one English case, a partner
of a firm of sugar refiners was entrusted to buy sugar for the firm. He supplied the firm with sugar
from his personal stock (which he had bought earlier at a lower price), at the prevailing market
price, making a considerable profit on the transaction. In a suit filed by other partners, it was held
that he was bound to account for such profit and that the firm was entitled to that profit. (Bentley v.
Craven, 1853, 18 Beav. 75)

2. Duty to render true accounts and full information (S. 9)

S. 9 also imposes upon a partner a duty to render true accounts and full information of all things
affecting the firm to any partner or his legal representative.

This duty of a partner is based on the principle of uberriamae fidei (utmost good faith), and calls
upon partners to make full and frank disclosures of all facts affecting the affairs of the firm.

Thus, when a partner is in possession of vital information about the affairs or assets of the firm, and
concealing such information, if he makes a contract with his co-partners, the contract can be
avoided by the co-partners. (Law v. Law, (1905) 1 Ch. 140)

A partner who is entrusted with a sale must fully disclose all the facts regarding the sale to the other
partner, and if he does not, he cannot exclude the other partner from a share in the profits actually
realised by the sale. (Dunne v. English, (1874) 18 Eq. 524)
Even a "sleeping partner" has the right to ask for true accounts of the firm. (Budh Ram v. The Dhuri
Co-op. Society, AIR 1972 Bom. 185)

Every partner is under a duty to indemnify the firm for any loss caused to it by his fraud in the
conduct of the business of the firm.

The obvious principle underlying this duty is to induce partners to deal honestly with all customers
of the firm.

Thus, if one partner commits a fraud on a customer in the ordinary course of business of that firm,
all the partners, including the innocent partners, would be liable. However, in such a case, the firm
can claim to be indemnified by the guilty partner.

The partner who commits fraud in the conduct of the business of the firm should make good the
loss sustained by the firm, and the amount so brought in should be divided amongst the partners.
(Navinchandra Jethabhai v. Moolchand, AIR 1966 Bom. 111)

It may be noted that under S. 13 (below), a partner is also liable to indemnify the firm for his wilful
neglect. However, that is subject to a contract to the contrary between the partners. But, under S.
10, a partner's liability to indemnify the firm for his fraud is an absolute liability, and a partner
cannot be exempted from this liability by a contract between the partners providing for such
exemption. This is so because fraud (or deceit) and negligence are two different things, and fraud, in
whatever form it may be, is unconditionally condemned by all legal systems, and no man is to be
allowed to contract himself out of liability for his own deceit.

4. Duty to act with due diligence (S. 12)

The fourth duty cast on every partner is to attend diligently to his duties in the conduct of the
business of the firm.

The law does not lay down the standard of diligence, but since every partner is deemed to be the
agent of every other partner, it can safely be said that he should act with as much diligence as is
expected of an agent under S. 212 of the Indian Contract Act.
Thus, it has been held that a partner is not liable for negligence if he can show that he used such skill
and judgment as he possessed in the conduct of that business. (S. Kenker v. M. Gobinda, (1919) Pat.
419)

It has also been held that if a partner refuses or neglects to perform his duties, that would give a
good ground to the other partners to apply for a dissolution of the firm. (Krishnamachariar v. S. Sah,
(1920) 39 M.L.J. 257)

5. Duty to indemnify for wilful neglect [S. 13(1)]

In order to supplement the fourth duty of a partner (above), S. 13(1) casts an obligation on every
partner to indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the
business of the firm.

Thus, if a partner is guilty of wilful negligence, and consequently, the firm suffers a loss, he would be
bound to indemnify the firm for such loss. However, he would not be liable for acts done in good
faith or for mere errors of judgment.

In one English case (Cragg v. Ford, 1 Y and CCC, 280), the question arose whether in the following
circumstances the defendant partner was guilty of "wilful neglect". The plaintiff and the defendant
were partners in a business which was being dissolved. As the defendant was the managing partner,
he was in charge of the dissolution. Although the plaintiff had advised the defendant to immediately
dispose of certain bales of cotton, the defendant said that he would do so at the end of the
dissolution. By that time prices of cotton went down materially, and the Court had to decide
whether the defendant partner was guilty of "wilful neglect". The Court held that a mere error of
judgment does not amount to wilful neglect, and that in the present case, the partner had no reason
to anticipate the sudden fall in prices.

The above principle (laid down in Cragg v. Ford) was also applied by the Patna High Court in Sasthi
Kenkar v. Man Gobinda (A.I.R. 1919 Pat. 419).

6. Duty to contribute to the losses (S. 13(b)]

 S. 13(b) of the Act lays down that, subject to a contract between the partners, the partners must
contribute equally to the losses of the firm. Normally, of course, the partnership deed provides the
ratios in which profits and losses are to be shared. It is even open to the partners to agree that one
or more of them shall not be liable at all for the losses suffered by the firm. It cannot, of course be
agreed that all the partners would not be liable for the losses suffered by the partnership.

7. Duty regarding proper use of property [S. 16(a)]

Under S. 16(a) of the Act, if a partner derives any profit for himself

(a) from any transaction of the firm, or (b) from the use of

(i) the property of the firm, or

(ii) the business connection of the firm, or

iii)the firm name

He must account for the profit and pay it to the firm

In Gardner v. McCutcheon (1842 Beav. 534), a ship belonged to two partners, one of whom was also the
captain of the ship. While the ship was operating under charter parties, the captain made considerable
profits by making certain contracts. The Court held that he was liable to account for such profits.

Problem: A, B and C carry on business of partnership as merchants. D, to whom they make

consignments for sale on commission, secretly allows Ca share in the commission, which he receives
in consideration of C using his influence to send consignments to him. A and B come to know of the
secret share of C. What are A's and B's rights against Cin respect of the secret share received by
him?

Ans. : This is a case falling under S. 16(a). A and B can compel C to account to the firm for the money
so received,

8. Duty not to compete [S. 16(b)]

It is well-established that a partner cannot derive any exclusive advantage by engaging in
transactions in competition with the firm.

S. 16(b), therefore, lays down that, subject to a contract between the partners, a partner carries on
any business of the same nature as, and competing with that of the firm, he must account for and
pay to the firm all profits made by him in that business.

In one case, a partnership was entered into for the business of importing salt into India and for re-
selling the same in Chittagong. One of the partners, in the course of the operations, bought some
quantity of salt for himself and resold the same on his own account. The Calcutta High Court held
that the partner was liable to account for this profit to his co-partners, as the opportunity to make
such a profit came his way while he was on the business of the firm. (Pulin v. Mahendra, (1921) 34
Cal. L.J. 405)

This duty is, however, subject to any variation made by the partnership deed. Thus, the agreement
between the partners may allow them to carry on any business whatsoever, whether competing or
not. Conversely, the agreement may restrain the partners from carrying on any other business
whatsoever, (i.e. whether competing or not). S. 11 of the Act clearly provides that the agreement
between the partners may provide that a partner shall not carry on any business other than that of
the firm, whilst he is a partner. The section further provides that this will not amount to restraint of
trade under S. 27 of the Indian Contract Act.

9. Joint and several liability for acts of the firm (S. 25)

By virtue of S. 25 of the Act, every partner is liable, jointly with all the other partners, as also
severally, for all the acts of the firm done whilst he is a partner.

The term 'act of a firm' is defined in S. 2(a) as any act or omission by all the partners, or by any
partner or agent of the firm, which gives rise to a right enforceable by or against the firm. A partner
is the agent of the firm for the purposes of the business of the firm (S. 18). In order to bind a firm, an
act or instrument done or executed by a partner or other person on behalf of the firm shall be done
or executed in the firm-name, or in any other manner expressing or implying an intention to bind
the firm. (S. 22)

S. 25 is in confirmity with the corresponding rule of the law of Scotland. Formerly, the English law on
the point was also the same. However, in 1879, the House of Lords held that during a partner's life,
his liability is only joint, though after his death, his estate can be held liable for unsatisfied debts of
the firm contracted while he was a partner. (Kendall v. Hamilton 4. App. Cases, 504)

This rule as to a person's liability as a partner, laid down in S. 25, is based on the principle of agency.
However, this general rule must be read in the light of other subsidiary rules which render him liable
as a partner on various other grounds. Thus, a partner may become liable for an act done by another
partner on behalf of the firm, but not binding on the firm, if such act has subsequently been ratified
by all the partners. In the same way, a partner may also become liable for an unauthorised act of his
co-partner on the ground of estoppel.

However, it is to be noted that S. 23 comes into play only if the act was done while such a person
was a partner of the firm. Thus, in one case, certain persons were proved to have been partners in a
firm, when acts constituting an infringement of a trade mark by the firm took place. However, the
damages arose after the dissolution of the firm. In the circumstances, it was held that such persons
were liable for damages arising out of the infringement, it being immaterial that the damages arose
after the dissolution of the firm. (Thomas Beat & Sons v. Rulia Ram, A.I.R. 1934 Lah. 625)

Similarly, in another case, where goods were sent to a firm "on approval" during the continuance of
the partnership, and out of these goods, the goods not required were returned after the dissolution
of the partnership, it was held that all the partners who were members of the firm at the time when
the goods were sent were liable for the goods accepted by the firm. (Mayhas v. Morley - A.I.R. 1925
Cal. 937)

D. PROPERTY OF THE FIRM AND ITS APPLICATION (Ss. 14-15)

Ss. 14 and 15 lay down a few simple rules relating to the application of the property of a firm. First
of all, the property of the firm includes all property and rights and interests in the property originally
brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm or for the
purposes and in the course of the business of the firm, and includes also the goodwill of the
business. Unless a contrary intention appears, property (and rights and interests in property)
acquired with money belonging to the firm are deemed to have been acquired for the firm : S. 14.

It may be noted that just because property belonging to one partner is used for the purpose of the
firm's business, it does not become the property of the firm. But, if there is anything to show the
intention of the partners to make it so, then it will become the firm's property. Thus, where the
owner of a mill agreed to carry on the manufacture in partnership with others, and the
ownerpartner was credited in the firm's account with the value of the mill as his capital, it was held
 that the mill had become the firm's property, and any additions to the mill would also be
partnership property. (Robinson v. Ashton, 1875 L.R. 20)

Likewise, if land is bought in the name of one partner, and paid for by the firm out of the profits of
the partnership business, the land will be considered to be partnership property. (Nerot v. Burnard,
187 4 Russ. 247)

Similarly, if one partner buys shares of a railway company in his own name, without the authority of
the other partners, but with the firm's money and on account of the firm, such shares would be
partnership property. (Ex parte Hinds, 1849 3 De G. & Sm. 603)

If a lease containing an option to renew is partnership property, and one of the partners renews the
lease, the renewed lease will also be partnership property. (Debi Parshad v. Jai Ram, A.I.R. 1952 Pun.
284)

As stated above, the property of a firm includes its goodwill . The term goodwill is not defined by the
Act, and may be said to be "the whole advantage, whatever it may be, of the reputation and connection
of the firm". It is something more than the mere chance or probability of old customers maintaining
their connection with the firm. (See Chapter 6, "Dissolution of a Firm", for a discussion on "goodwill.)

Lastly, S. 15 declares the rule that, subject to a contract between the partners, the property of the firm
is to be held and used by the partners exclusively for the purposes of the business of the firm.

Effect of change in the firm or its business (S. 17)

S. 17 provides that, subject to a contract between the partners,

(a) if a change occurs in the constitution of a firm,-the mutual rights and duties of the partners in the
reconstituted firm remain the same as before, as far as may be;

(b) where a firm constituted for a fixed term continues to carry on business after the expiry of that
term,-the mutual rights and duties of the partners remain the same as before, as far as they may be
consistent with the incidents of partnership at will, and
 (c) if a firm constituted to carry out one or more adventures or undertakings, carries out other
adventures or undertakings, - the mutual rights and duties of the partners in respect of the new
adventures or undertakings are the same as in respect of the original adventure or undertaking

Chapter 4

RELATIONS OF PARTNERS TO THIRD PARTIES (Ss. 18-24 & 26-30)

A. AUTHORITY OF A PARTNER (Ss. 18-24)

The first principle as to the authority of a partner is declared in S. 18, which lays down that a partner is
the agent of the firon for the purposes of the business of the firm.

This is one of the most important tests of partnership. As seen earlier, agency is the essence of the
relationship of partnership. A partner is both a principal and an agent. While the relation between
partners inter se is that of principals, they are agents of the firm, and also of one another, in relation to
third parties for the purposes of the business of the firm.

Thus, each partner is regarded as an agent of the other partners, and as such, a partner, acting in the
course of the business of the firm, can bind his co-partners. But in order to bind his co-partners, it is
necessary for the partner acting on behalf of the firm to contract in the firm name or in any other
manner expressing or implying an intention to bind his co-partners. A partner contracting in his own
name incurs only a personal liability, and not the collective liability of the firm. The mere fact that
money borrowed by a partner in his own name on security belonging to him personally, has been used
for the purpose of the firm with the knowledge of partners, does not render them liable.

Implied authority of partner (S. 19(1)]

S. 19 lays down that, subject to the provisions of Section 22 (which deals with the mode of doing an act
to bind the firm), the act of a partner which is done to carry on, in the usual way, business of the kind
carried on by the firm, binds the firm. The authority of a partner to bind the firm is called his implied
authority
This implied authority of a partner is often referred to as his ordinary or apparent or ostensible
authority. Lindley (the learned English author on partnership) prefers the term implied authority, and
the same has been accepted by the Indian Act also.

In Bank of Australasia v. Breillat, (1847) 6 M.P.C. 193, the Privy Council adopted a passage from Story on
Agency, in which the general powers of partners as agents of the firm have been well summed-up in the
following words :S

"Every partner is, in contemplation of law, the general and accredited agent of the partnership, or as it is
sometimes expressed, each partner is praepositus negotils societatis, and may consequently bind all the
other partners by his acts, in all matters which are within the scope and object of the partnership.

Hence, if the partnership is of a general commercial nature, he may buy goods on account of the
partnership, he may borrow money, contract debts and pay debts on account of the partnership; he
may draw, make, sign, indorse, accept, transfer, negotiate, and procure to be discounted, promissory
notes, bills of exchange, cheques and other negotiable papers, in the name and on account of the
partnership.

In order to bind the firm, for an act of a partner done within the scope of his implied authority, three
conditions must exist :

1. The act must be done in the conduct of the business of the kind carried on by the firm.

2. The act must be done in the way which is usual in such business.

3. Finally, the act must be done in the firm name or in any other manner expressing or implying an
intention to bind the firm.

The question whether a given act can or cannot be said to be done in carrying on a business in the way
in which it is usually carried on must evidently be determined (a) by the nature of the business, and (b)
by the practice of persons engaged in it. Evidence on both of these points is necessarily admissible.
(Lindley on Partnership)

Examples of implied authority of a partner

1. A partner can buy on the credit of the firm, any goods of a kind used in its business. This power
extends to both, a trading and a nontrading partnership.

2. Similarly, a partner may hire on the credit of the firm, any goods of a kind used in its business.

CASE-A partner of a firm, whose business it was to trap wild elephants, hired an elephant to be used for
trapping wild elephants, and one of the terms of hire was that the hirer should pay 5,000 if the elephant
died during the period of hire. It was held that the other partners also were bound by this term.
(Mathura Nath v. Sreejukta Bageshwari, 1927 4 Cal. L.J. 362)

RELATIONS OF PARTNERS TO THIRD PARTIES

3. Apartner may engage servants or agents, and he may also discharge such persons, although he cannot
discharge them against the will of his co-partners.

4. A partner can institute and defend suits in the name of the firm. It has been held in England
that a partner who attends to the affairs of a firm has an implied authority to employ a
solicitor to defend a suit filed against the firm.

FRAUDULENTACT OF A PARTNER -- An interesting question that arises in this connection is whether

a firm would be liable for the act of its partner, which though within his authority, has in fact been
done in fraud upon his other partners.

Now, it is a well-established rule of law that a principal is answerable for the acts of his agent,
including the agent's fraudulent acts, provided that they fall within the scope of his authority. The
same principle applies to partners, and for the same reason, a firm cannot escape liability showing
that a partner's act (which falls within the scope of his authority) was actually a fraud on the firm.

However, this rule does not apply to a case where there is collusion between such a partner and the
third party. The rule presumes that the third party is acting bona fide and has no knowledge of the
fraud.

Acts which fall outside the implied authority of a partner (S. 19(2)]
S. 19(2) enumerates eight acts of a partner which will not bind the firm. These are acts which do not
fall within his authority.

Thus, in the absence of any usage or custom of trade to the contrary, the implied authority of a
partner does not empower him to

1. submit a dispute relating to the business of the firm to arbitration; behalf of the firm in his name;

2. open a banking account on 3. compromise or relinquish any claim, or portion of a claim, by the
firm;

4. withdraw a suit or proceeding filed on behalf of the firm; 5. admit any liability in a suit or
proceeding against the firm; 6. acquire immovable property on behalf of the firm; 7. transfer
immovable property belonging to the firm; 8. enter into a partnership on behalf of the firm.

It has been held that though, in the absence of a specific agreement, usage or custom, a partner has
no authority to refer a dispute to arbitration, nevertheless an award in such an arbitration will be
binding on such partner, though it may not bind the other partners of the firm.

It may be noted that clause 2 (above) deals with the case of a partner opening a bank account on
behalf of the firm in his own name. In one case, in order to avail of credit facilities, a partner opened
a bank account in the name of the firm, forging the signature of the other two partners. It was held
that the restriction on the implied authority of a partner is as regards opening a bank account in the
name of the concerned partner. In this case, as the account was opened in the name of the firm, all
the partners were liable. (Bank of Baroda v. Himalaya Brush Industries, 2000 (3) BCR 697)

It may also be noted that the above enumeration of acts which falls outside the scope of a partner's
implied authority is not exhaustive, but merely illustrative. To these may be added the following
four, to be found in the case law on this point:

(a) Apartner has no implied authority to bind the firm by giving a guarantee in respect of debts of
third parties.
(b) A partner has no implied authority to set off his own personal debts against debts due to the
firm.

(c) A partner has no implied authority to set off a decree obtained by the firm for less than the
decretal amount.

(d) A partner has no implied authority to accept fully paid-up shares in a company in satisfaction of a
debt due to the firm.

Extension and restriction of a partner's implied authority (S. 20)

S. 20 then enacts that the partners in a firm, by contract between the parties, may extend or restrict
the implied authority of any partner. However, in spite of any such restriction, any act done by a
partner on behalf of the firm, which falls within his implied authority, binds the firm, unless the
person with whom he is dealing knows of the restriction, or does not know or believe that partner
to be a partner.

Thus, A and B are partners in a grocery business. The partnership deed provides that A shall not buy
anything on behalf of the firm. But A nevertheless enters into contracts to buy groceries. What is the
liability of B?

Following the provisions of S. 20, it will be seen that B will be liable only if the person or persons
with whom he had entered into such contracts had no notice of the terms of partnership which
provide that A shall not buy anything on behalf of the firm, or if the third party did not know or
believe A to be B's partner.

Partner's authority in an emergency (S. 21)

Under S. 21, a partner has authority, in an emergency, to do all such acts for purpose of protecting
the firm from loss, as would be done by a person of ordinary prudence in his own case, acting under
similar circumstances, and such acts bind the firm.
A similar authority to act in an emergency is given to an agent by S. 189 of the Indian Contract Act. It
is submitted that even in the absence of S. 21, a partner would be able to claim the protection of
said S. 189, in view of the fact that the Act expressly declares a partner to be an agent of the firm.

A question sometimes arises as to whether a power to do what is usual includes a power to do what
is unusual, however, urgent it may be. Answering the question in the negative, it has been held, in
an old English case, that an agent who has no authority to borrow money, cannot do so even in an
emergency, to enable the business to be carried on. (Hawtayne v. Bourne, 1841,7 M & W, 595)

Mode of doing an act to bind the firm (S. 22)

Section 22 lays down the mode of doing an act by which a firm can be bound. It provides that in
order to bind a firm, an act or instrument done or executed by a partner (or other person on behalf
of the firm) should be done or executed in the firm name or any other manner expressing or
implying an intention to bind the firm.

Punjab Bank v. Muhammad, 15 Lah. 625.- A, one of the two partners in the Punjab Alliance Auction
Rooms, executed a pronate in favour of the plaintiff. The note was signed by A describing himself as
Proprietor, Punjab Alliance Auction Rooms. It was held that A's description as a proprietor of the
firm was not sufficient to justify the firm being held liable on the note.

Effect of admission by partner (S. 23)

An admission or representation made by a partner concerning the affairs of the firm is evidence
against the firm, if it is made in the ordinary course of business.

The rule contained in S. 23 is based on the corresponding provision of S. 15 of the English

Partnership Act.

If a partner makes an admission regarding the partnership affairs, and such an admission is made in
the ordinary course of business, it will be evidence against the firm. But the rule will not apply
where such a representation refers to the extent of the partner's authority to bind the firm. (Ex
parte Agace, 1792, 30 E.R. 145)
It may also be noted that such an admission, though relevant, is not conclusive against the firm,
unless it operates by way of an estoppel. (In Re. Coasters Ltd., 1911 1 Ch.86)

Effect of notice to acting partner (S. 24)

Notice to a partner who habitually acts in the business of the firm of any matter relating to the
affairs of the firm operates as notice to the firm, except in the case of fraud on the firm committed
by, or with consent of, that partner.

This rule is based on the principle of agency, that notice to an agent is equivalent to a notice to the
principal. Since partnership is a form of agency, this rule applies to a partnership firm also.

As observed by the Supreme Court with reference to a partnership, notice to a principal is notice to
all his agents and notice to an agent in matters connected with his agency is notice to his principal.
(Ashutosh v. State of Rajasthan, AIR 2005 SC 3434)

A question arose in an English case as to whether notice given to a partner before he became a
partner would operate as a notice to the firm. The Court held that such knowledge of a partner
would not operate as notice to the firm. (Williamson v. Barbour, 1877 9 Ch. 535)

An exception is made by S.24 in cases of fraud. This is based on common sense, and when a partner
is committing a fraud on his other partners, notice to him will not be notice to the firm. In Bignold v.
Waterhouse (1813 105 E.R. 95), a partner of a firm of a carrier, acting in fraud of his co-partners,
agreed to transport valuable parcels free of charge. The other partners were held not liable for the
loss of the parcels. The fact that some clerks in the firm were aware of the fraud was held not to
affect the innocent partners.

Likewise, if a partner who is also a trustee of a trust, employs trust-funds in the partnership
business, his guilty knowledge cannot be imputed to the firm. (Mara v. Browne, 1896 1 Ch. 199)

B. LIABILITY OF THE FIRM FOR A PARTNER'S ACTS (Ss. 26-27)

Ss. 26 and 27 deal with the liability of a firm for its partner's acts, including his forts, misapplication
etc. S. 26 provides as follows:

Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of
a firm, or with the authority of his partners, - loss or injury is caused to any third party, or any
penalty is incurred, - the firm is liable therefor to the same extent as the partner.

TORTS OF A PARTNER — The word injury' in S. 26 implies a 'tort. The liability of a firm for the torts of
a partner rests on precisely the same principles as the liability of a master for the torts of his
servant, inasmuch as both are merely branches of the law of principal and agent.

Both under English and Indian law of torts, partners are liable jointly and severally for wrongful acts
committed by a partner acting in the ordinary course of the partnership business. The principle
underlying this is that the other members hold him out to the world as a person for whom they are
responsible.

Thus, in Hamlyn v Houston & Co. [(1903) 1 K.B. 81), one of two partners, without the knowledge of
his co-partner, bribed a clerk of the plaintiff, a competitor in trade, and induced him, in breach of his
duty to his employer, to divulge confidential information in regard to the plaintiff's business. It was
in the ordinary course of the business of the firm to obtain such information by legitimate methods,
and the partner acted in the interest of the firm. Both partners were held liable to the plaintiff.

But a wrongful act or default of a partner, when not acting in the ordinary course of business of the
firm, does not render the other partners responsible for the same.

Venkat v. Natesa, (1939) I. M. L. J. 905.- In this case, N and Kentered into a partnership to supply
goods to jails. K provided finance for the partnership business and N did the work. K paid bribes to
officials and entered the amounts in the account books of the partnership as items of expenditure.
N, in his turn, also spent partnership funds in paying bribes. In a suit filed by N against K for the
dissolution of partnership and taking of accounts, Kobjected to the amounts spent in bribery by N
being taken in account, and thereupon, N objected to the amounts spent in bribery by K. The court
held that neither N nork was entitled to debit the partnership with money spent for an illegal
purpose.

C. LIABILITY BY "HOLDING OUT" (S. 28)

 S. 28 of the Act deals with what is known as liability by "holding out". If one turns to S. 235 of the
Contract Act, which deals with the liability of a pretended agent', it will be seen that it is very much
similar to the present S. 28. The principle underlying both is exactly the same.

Any one who, by words (spoken or written) or by conduct, represents himself, or knowingly permits
himself to be represented, as a partner in a firm, is liable as a partner in that firm, to any one who
has, on the faith of any such representation, given credit to the firm, - whether the person
representing himself, or represented to be a partner, does or does not know that the representation
has reached the person so giving credit : S. 28(1).

However, when after a partner's death, the business is continued in the old firm name, the
continued use of that name (or of the deceased partner's name) does not, of itself, make his legal
representative or his estate liable for any act of the firm done after his death : S. 28(2).

LIABILITY BY HOLDING OUT – Where a person represents himself, or knowingly permits himself to be
represented, as a partner in a firm, he becomes liable as a partner in that firm, to any one who, on
the faith of any such representation, has given credit to the firm. The person so representing
himself, or permitting himself to be so represented, is known as a partner by holding out or a
partner by estoppel. Even want of knowledge on his part of the effects of his acts and conduct
would not absolve him from liability.

In other words, where a man holds himself out as a partner, or allows others to do it, he is then
estopped from denying the character he has assumed, upon the faith of which creditors may be
presumed to have acted. A man so acting may be rightly held liable as a partner by estoppel. In
other words, the doctrine of "holding out" is a part of the principle of estoppel, which lays down
that where one person, by words or conduct, induces another to believe him and act upon the
existence of a particular state of facts, he cannot afterwards, as regards that person, deny the
existence of such facts.

Of course, this doe nd mean that such a person actually becomes a partner of that firm, or that he has
any rights against the other partners for a share of the profits, - or any other thing. The legal effect of S.
28 is that such a person becomes liable to the third party as if he was a partner in that firm.

Thus, A is in the habit of representing himself to be a partner of a particular firm. B. on the strength of
such representation, and without giving any notice to A. supplies goods on credit to the firm. A would be
liable as a partner to B for the price of the goods.
It will thus be seen that liability by holding out is merely a special application of the principle of estoppel
enunciated by S. 115 of the Indian Evidence Act, 1872.

The rule embodied in this section was laid down by Parke J. in an old English case, where he observed as
follows:

....... it could have been proved that the defendant held himself out to be partner, not to the world for
that is a loose expression but to the plaintiff himself, he would be liable to the plaintiff in all transactions
in which he engaged and gave credit to the defendant upon the faith of his being such partner."
(Dickinson v. Valpy, 10 B. & C. 128)

In one English case, when a partner retired from the firm, he gave express directions that the old note-
paper (on which his name appeared) ought not to be used any more. The continuing partner, contrary to
this direction, used the old note-paper, and the question was whether the retiring partner had thus
permitted himself to be represented as a partner. It was held that, just because the retiring partner had
been careless in not destroying all the old note-paper, he could not be said to have permitted himself to
be represented as a partner of the firm. (Tower Cabinet & Co. Ltd. v. Ingram, 1949 All E.R. 1033)

ESSENTIALS OF S. 28 – In order to stop a person from denying that he is a partner on the doctrine of
"holding out", the following two important elements must co-exist:

1. A person must represent himself to be a partner in a firm, or knowingly permit himself to be

represented; and

2. Another person must have given credit to the firm on the faith of such representation

The following seven additional points may also be noted in connection with the doctrine of holding out:

(i) The representation may be express or implied. It need not necessarily be by words, spoken or written.
It need not be made by the person himself, but may be made by others.

(ii) There will be no representation by conduct if the acts relied upon are ambiguous.
(iii) A general representation to the world at large is not sufficient, unless the person who gives credit
can satisfy the Court that he was aware of, and acted upon it to his prejudice.

(iii) To establish liability, it is not essential to show that the party making the representation (or
permitting it to be made) has acted fraudulently or negligently. Even want of knowledge on
his part of the effects of his acts and conduct, would not absolve him from liability, if his acts
and conduct were such as would induce a reasonable man to believe that he was a partner,
and to act upon such belief. The main thing is whether the representation has caused the
person to whom it was made to act on the faith of it, so as to alter his position.

(v) A former owner does not become a partner by estoppel merely because the firm has continued
to use its old name of which his own name forms a component part. The rule of estoppel is binding
on a former partner who has retired without giving proper notice of his retirement

(vi) There is no liability in tort on the ground of holding out, because the injured person cannot claim
that he was led to suffer the injury by his belief in any representation. Thus, B allowed his name to
appear on a traction-engine. A hired the engine, and through his negligence, injured C. C sued B on
the ground of "holding out".- It was held that B was not liable.

(vii) There can be no holding out to a person who is aware of the actual facts, e.g., a person who has
inspected the entries in the Register of Firms, in case of a firm which has been registered under the
Act.

EFFECTS OF 'HOLDING OUT. - If a person holds himself out to be a partner of a firm, he becomes
personally liable. He does not thereby become a partner in the firm; and he is also not entitled to
any rights as against those who are in fact partners in the firm. By holding out to be a partner, he
does not become an agent of the firm. He merely makes himself personally liable for the credit given
to the firm on the faith of his representation.

D. RIGHTS OF A TRANSFEREE OF A PARTNER'S INTEREST (S. 29)

Can a partner transfer his interest in the partnership to a stranger? The wording of S. 29 clearly
suggests that he can. A transfer by a partner of his interest in the firm may be either absolute, or by
mortgage, or by creation by him of a charge on such interest. However, the fundamental principle
underlying the law of partnership is that a stranger cannot be foisted upon the remaining partners
against their will. Consequently, even when a partner transfers his interest in firm, the transferor
does not cease to be a partner, nor does the transferee become one. S. 29 of the Act deals with such
transferee's rights, both during continuance of partnership and after its dissolution.

Transferee's rights during continuance of partnership (S. 29(1)]

A transfer by a partner of his interest in the firm (either absolute or by mortgage, or by the creation
of a charge on such interest) does not entitle the transferee, during the continuance of the firm, to
interfere in the conduct of the business, or to require accounts, or to inspect the books of the firm,
but entitles the transferee only to receive the share of profits of the transferring partner, and the
transferee has to accept the accounts of profits agreed to by the partners : S. 29(1).

S. 29(1) can be analysed thus

During the continuance of the partnership, the transferee of a partner's interest is not entitled to

(1) interfere in the conduct of the business; or

(2) inspect accounts; or

(3) inspect the books of the firm.

He is entitled only to receive the share of profits of the transferring partner, and he must accept
(i.e., he cannot question or dispute) the accounts of profits agreed to by the partners: S. 29(1).

Transferee's rights after discontinuance of partnership (S. 29(2)]

If the firm is dissolved, or if the transferring partner ceases to be a partner,the transferee is entitled,
as against the remaining partners, to receive the share of the assets of the firm to which the
transferring partner is entitled, and, for the purpose of ascertaining that share, to an account as
from the date of the dissolution: S. 29(2).

In other words, if the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled to receive the transferring partner's share of the assets of the firm, and for this
purpose, is also entitled to an account as from the date of dissolution.
E. LAW RELATING TO MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP (S. 30)

S. 30 of the Act deals with the right, liabilities and disabilities of a minor in a partnership

At the very outset, S. 30 lays down that a minor cannot be a partner in a firm, but, with the consent
of all the partners, he may be admitted to the benefits of partnership

In India, a minor is not competent to contract at all (S. 11 of the Indian Contract Act), and therefore,
cannot be a partner of a firm. (Sanyasi Charan Mandal v. Krishnadhan Banerji, 1922 L.R. 49)
Needless to say, there cannot be a partnership wholly of minors (Shivaram v. Gaurishankar, A.I.R.
1961 Bom. 136). The Punjab High Court has laid down that if a minor is made a fullfledged partner,
the entire partnership deed is invalid, not only vis-a-vis the minor, but also with respect to the other
partners who are not minors.

The Allahabad High Court has held that if a partnership consists of two partners and one of them
dies, and the other admits a minor to the benefit of the business, the minor cannot enforce his
rights under Section 30. That section does not apply in such a case, because there was no subsisting
partnership to the benefit of which the minor could be said to be admitted. (Lachmi Narain v. Beni
Ram, 1931 53 All. 479)

The Act does not lay down as to which are the acts which would amount to admitting a minor to the
benefits of a partnership. No doubt, there must be some definite act on the part of the partners,
such as the allotment of a share, or a distribution of a part of the profits, or any other similar act.

Such a minor has a right to a share of the property and of the profits of the firm as may be agreed
upon, and he may have access to and inspect and copy any of the accounts of the firm. (S. 30(2)]

S. 30 also lays down that where any person has been admitted as a minor to the benefits of
partnership in a firm, the burden of proving the fact that such person had no knowledge of such
admission until a particular date after the expiry of six months of his attaining majority lies on the
person asserting that fact.

Rights of a minor
The following seven rights of a minor are to be deduced from S. 30. Viz

1. He may be admitted to the benefits of a partnership.

2. He has a right to share the property and profits of the firm.

3. He may have access to and inspect and copy, the accounts of the firm.

4. He may sue for accounts on severing his connection with the firm

5. On attaining majority, he has the option of becoming a partner in the firm, in which case he will
be entitled to the share to which he was entitled as a minor.

6. On attaining majority, he also has the option of severing his connection with the firm, in which
case his share is not liable for any act of the firm done after the date of public notice that he has
elected not to become a partner. He is also entitled to sue the partners for his share of the property
and profits.

7. Lastly, he is not personally liable for any acts of the firm during his minority, he cannot be
adjudged insolvent if the debts of the firm cannot be satisfied out of the property of the firm.

Liabilities of a minor (S. 30(3)]

The following are the four liabilities of a minor admitted to benefits of a partnership

1. His share is liable for the acts of the firm, but he has an option of severing his connection with the
firm within six months of his attaining majority or of his obtaining knowledge that he had been
admitted to the benefits of the partnership, whichever date is later.

2. If, on attaining majority, he elects to become a partner,- he becomes personally liable to third
parties for all acts of the firm done since he was so admitted to the benefits of the partnership.

3. After attaining majority and before giving public notice, he may be liable for holding himself out as
a partner.

Minor's disabilities (S. 30(4)]

Such a minor cannot sue the partners for an account or payment of his share of the property or
profits of the firm, except when severing his connection with the firm, and in such a case, the
amount of his share is to be determined by a valuation made as far as possible in accordance with
the rules contained in Section 48. All the partners acting together, or any partner entitled to dissolve
the firm upon notice to the other partners, may elect, in such a suit, to dissolve the firm, and
thereupon the Court will proceed with the suit as one of dissolution and of settling accounts
between the partners, and the amount of the share of the minor is determined along with the
shares of the partners.

So long as the minor remains a minor, he is governed by the aforesaid rule. But what is his position
as and when he attains majority?

In answer to the above question, S. 30 provides that at any time within six months of his attaining
majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership,
(whichever date is later), such a person may give public notice that he has elected to become, or
that he has elected not to become, a partner in the firm, and such notice determines his position as
regards the firm. If he fails to give such notice, he becomes a partner in the firm on the expiry of the
said period of six months.

Where such person elects not to become a partner,

(a) his rights and liabilities continue to be those of minor under this section upto the date on which
he gives public notice;

(b) his share is not liable for any acts of the firm done after the date of the notice; and

(c) he is entitled to sue the partners for his share of the property and profits.

ENGLISH LAW -- The rules of English law regarding a minor's position in a partnership differ from
those of Indian law in the following two respects:

1. Under the English law, a minor's contract is not void, but voidable, so that there is nothing to
preclude him from entering into a contract of partnership. Though while he is a minor, he incurs
 no liability and is not responsible for the debts of the firm, when he comes of age, or even
before, he may disaffirm past transactions.

2. If such a minor, on coming of age, neither affirms nor disaffirms the partnership, in a English law, he is
held liable only for debts incurred by the firm since his majority, and is not conclusively held to ratify
obligations contracted during his minority. (Goode v. Harrison, (1821) B. & Ald. 147)

As already observed in India, the minor would be liable for all obligations incurred by the firm since he
was admitted to the benefits of partnership, whereas in England, he would be liable only for debts by
the firm since his majority

Chapter 5

INCOMING AND OUTGOING PARTNERS (Ss. 31-38 & S. 72)

A. NEW PARTNERS [Ss. 30(7) & 31]

Introduction of a new partner (S. 31)

S. 31 provides that no person can be introduced as a partner into a firm without the consent of all the
existing partners. Moreover, a person who is introduced as a partner into a firm does not thereby
become liable for any act of the firm done before he became a partner.

It may be noted that there is nothing to prevent an incoming partner agreeing with his co-partners to
make himself liable for the debts incurred by the firm prior to his admission therein. But, even where he
has so agreed, the agreement does not confer any right on creditors of the old firm to impose the old
debts on the new partner. They can acquire such a right only by entering Into an agreement between
themselves and the new partner, either expressly or by implication

Rights and liabilities of an incoming partner [Ss. 30(7) & 31]

Introduction of partner.-Subject to contract between the partners, and to the right of a minor to
exercise his option under S. 33, the consent of all existing partners is necessary for the introduction of a
new partner : S. 31(1).

Further, a new partner cannot be held responsible for the acts of the old partners, for, at the time when
the acts were done, they were not authorised to act as his agent. Nor can he be held liable on the
ground that he has ratified those acts, for ratification is impossible, since the acts were not done on his
behalf. He is liable, however, for new liabilities arising out of a continuing contract made by the firm
before he joined it.

The only way in which a new partner can be made liable to the creditors of the firm in respect of past
debts is by proving

(1) that the re-constituted firm has assumed the liability to pay the debt;

and

(2) that the creditor concerned has agreed to accept the reconstituted firm as his debtor, and discharge
the old firm from its liability. Where a minor admitted to the benefits of partnership elects, on attaining
majority, to become a partner, he becomes personally liable for all the acts done since the date of his
admission : S. 30(7).

B. RETIREMENT OF A PARTNER [Ss. 32, 33(2) & 72]

S. 32(1) lays down three ways in which a partner can retire. It says that a partner may retire

(1) with the consent of all the other partners; or

(2) in accordance with an express agreement between the partners; or

(3) where the partnership is at will, by giving notice in writing to all the other partners of his intention to
retire.
A retiring partner may be discharged from any liability to any third party for acts of the firm done before
his retirement by an agreement made by him with such third party and the partners of the re-
constituted firm, and such agreement may be implied by a course of dealing between such third party
and the re-constituted firm after he had knowledge of the retirement: S. 32(2).

Thus, A, B and Care partners. A retires, and a new partner X is introduced into the firm. X agrees to take
over the liability of A. D, a creditor agrees with A and the re-constituted firm of B, C and X, that he will
look only to the new firm for the payment of his debt. A, the retiring partner, is discharged from liability
to D

154

THE SALE OF GOODS ACT

However, a retired partner is not liable to any third party who deals with the firm without knowing that
he was a partner : S. 32(3).

Thus, A, B and Care partners. C, who is an active partner, retires without giving public notice of
retirement. A and B in carrying on the old business incur a liability towards X C is also liable to X

So also, A, B and C are partners. C, who is an active partner, retires without giving public notice of his
retirement. Thereafter, C has a business transaction with X, purporting to act on behalf of the firm from
which he had retired. A and B are also liable to X

ENGLISH LAW - Under English Law, the right of a partner to retire is quite restricted. In the words of
Lindley, "there is only one method by which a partner can retire without the consent of his co-partners,
and that is by dissolving the firm".

Mode of giving public notice (S. 72)

State the mode of giving public notice under the partnership Act.

S. 72 lays down the rules relating to giving of public notice as follows: (A) If such notice relates to(A)
(i) the retirement of a partner of a registered firm; or

(ii) the expulsion of a partner of a registered firm; or

(iii) the election (to become or not to become a partner) by a person who was admitted to the benefits
of a registered firm and who has now attained majority;

the notice must be(i) given to the Registrar of Firms (under S. 63); and (ii) published

(a) in the local Official Gazette, and (b) in at least one vernacular newspaper circulating in that district.

(B) If such notice is to be given in any other case,

(B) the notice must be published

(i) in the local Official Gazette; and

(ii) in at least one vernacular newspaper circulating in that district.

It may be noted that publication in a vernacular newspaper should be in the district where the firm has
its place of business, and in case there is more than one, the principal place of business.

DORMANT PARTNER The terms "dormant partner" and "sleeping partner" are not used by the Act. In
common parlance, a dormant or sleeping partner is one who has only contributed capital to the firm,
but who does not take an active part in the conduct of the business, and who may be, and often is,
prohibited from taking such active part. By remaining a partner, he is always liable for the debts of the
partnership, whether third parties know of his being a partner or not

Even if a dormant partner retires without public notice, he is not liable to any third party who
subsequently deals with the firm, without knowing that he was a partner (Proviso to S. 32(3)]. Similarly,
where a party dealing with the firm after dissolution of the old partnership had no knowledge whatever
of the dormant partner's previous connection with the partnership, he cannot get any relief as against
the dormant partner. (S. 45)

As stated above, a dormant partner may retire from a firm without giving notice to the world. The
reason for this is that sleeping partner, who has never been known to creditors as a partner, has never
been given credit by third parties. Thus, A, B and C are partners. C is a sleeping partner, who has not
been known by creditors to be a partner of A and B. C retires without giving public notice of his
retirement. C is not liable for subsequent debts incurred by A and B.

Lastly, S. 33(2) lays down that all the above rules which apply to a retired partner, also apply to an
expelled partner.

C. RIGHTS AND LIABILITIES OF AN OUTGOING PARTNER (Ss. 32, 36 & 37)

His rights (Ss. 36-37)

An outgoing partner has two rights, viz.

1. To carry on competing business, and

2. To share the subsequent profits, if the other partners continue the firm's business without settling his
accounts.

Both these rights are discussed below in their necessary details.

1. An outgoing partner may carry on a business competing with that of the firm, and he may advertise
such business, but, subject to contract to the contrary, he cannot

(a) use the firm name; or

(b) represent himself as carrying on the business of the firm; or

(c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner: S.
36(1).

As seen earlier, a partner may make an agreement with his partners, that on ceasing to be a partner, he
will not carry on any business similar to that of the firm within a specified period or within specified local
limits; and, notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such an
agreement is valid if the restrictions imposed are reasonable : S. 36(2).

2. When the continuing partners carry on the business of the firm with the property of the firm without
any final settlement of accounts as between them and the outgoing partner,-then in the absence of a
contract to the contrary,the outgoing partner is entitled to claim his share in the profits of the firm, or at
his option, interest at 6 per cent per annum on the amount of his share in the property of the firm : S.
37.

Thus, A and B are partners. The partnership is dissolved by consent, and it is agreed that the assets and
business of the firm would be sold by auction. A nevertheless continues to carry on the business on the
partnership premises, with partnership property and capital, and on his own account. What are B's
rights ?-A must account to B for the profits thus made; alternately, B may claim 6% interest on his share.

A firm consisted of four partners A, B, C and D. A died, leaving a minor son X. B sold his interest in the
firm to Y. The remaining partners thereupon continued the firm as they were entitled to do. What are
the rights of X and Y? Can they insist on being admitted as partners ? - X and Y cannot insist on being
admitted as partners, for a partnership can only arise as a result of a voluntary agreement, express or
implied between two or more persons. But each of them can claim a share in subsequent profits under
S. 37.

His liabilities (Ss. 32 & 36)

The liabilities of an outgoing partner are two:

1. An outgoing partner will be liable to third parties for all acts of the firm until he gives public notice of
retirement: S. 32(3). (For mode of giving public notice, see S. 72, discussed above.)
2. An outgoing partner has no right, (a) to use the firm's name, or (b) to represent himself as carrying on
the business of the firm, or (c) to solicit the custom of the old customers of the iivm-unless the other
partners have contracted themselves out of their rights in this respect : S. 36.

D. EXPULSION OF A PARTNER (S. 33)

S. 33 deals with expulsion of a partner. It lays down that a partner cannot be expelled from a firm by any
majority of the partners, save in the exercise, in good faith, of powers conferred by contract between
the partners.

All the provisions which apply to a retired partner also apply to an expelled partner.

POWER OF EXPULSION, HOW EXERCISED A power to expel a partner can only be conferred by an express
agreement between the partners. Even where such a power is conferred by the terms of the partnership
agreement, it can only be exercised by a majority of the partners, and it must be exercised in utmost
good faith. Reasonable warning and opportunity of explanation must be given to the partner sought to
be expelled.

An irregular expulsion, being wholly inoperative, the person against whom it is directed does not cease
to be a partner. He may claim reinstatement in his rights as a partner, but he cannot recover damages
for wrongful expulsion. (Wood v. Wood, 1874 L.R. Ex. 190). (It is indeed difficult to understand as to why
a partner who has been in fact wrongfully expelled and damnified, should not have the right to recover
damages.)

Even where a Partnership Deed contains an explusion clause, it will not be deemed to have been
exercised in good faith, unless it is exercised honestly in the best interests of the firm and after giving
that partner an opportunity to be heard. (Const v. Harris, 1823 T & R 496)

In one case, a Partnership Deed conferred a power of explusion on the ground of misconduct. One of
the partners issued letters to the Bank to stop payment of all cheques of the firm, unless such cheques
were signed by him, thereby dislocating the entire business of the firm. The Court held that his expulsion
would be justified on the ground of this misconduct, and could not be said to be wanting in good faith.
(Green v. Howell, 1910 1 Ch. 495)
As stated above, S. 33 provides that all the rules which govern the liability of a retired partner to third
parties will apply in the case of an expelled partner. It places an expelled partner on precisely the same
footing as a retired partner, as regards his liabilities for existing and future debts of the firm. Sec. 33
regards expulsion in the same way as Sec. 32 regards retirement, that is, it makes the assumption that
the firm continues after expulsion without a dissolution of partnership as between the remaining
partners.

E. INSOLVENCY OF A PARTNER (S. 34)

S. 34 lays down law as to the effect of insolvency of a partner. It provides that where a partner in a firm
is adjudicated an insolvent,- he ceases to be a partner on the date on which the order of adjudication is
made, whether or not the firm is thereby dissolved.

When under a contract between the partners, the firm is not dissolved by the adjudication of a partner
as an insolvent,-the estate of a partner so adjudicated is not liable for any act of the firm, and the firm is
not liable for any act of the insolvent, done after the date on which the order of adjudication is made.

The insolvency of a partner does not invariably result in dissolution of the firm, for it is open to the
partners to agree that the adjudication of a partner as an insolvent will not dissolve the firm as regards
the continuing partners. Sections 34, 41(a), 42(d) and 47 may conveniently be read together when
dealing with the effect of insolvency of one or more partners in a firm.

Effects of insolvency of a partner (Ss. 34, 41, 42 and 47)

The effects of the insolvency of a partner may be summed up as follows:

(i) The partner adjudicated an insolvent ceases to be a partner on the date on which the order of
adjudication is made : S. 34.

(ii) The firm is dissolved on the date of the order of adjudication, unless there is a contract to the
contrary : S. 42.

(iii) If all the partners, or all the partners but one, are adjudicated insolvent, the firm is automatically
dissolved : S. 41(a).
(iv) The estate of the insolvent is not liable for any act of the firm after the date of the order of
adjudication. Adjudication as an insolvent is a notorious event, and no further notice thereof is required
to old or new customers of the firm : S. 34.

(v) After the dissolution of the firm, the firm is not bound by the acts of a partner who has been
adjudicated insolvent. However, this would not affect the liability of any person who has, after such
adjudication, represented himself, or knowingly permitted himself to be represented, as a partner of the
insolvent: S. 47.

F. DECEASED PARTNER (Ss. 35, 42 & 45)

Subject to contract between the partners, a firm is dissolved by the death of a partner : S. 42(c). Where
a firm is thus dissolved, though the surviving partners continue to be liable for acts done on behalf of
the firm until public notice of dissolution is given, the estate of the deceased partner is not subject to
any such liability: S. 45(1).

S. 35 deals with the liability of the estate of a deceased partner. It provides that where under a contract
between the partners, the firm is not dissolved by the death of a partner,-the estate of a deceased
partner is not liable for any act of the firm done after his death.

LIABILITY OF A DECEASED PARTNER'S ESTATE - Reading Sections 35 and 45(1) together, it is clear that
the estate of a deceased partner is not liable for any act of the firm done after his death, whether the
death has dissolved the firm or not. No public notice is required in either case to absolve the estate of
the deceased partner from liability for the future obligations of the firm.

Revocation guarantee by change in firm (S. 38)

A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is, in
the absence of agreement to the contrary, revoked as to future transactions, from the date of any
change in the constitution of the firm : S. 38.

Thus, A becomes a surety to the firm of “N.C. Mookerji” for B's conduct as cashier to the firm. The
constitution of the firm is subsequently changed, and its name is altered to "N. Mookerji & Sons". A is
not liable for B's defalcation subsequent to the change. (Neel Comul Mookerjee v. Bipro Das
Mookerjee1901 28 Cal. 597)

Chapter 6

DISSOLUTION OF FIRMS (Ss. 39-55)

The rules regulating the dissolution of a firm are contained in Sections 39 to 55 of the Act. S. 39 lays
down that the dissolution of partnership between all the partners of a firm is called the 'dissolution of
the firm'.

The dissolution of a firm may take place in one of the following five ways:

1. As a result of an agreement between all the partners : S. 40.

2. Compulsory dissolution, i.e.,

(a) By the adjudication of all the partners, or of all the partners but one, as insolvent : S. 41(a). (This
clause has been omitted by the Insolvency and Bankruptcy Code, 2016.)

(b) By the business of the firm becoming unlawful : S. 41(b).

3. Subject to agreement between the partners, on the happening of certain contingencies, such as

(i) efflux of time;

(ii) completion of the adventure for which it was entered into;

(iii) death of a partner, and

(iv) insolvency of a partner : S. 42.

4. By a partner giving notice of his intention to dissolve the firm, in case of a partnership at will : S. 43.
5. By intervention of the Court in case of

(i) a partner becoming of unsound mind; (ii)permanent incapacity of a partner;

(iii) misconduct of a partner affecting the business of the firm;

(iv) wilful or persistent breaches of agreement by a partner;

(v) transfer or sale or charge of the whole interest of a partner;

(vi) improbability of the business being carried on save at a loss;

(vii) the Court being satisfied on any other equitable ground that the firm should be dissolved : S. 44.

The above can be summarised in a tabular form thus:

DISSOLUTION WITHOUT THE INTERVENTION

OF THE COURT

1. By agreement (S.40)

2. Compulsory dissolution (S. 41) (a) By the business becoming unlawful.

3. On the happening of certain con

tingencies : (S. 42)

(a) expiry of a fixed term;

UNDER THE ORDER OF THE COURT

(Ss. 40-43) On the ground: (S. 44)

1. That a partner has become of unsound mind.

(b) completion of the adventure;

(c) death of a partner;

(d) insolvency of a partner

4. By notice from one partner to the others - in case of partnership at will. (S. 43)

2. That a partner (other than the one suing) has become permanently incapable.

3. That a partner (other than the partner suing) is guilty of conduct likely to prejudicially affect the
business.

4. That a partner (other than the partner suing) wilfully or persistently commits a breach of agreement.

5. That a partner (other than the partner suing):

(a) has transferred the whole of his interest in the firm to a third party; or

(b) has allowed his share to be charged under 0.21, r. 49 of the Civil Procedure Code; or

(c) has allowed his share to be sold in the recovery of arrears of land revenue.

6. That the business of the firm cannot be carried on save at a loss.

7. On any other just and equitable ground.

A. MODES OF DISSOLUTION

Dissolution by agreement (S.40)

A firm may be dissolved –

(a) with the consent of all the partners; or

(b) in accordance with a contract between the partners.

Clause (a) is an application of the general rule of law which lays down that a contract can be discharged
by mutual agreement.

Clause (b) covers a case where dissolution occurs in pursuance of a contract previously made, the most
common example being that of a clause in the partnership deed itself, providing for dissolution in
certain events, as for instance, in the case of physical incapacity, or on the ground of incompatibility of
temperament, and so on.

2. Compulsory dissolution (S. 41)

A firm is dissolved -

(i) by the adjudication of all the partners, or of all the partners but one. as insolvent. (Omitted by the
Insolvency and Bankruptcy Code, 2016)

(ii) by the happening of any event which makes it unlawful for the business of the firm to be carried on,
or for the partners to carry it on in partnership.

However, it is also provided that where more than one separate adventure or undertaking is carried on
by the firm, the illegality of one or more would not of itself, cause the dissolution of the firm in respect
of its lawful adventures and undertakings.
Cases : A and 10 others form a partnership and carry on a particular trade. Later, the Legislature passes
an Act which makes it unlawful for more than 10 persons to carry on that trade in partnership. The
partnership is dissolved.

X, domiciled in England, carries on business in partnership with Y, domiciled in Germany. War breaks out
between England and Germany. The partnership between X and Y is dissolved. (Griswold v. Waddington,
(1818) Supreme Court, N. Y. 15 Johns. 57)

X and Y both Indians, charter a ship to go to a port in country A, and receive a cargo on their joint
venture. Before the ship can arrive, war breaks out between India and country A, and continues beyond
the date on which the ship was to be loaded. This partnership between X and Yis dissolved. (Esposito v.
Bowden, 1857 7 E & B 763

3.Dissolution on the happening of certain contingencies (S. 42) Subject to contract between the
partners, a firm is dissolved

(a) If constituted for a fixed term,- by the expiry of that term;

(b) If constituted to carry out one or more adventures or undertakings- by the completion thereof;

(c) By the death of a partner, and I

d)By the adjudication of a partner as insolvent.

Clause (a): Any partnership constituted for a fixed term, as for instance, for five years, is dissolved at
the end of such specified time. Of course, such a firm can also be dissolved – for any other lawful
cause — even before the expiry of such period.

Clause (b) : In one case, a partnership was formed to undertake the work of white-washing of
military barracks and construction of latrines. It was held that the firm would cease to exist when
such work was over. (Banshi Lal V. Jamuna Prasad, A.I.R. 1981 All. 324)

- Clauses (c) and (d): If one of the partners dies or is adjudicated insolvent, the firm is dissolved,
unless there is a stipulation to the contrary in the Partnership Deed. Thus, it is perfectly in order to
provide that the death or insolvency of a partner would not dissolve the firm, and that such firm
would continue to do business with the remaining partners. Such a stipulation may be express or
implied.

The only logical exception is that such a stipulation will be of no effect when the partnership consists
of only two partners. Thus, in the Partnership Deed executed between A and B, it is provided that,
on the death of one of the partners, the firm would not stand dissolved. A dies. The partnership is
dissolved, as there cannot exist a partnership consisting of only B.

4. Dissolution by notice of partnership at will (S. 43)

Where a partnership is at will,- the firm may be dissolved by any partner giving notice in writing to
all the other partners of his intention to dissolve the firm. The firm is dissolved as from the date
mentioned in the notice as the date of dissolution or, if no date is mentioned, as from the date of
the communication of the notice.

5. Dissolution by the Court (S.44)

S. 44 lays down the seven important cases in which the Court can order dissolution. This section
provides as follows:

At the suit of a partner, the court may dissolve a firm on any of the following grounds, namely

1. That a partner has become of unsound mind.

Such a suit may be filed by the next friend of the partner who has become of unsound mind, or by
any other partner.

In such cases, dissolution becomes necessary to protect the interest both of the insane as well as the
other partners.

2. That a partner (other than the partner suing) has become in any way permanently incapable of
performing his duties as a partner.
Such incapacity may be due to illness, mental or physical. However, such illness should be of a
permanent nature. Thus, in one English case, it was held that the paralysis of a partner was not a
ground for dissolution of the firm, as the medical evidence showed that the attack of paralysis was
only temporary. (Whitwell v. Arthur, 35 Beav. 140)

3. That a partner (other than the partner suing) is guilty of conduct which is likely to affect
prejudicially the carrying on of the business, regard being had to nature of the business.

Under this clause, moral turpitude of a partner would be a sufficient ground. Professional
misconduct would also suffice. Thus, misapplication by a Solicitor and adultery by a doctor have
been held to be sufficient grounds.

Although it is not necessary that such misconduct should be connected with the business of the
firm, it should be of such a nature that it would damage the business prospects of the firm. Thus, a
Court conviction for travelling without a ticket (Carmichael v. Evans, (1904) 90 LT 573), or for breach
of trust (Essel v. Hayward, (1860 30 Beav. 130) have been held to be sufficient grounds.

However, misconduct in one's private life may not be a sufficient ground. In Snow v. Milford (1868
18 LT 142), a partner of a firm of bankers had committed adultery with several women in the city
where the banking business was carried on, and his wife had also left him. When the other partners
applied for dissolution on this ground, the Court dismissed the suit, Lord Romilly observing as
follows : "lam of the opinion that however much a court may reprove the conduct of a man who is
guilty of adultery, that is no reason for turning him out of a common trading partnership. In the case
of bankers, how can the court say that a man's money is less safe because one of the partners
commits adultery?"

4. That a partner (other than the partner suing) wilfully or persistently commits a breach of
agreement relating to the management of the affairs of the firm or the conduct of its business, or
otherwise so conducts himself in business matters, that it is not reasonably practicable for the other
partners to carry on the business in partnership with him.

It has been held that destroying old account books, preparing false balance-sheets and making false
entries in books are sufficient grounds under this clause.

5. That a partner, other than the partner suing,

(a) has, in any way, transferred the whole of his interest in the firm to a third party; or

(b) has allowed his share to be charged under Order 21, Rule 49 of the Civil Procedure Code, 1908;
or

(c) has allowed his share to be sold in the recovery of arrears of land revenue, or any other dues
which are recoverable as arrears of land revenue.

6.That the business of the firm cannot be carried on save at a loss.

The reason for this ground is that the motive of every partnership is the acquisition of gain. If,
therefore, the business can be continued only at a loss, it would be a good ground for the Court to
dissolve such a partnership.

7. On any other ground which renders it just and equitable that the firm should be dissolved.

Thus, if the substratum of the partnership is gone or if there is a deadlock between the partners, the
Court may wind up the partnership on the ground that it is just and equitable to do so.

The power of the Court to dissolve a partnership on this ground is analogous to its power to wind up
a company on the just and equitable ground under S. 433 of the Companies Act, 1956.

Thus, courts have ordered winding up of a partnership firm in the following cases, observing that it
would be just and equitable to wind up the firm:

(a) when the substratum of the partnership was gone; (b) when there was a serious deadlock
between the partners;

(c) when a partner committed adultery with a co-partner's wife (Hasham v. Nariman, AIR 1924 Bom.
57
(d) when there was a total want of cooperation and mutual confidence between the partners,
leading to chronic disputes (Babu Lal v. Kanhaiya Lal, 1953 A.V.P. 43);

(e) when there was a perpetual state of tense feelings between the partners (Hasham v. Nariman,
above)

As regards the just and equitable clause, Lord Lindley has rightly remarked that the Court ought not
to fetter itself by any rigid rules in this regard. This clause cannot be construed to be ejusdem
generis with (i.e., of the same type as) the other six which precede it. In fact, an application of the
ejusdem generis rule of construction would not leave any room for this clause to operate. However,
the words "just and equitable" connote something more than mere convenience. A mere opinion of
a Judge that dissolution of a firm would, on the whole, be the best course for that firm, would not
be enough.

The exercise of the power by the Court under this clause is discretionary. However, this discretion is
judicial discretion, and must be exercised with due regard to the circumstances and exigencies of
the case. On the other hand, this discretion ought not to be crystallized by decisions laying down
definite rules on the point. Rather, the Court should have untrammelled discretion and decide each
case on its own merits.

B. RIGHTS AND LIABILITIES OF PARTNERS AFTER DISSOLUTION (S. 45-55)

Ss. 45 to 55 lay down the rights and obligations of partners after dissolution. They lay down the rules
for the guidance of the partners.

RIGHTS (Ss. 46 & 51-54)

Upon dissolution, a partner has four rights, as under:

1. Right to lien (S. 46)

On the dissolution of a firm, every partner is entitled to have the property of the firm applied in
payment of the debts and liabilities of the firm, and to have the surplus distributed among the
partners (or their representatives) according to their rights.
PARTNER'S EQUITABLE LIEN - In order to discharge himself from the responsibility to which a partner
is subject, every partner has a right to have the property of the firm applied first in payment of the
debts and liabilities of the firm; and in order to secure his proper share of the assets of the firm,
every partner has the right to have the surplus distributed among the partners or their
representatives, according to their rights. This right is known in English law as the equitable lien of a
partner. Although this right exists during the partnership, it is not so much in evidence during the
continuance of a firm and comes into full play in the event of its dissolution.

Pollock defines equitable lien as a partner's “right to have a specific portion of property dealt with in
particular way for the tion of specific claims". It is thus distinct from a 'possessory lien', which is a
mere right to hold the goods of another man until he makes a certain payment, and which does not
carry with it the right of dealing with the goods.

2. Right to return of premium (S. 51)

Where a partner has paid premium on entering into partnership for a fixed term, and the firm is
dissolved before the expiry of that term otherwise than by the death of a partner,- he is entitled to
repayment of the premium (or of such part thereof as may be reasonable), regard being had to the
terms upon which he became a partner and to the length of time during which he was a partner,
unless

(a) the dissolution is mainly due to his own misconduct; or

(b) the dissolution is in pursuance of an agreement containing no provision for the return of the
premium or any part of it.

The conditions necessary to attract the applicability of Section 51 are:

(i) The partnership must be for a fixed term.

(ii) The firm must have been dissolved prematurely, i.e., before the expiry of that term.

(iii) It must have been dissolved otherwise than by the death of a partner.
The section will not operate where

(i) The firm is dissolved, though prematurely, on account of the death of a partner, or

(ii) The dissolution is mainly due to the misconduct of the partner who had paid the premium, or

(ii) The dissolution is in pursuance of an agreement which contains no provision for the return of the
premium, or any part thereof.

A and B entered into a partnership for a term of ten years, A paying a premium of 10,000 to B. Just
before the end of the second year, B became bankrupt. A question arose whether A was entitled to
the return of the premium, and if so, how much ? It was held that B's insolvency terminated the
partnership and therefore B's estate must return or give credit for a proportionate part of the
premium, namely, * 8,000. (Freeland v. Stansfeld, 65 E. R. 490)

3. Right where partnership contract is rescinded for fraud or misrepresentation (S. 52)

Where a contract creating a partnership is rescinded on the ground of fraud or misrepresentation of

any of the parties thereto, the party entitled to rescind is, without prejudice to any other right,
entitled

(a) to a lien on, or a right of retention of the surplus or the assets of the firm remaining after the
debts of the firm have been paid, for any sum paid by him for the purchase of a share in the firm and
for any capital contributed by him;

(b) to rank as a creditor of the firm in respect of any payment made by him towards the debts of the
firm; and

(c) to be indemnified by the partner or partners guilty of the fraud or misrepresentation against all
the debts of the firm : S. 52.

A contract of partnership, like any other contract, may be rescinded on the ground of fraud or
misrepresentation. The rights of the party entitled to rescind are expressly provided for in the
 present section. (The principles on which a contract may be set aside for fraud or misrepresentation
are to be found in the Indian Contract Act.)

4. Right to restrain use of firm name or property (Ss. 53-54)

After a firm is dissolved, every partner or his representative may, in the absence of a contract
between the partners to the contrary, restrain any other partner or his representative from carrying
on a similar business in the firm name, or from using the property of the firm for his own benefit,
until the affairs of the firm have been completely wound up.

Where, however, any partner or his representative has bought the goodwill of the firm, nothing in
this section affects his right to use firm name : S. 53.

As seen earlier, partners may, upon or in anticipation of the dissolution of the firm, make an agreement
that some or all of them will not carry on business similar to that of the firm within a specified period or
within specified local limits; and notwithstanding anything contained in Section 27 of the Indian Contract
Act, such an agreement is valid, if the restrictions imposed are reasonable : S. 54.

LIABILITIES (Ss. 45 & 47)

Upon dissolution, a partner is subject to two main liabilities, viz:

1. Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties
for any act done by any of them, which would have been an act of the firm if done before the
dissolution, until public notice is given of the dissolution : S. 45(1).

The principle on which this provision is based is that, after the dissolution of a firm, persons dealing with
its partners are entitled to assume that they continue to be each other's agents, until public notice is
given of the dissolution. It is only fair and equitable that a secret dissolution should not be allowed to
prejudice the rights of third parties, who have continued to deal with the firm in ignorance of the
dissolution and upon the assumption that the relationship of partnership has continued.

Ex parte Robinson (1883) 3 Dea. & Ch. 376 – A and B, partners in a trade, agree to dissolve the
partnership, and execute a deed for that purpose, declaring the partnership dissolved as from 1st
January, 2010, but do not discontinue the business of the firm or give notice of the dissolution. On 1st
February, 2010, A indorses a bill in the partnership name to C. The firm is liable on the bill under S. 45(1).
But the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having
been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under
this section for acts done after the date on which he ceases to be a partner : S. 45, provison.

Thus, there are three cases where no notice of dissolution need be given, namely,

(i) where a partner dies;

(ii) where a partner is adjudicated insolvent;

(iii) where a dormant partner (i.e., partner who was not known to the third party to be a partner) retires.

2. After the dissolution of a firm, the authority of each partner to bind the firm, and the other mutual
rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be
necessary to wind up the affairs of the firm, and to complete transactions begun but unfinished at the
time of the dissolution, but not otherwise : S. 47.

A partner is an agent of the firm for the purposes of the business of the firm: S. 18. The general rule is
that the agency of a partner is terminated by dissolution of the firm. But even after dissolution of the
firm, necessary that someone should have authority to wind up the affairs of the firm. Hence, S. 47
makes the necessary provisions in this connection.

After the dissolution of the firm, a partner has, however, no authority to acknowledge a debt or to make
a part-payment, because it is not necessary for the winding up

It is to be noted, however, that the firm is, no case, bound by the acts of a partner who has been
adjudicated insolvent. But a person, who represents himself, or knowingly allows himself to be
represented, as the partner of an insolvent will be liable for the latter's acts : Proviso to S. 47.

Woodbridge v. Swann (1833) 4 B. & Ad. 633 - A and B are partners. A becomes bankrupt. B continues to
carry on the trade of the firm and pays partnership money into a bank to meet current bills of the firm.
A's Trustee in Bankruptcy claims these moneys from the Bank. Here, the bank is entitled to this money
as against A's Trustee in Bankruptcy. (See S. 47)
C. RULES FOR SETTLING ACCOUNTS AFTER DISSOLUTION (Ss. 48-49 & 55)

Ss. 48, 49 and 55 (- discussed below -) prescribe the mode in which accounts are to be settled between
the parties after dissolution of partnership.

Mode of settling accounts and division of profits and losses (S. 48)

In settling the accounts of a firm after dissolution, the following rules are to be observed, subject to any
agreement by the partners :

(a) Losses, including deficiencies of capital, are to be paid first out of profits, then out of capital, and
lastly, if necessary, by the partners individually in the proportions in which they were entitled to share
profits.

A and B were partners, the agreement between them being that the profits and losses of the business
were to be shared equally. A died, and on an account of the partnership being taken, it is found that he
contributed £ 1,929 to the capital of the firm, and B contributed only £ 29. The assets amount to £
1,400. The deficiency must be shared equally by B and the estate of A.

If in the above case, the agreement between A and B was that on dissolution, the surplus assets should
be divided between the partners according to their respective interests in the capital, and on the
dissolution a deficiency of capital is found, the assets will be divided between the partners in proportion
to their capital, with the result that A's estate would have to bear the greater part of the burden.

(b) The assets of the firm, including any sums contributed by the partners to make up deficiency of
capital are to be applied in the following manner and order:

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner rateably what is due to him from the firm for advances, as
distinguished from capital;

(iii) in paying to each partner rateably what is due to him on account of capital; and
iv)the residue, if any, is to be divided among the partners in the proportion in which they were
entitled to share the profit: S. 48.

This is in accordance with the rule laid down in Garner v. Murray, (1904 1, Ch.57), a leading case on
the subject. The effect of the rule no doubt is that, in such a case, a partner who has contributed a
greater part of the capital may lose more than his other partners otherwise sharing equally with him
in the profits and losses of the firm. But as pointed out by Joyce J., in the abovementioned case,
there is nothing in the section to make a solvent partner liable to contribute for an insolvent partner
who fails to pay his share.

Payment of partnership debts and separate debts (S. 49)

Where there are joint debts due from the partnership and also separate debts due from any
partner, the partnership property must be first applied in payment of the debts of the firm, and if
there is any surplus, then the share of each partner must be applied in payment of his separate
debts, or paid to him if he has no debts. So also, the separate property of any partner must first be
applied in payment of separate debts, and the surplus, if any, in payment of the debts of the firm : S.
49.

Thus, when the partnership assets are not sufficient to pay off the joint debts of the firm, the
creditors of the firm can have recourse to the partner's separate property only after his arate
creditors have been paid. A partner is not entitled to insist that a creditor of the firm should proceed
against the assets of the firm before proceeding against the partners individually. In order to
discharge the joint debts of the firm after its dissolution, each partner has a lien over the
partnership property.

Sale of goodwill after dissolution (S. 55)

S. 55 lays down certain rules for settling accounts so far as the goodwill of the firm is concerned. It
provides that in settling the accounts of a firm after dissolution, subject to any contract between the
partners, the goodwill is to be included in the assets, and it may be sold separately or along with
other property of the firm : S. 55(1).
 Where the goodwill of a firm is sold after dissolution, a partner may carry on a business, competing
with that of the buyer and he may advertise such business, but subject to agreement between him
and the buyer, he cannot

(1) use the firm name, or

(2) represent himself as carrying on the business of the firm, or

(3) solicit the custom of persons who were dealing with the firm before its dissolution : S. 55(2).

Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer, that
such partner will not carry on any business similar to that of the firm within a specified period or
within specified local limits, and notwithstanding anything contained in Section 27 of the Indian
Contract Act, such agreement is valid if the restriction imposed is reasonable: S. 55(3).

GOODWILL "Goodwill" is the benefit arising from a firm's business connection. It is defined by Lord
Eldon in Cruttwell v. Lye, (1810 17 Ves. 335) as "the probability that old customers will resort to the
old place." But this definition is not complete. What "goodwill" means must depend on the
character and nature of business to which it is attached.

It has rightly been said that "goodwill" is "a thing very easy to describe, but very difficult to define". The
term "goodwill" is not defined in the Act. It may be described as the advantage which is acquired by a
business, beyond the mere value of the capital, stock, fund or property employed therein, in
consequence of the general public patronage and encouragement which it receives from constant or
habitual customers.

Goodwill is a commercial term, signifying the value of the business in the hands of a successor. It is
something more than the mere chance or probability of old customers maintaining their connection,
though this is material. It may be summed up as "whole advantage, whatever it may be, of the
reputation and connection of the firm, which may have been built up by years of honest work or gained
by lavish expenditure of money." Very often, it is the very life and sap of a business. In valuing the
goodwill, the Court should set such a value upon it as is existing on the day of the dissolution.

According to the Bombay High Court, the goodwill of a business is an intangible asset, being the whole
advantage of the reputation and connections formed with the customers, together with the
circumstances which make the connection durable. It is that component of the total value of that
undertaking which is attributable to the ability of the concern to earn profit over the course of years
because of its reputation in the location and other features.
What goodwill means must depend on the character and nature of the business to which it is attached;
it is composed of a variety of elements and is bound to differ in its composition in different trades and in
different businesses in the same trade. One element may preponderate in one business and another in
another business.

Goodwill may be personal or local. “Personal goodwill" is the advantage of the recommendation of the
owner of a business and of the use of his name; "local goodwill" is merely the advantage which is
attached to the premises, and must be taken into account in calculating the value of such premises.

In C.I.T. v. B.C. Srinivasa Setty (1981 128 I.T.R. 294), the Supreme Court held that no business
commenced for the first time possesses any goodwill from the start. Goodwill is generated as the
business is carried on, and may be augmented by the passage of time. Explaining the term goodwill, the
Court observed as follows:

"Goodwill denotes the benefit arising from connection and reputation. A variety of elements goes into
its making, and its composition varies in different trades and in different businesses in the same trade,
and while one element may preponderate in one business, another may dominate in another business.
Its value may fluctuate from one moment to another, depending on changes in the reputation of the
business. It is affected by everything relating to the business, - the personality and business rectitude of
the owners, the nature and character of the business, its name and reputation, its location, its impact on
the contemporary market, the prevailing socio-economic ecology, introduction to old customers and
agreed absence of competition."

Rights of the buyer 1990 MOITATION

The purchaser of the goodwill of a partnership business has following three rights:

1. He can use the firm name.

2. He can claim the benefit of any covenant by a partner not to carry on any competing business. his
vendor's successor.

3. He can trade as his vendor successor

Exception to rule against agreement in restraint of trade (Ss. 11, 36, 54, 55)
As seen earlier, an agreement in restraint of trade is void (S. 27 of Indian Contract Act). However, this
rule has to be read in light of the following exceptions laid down by the Indian Partnership Act :

1. A contract between the partners may provide that a partner will not carry on any business other than
that of the firm while he is a partner : S. 11(2).

2. A partner may make an agreement with his partners that on ceasing to be a partner, he will not carry
on any business similar to that of the firm within a specified period or within specified local limits,
provided that the restrictions imposed are reasonable: S. 36(2).

3. Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or
all of them will not carry on a business similar to that of the firm, within a specified period or within
specified local limits, provided the restrictions imposed are reasonable : S. 54.

4.Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that
such a 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 : S. 55(3).

Chapter 7

REGISTRATION OF FIRMS (Ss. 56-71)

Chapter 7 deals with the law as to registration of a firm. The most important provisions of this
Chapter are contained in Sections 68 and 69. A summary of the Chapter is given first, and
Sections 68 and 69 are then dealt with at greater length. The Chapter is thus discussed under
the following three heads:

A. General provisions relating to registration of firms B. Effect of registration C. Effect of non-

registration.

A. GENERAL PROVISIONS RELATING TO REGISTRATION OF FIRMS (Ss. 56-67; 70 & 71)

S. 56 authorises the State Government of any State to exempt that State from the operation of
this Chapter operation of the Act. S. 57 then provides that the Government may appoint
Registrars of Firms for the purpose of this Act, and may define the area within which they must
exercise their powers and perform their duties. Every Registrar is deemed to be a public servant
within the meaning of Section 21 of the Indian Penal Code.

The registration of a firm may be effected at any time by sending by post, or delivering to the
Registrar of the area in which any place of business of the firm is situated or proposed to be
situated, a statement in the prescribed form, and accompanied by the prescribed fee, stating

(a) the firm name; (b) the place, or principal place, of business of the firm; (c) the names of any
other places where the firm carries on business; (d) the date when each partner joined the firm;
(e) the names in full and permanent addresses of the partners; and (1) the duration of the firm :
S. 58.

In the State of Maharashtra, the application for registration of a firm is also to be accompanied
by a true copy of the Partnership Deed and must be made within one year from the date of the
constitution of the firm.

Such a statement is to be signed by all the partners, or by their agents specially authorised in
this behalf. Each person signing the statement must also verify it in the prescribed manner.
When the Registrar is satisfied that the provisions of Section 58 have been duly complied with,
he records entry of the statement in a register called the Register of Firms, and files the
statement : S. 59

When an alteration is made in the firm name or in the location of the principal place of business
of a registered firm, a statement is to be sent to the Registrar specifying the alteration, signed
and verified in the manner required under Section 58. When the Registrar is satisfied that the
provisions of law have been duly complied with, he amends the entry relating to the firm in the
Register of Firms in accordance with the statement, and files it along with the statement relating
to the firm filed under Section 59 : S. 60.

When a registered firm disc business at any place or begins to carry on business at any place,
such place not being its principal place of business, any partner or agent of the firm may send an
intimation thereof to the Registrar, who must make a note of such intimation in the entry
relating to the firm in the Registrar of Firms, and file the intimation along with the statement
relating to the firm : S. 61.

When any partner in a registered firm alters his name or permanent address, an intimation of
the alteration may be sent by any partner or agent of the firm to the Registrar, who deals with it
in the manner provided in Section 61 : S. 62.

When a change occurs in the constitution of a registered firm, any incoming, continuing or
outgoing partner, and when a registered firm is dissolved, any person who was a partner
immediately before the dissolution (or the agent of any such partner or person specially
authorised in this behalf) may give notice to the Registrar of such change or dissolution,
specifying the date thereof. The Registrar has then to make a record of the notice in the entry
relating to the firm in the Register of Firms, and file the notice along with the statement relating
to the firm : S. 63(1).

When a minor who has been admitted to the benefits of partnership in a firm attains majority,
and elects to become or not to become a partner, and the firm is a registered firm, he or his
agent specially authorised in this behalf, may give notice to the Registrar that he has or has not
become a partner, and the Registrar then deals with the notice in the prescribed manner: S.
63(2).

The Registrar has the power, at all times, to rectify any mistake in order to bring the entry in the
Register of Firms relating to any firm in conformity with the document relating to that firm filed
under this Chapter: S. 64.

A Court deciding any matter relating to a registered firm, may direct the Registrar to make any
amendment in the entry in the Register of Firms relating to such firm which is consequential
upon its decision, and the Registrar must amend the entry accordingly: S. 65.

The Register of Firms is open to inspection by any person on payment of such fee as may be
prescribed : S. 66(1). All statements, notices and intimations filed under this Chapter are also
open to inspection, subject to such conditions and on payment of such fee as may be
prescribed : S. 65(2). On application, the Registrar must furnish to any person, on payment of
such fee as may be prescribed, a copy certified under his hand of any entry or portion thereof in
the Register of Firms : S. 67.

Penalty for furnishing false particulars

S. 73 provides that if any person who signs any statement, notice or intimation

(a) containing any particulars, which he(i) knows to be false, or (ii) does not believe to be true;
or (b) containing particulars which he(i) knows to be incomplete; or (ii) does not believe to be
complete

he becomes punishable with imprisonment which may extend to three months, or with fine, or
both.

The State Government may make rules under the Act : S. 71.

B. EFFECT OF REGISTRATION (S. 68)

At the outset, it is to be noted that the Act does not make it obligatory to register a firm. It is not
compulsory that a partnership firm must be registered. The Act does not say so. But it is highly
 advisable that it should be registered. S. 68 creates and declares a rule of evidence, namely, that
of conclusive proof. Section 68 provides that any statement, intimation or notice recorded or
noted in the Register of Firms is, as against any person by whom, or on whose behalf such
statement, intimation or notice was signed, conclusive proof of any fact therein stated.

It is further provided that a certified copy of an entry relating to a firm in the Register of Firms
may be produced in proof of the fact of the registration of such firm, and of the contents of any
statement, intimation or notice recorded or noted therein.

EFFECT OF REGISTRATION - As seen above, registration of a firm is not made compulsory under
the Act, but S. 68 lays down a rule of conclusive proof, and enables a certified copy of an entry in
the Register of the Firms to be tendered in evidence of (a) the registration of the firm to which
the entry relates, and of (b) the contents of any statement, intimation or notice recorded or
noted therein. The result is that although the law does not make registration of a firm
compulsory, from the practical angle, it is highly advisable to do so. This is all the more so if one
considers the effects of non-registration, which are provided for by S. 69 (discussed below).

Section 70 of the imposes a penalty (fine or imprisonment upto three months or both) for furnishing
false or incomplete particulars in any statement or document sent to the Registrar. Thus, when once a
firm is registered, the Registrar of Firms will continue to contain a complete, correct and up-to-date list
of all partners who will be liable for the debts of the firm, and the statement recorded in the Register
would afford a strong protection against false denials of partnership and the evasion of liability towards
persons who deal with the firm.

C. EFFECT OF NON-REGISTRATION (S. 69)

S. 69 is one of the most important sections in the Act. It is because of this section that it would be in the
interests of the partners to get the firm registered,although, under the Act, such registration is not
compulsory.

S. 69 lays down four rules, which may be set out as under:

Rule 1

Firstly, it is provided that no suit to enforce a right (i) arising from a contract, or (ii) conferred by this Act
can be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm
or any person alleged to be (or to have been) a partner in the firm, unless
(a) the firm is registered; and

(b) the person suing is, or has been, shown in the Register of Firms as a partner in the firm.

Rule II

Secondly, it is provided that no suit to enforce a right arising from a contract can be instituted in any
Court by or on behalf of a firm against any third party, unless

(a) the firm is registered; and

(b) the persons suing are, or have been, shown in the Register of Firms as partners in the firm.

Rule III

Rule III lays down that the provisions of Rules I and Il apply also to a claim of set-off or other proceeding
to enforce a right arising from a contract. However, these Rules do not affect

(a) The enforcement of any right to sue for the dissolution of a firm, or for accounts of a dissolved firm,
or any right or power to realise the property of a dissolved firm. (This exception does not, however,
apply to the State of Maharashtra. See below.)

(b)The powers of an Official Assignee, Receiver, or Court under the Presidency-towns Insolvency Act,
1909, or the Provincial Insolvency Act, 1902, to realise the property of an insolvent partner.

Rule v

Lastly, it is provided that the above rules do not apply:

(a) to firms or to partners in firms which have no place of business in India. or whose places of
business in India are situated in areas to which, by notification under Section 56, this Chapter does
not apply; or

(b) to any suit or claim of set-off not exceeding one hundred rupees in value, or to any proceeding in
execution, or other proceeding incidental to, or arising from any such suit or claim.

EFFECT OF NON-REGISTRATION OF A PARTNERSHIP FIRM – As seen above, the Indian Partnership

Act has provided for the registration of firms, but has not imposed any penalties for nonregistration.
Non-registration does not make the partnership agreement, or any transaction between the partner
and third parties, void. It is, therefore, optional for a firm to get itself registered. But no prudent
partner or firm should hesitate to get his or its name registered at the earliest possible opportunity,
for the effect of non-registration is rather serious Section 69 of the Act imposes certain disabilities
on unregistered partners seeking to enforce certain claims in the Civil Courts. The said section
provides the pressure which is brought to bear on partners to have the firm and themselves
registered. The pressure consists in denying certain rights of litigation to the firm or partners not
registered under this Act.

Each of the four Rules (mentioned above) is discussed below at greater length.

Rule 1 [S. 69(1)]

On analysing Rule 1, one finds that it bars the right of any person suing as a partner in the firm to
enforce a right (1) arising from a contract, or (ii) conferred by the Partnership Act, against either

(1) the firm, or

(2) any present or past member of the firm,

unless (i) the firm is registered and (ii) the person suing is or has been shown in the Register of Firms
as a partner in the firm.

This Rule is confined to the effect of non-registration of a firm in case of legal proceedings between
the partners inter se. A partner (or a person claiming to be or to have been a partner) cannot bring a
suit to enforce a right arising from a contract or conferred by this Act, against the firm or against his
copartner, unless the firm is registered and the name of the partner suing appears in the Register of
Firms as a partner in the firm.

The difficulty caused by this rule may be got over by getting registration of the firm effected at any
time before the suit is filed. Registration of the firm, however, can be effected only if the statement
required to be furnished to the Registrar of Firms is signed by all the partners or their specially
authorised agents and duly verified (S. 58), and when disputes have arisen between partners, it is
not at all likely that they would all join in doing so. The only remedy of the partner or partners
desiring to bring a suit in such a case will be to ask for dissolution of the firm and accounts, or for
accounts, if the firm is already dissolved.

An interesting point has been raised in some cases under this section. Is registration of a firm a
condition precedent to the filing of the suit? In other words, must such registration necessarily take
place before the suit is filed? Or can the firm be registered after the suit is filed, on the ground that
such registration would operate retrospectively? Some decisions (mainly from the Nagpur and
Calcutta High Courts) have held that a suit by an unregistered firm can be validated by subsequent
registration. However, several other High Courts (including the High Courts of Bombay, Madras,
Patna and Lahore) have held that such subsequent registration cannot cure a defect which existed
when the suit was instituted. These decisions have taken the view that such a suit is non est, i.e.,
non-existant in the eyes of law, and should therefore be dismissed at the threshold. It is of course,
open to the firm to withdraw the suit, get itself registered, and then file a fresh suit. Needless to
mention, the fresh suit should not be time-barred.

It is submitted that the latter view (namely that subsequent registration does not cure the technical
defect) is more sound, and now also finds support in the decision of the Supreme Court in C.I.T., A.P.
v. Jayalakshmi Rice and Oil Mills (A.I.R. 1971 S.C. 1015).

Another interesting question is whether the defence of nonregistration of the firm can be raised for
the first time at the appellate stage. Here also, there are conflicting decisions of various courts.
According to the Madras High Court, this point can be raised for the first time in appeal. (G.
Thakersey v. Abdul Rahim, AIR 1962, Mad. 634) The Rajasthan High Court has, however, ruled that
this point cannot be raised for the first time at the appellate stage. (Kalyan Sahai v. Lachhminarain,
AIR 1951 Raj. 11)

Rule II [S. 69(2)]

 S. 69(2) deals with enforcing claims by the firm against third parties, and prohibits the enforcing in a
suit of any right arising from a contract against a third party, unless the firm is registered and the
persons suing are, or have been, shown in the Register of Firms as partners in the firm.

One important point is to be noted in connection with this Rule. This section does not affect the
right of a third party to proceed against the firm or its partners, even though unregistered; nor does
it affect the right of the Official Assignee to realise the property of an insolvent partner.

It is also important to note that the Act does not lay down that any transaction of an unregistered
firm will be invalid; it merely says that a firm will not be allowed to take the assistance of a Civil
Court, except upon the condition precedent that it is registered. Registration may be affected by a
firm at any time before filing a suit or taking other civil proceedings in a Court against third parties.

Rule III [S. 69(3)]

Under this Rule, the disabilities mentioned in the preceding two Rules extend also to a claim of set-
off and to other proceedings to enforce any right arising from a contract.

Two important exceptions are, however, made to the rules contained in those sub-sections. The first
exception seems to have been made on equitable grounds, and the second on the ground of
convenience. The first exception allows partners, even in case of an unregistered firm, to enforce
their right to sue for dissolution and accounts or to ask for accounts where the firm has already been
dissolved. This sub-clause also makes it clear that it will not be necessary to have registration of a
firm effected where a suit or any legal proceedings are instituted to realise the property of a
dissolved firm, as for instance, a suit to recover a debt due to the firm. (This exception does not,
however, apply to the State of Maharashtra. See below.)

The second exception saves the powers of an Official Assignee, Receiver or Court to realise the property
of an insolvent partner under the Insolvency Act.

Rule IV [S. 69(4)]

This Rule provides that Rules I, II and III above do not apply

(a) to firms or to partners in firms which have no place of business in India, or whose places of
business in India are situated in areas to which, by notification under section 55, this Chapter does
not apply, or
 (b) to any suit or claim of set-off not exceeding 100 in value, or to any proceeding in execution, or
other proceeding incidental to, or arising from, any such suit or claim.

Clause (a) above, exempts from the operation of S. 69 firms whose places of business are all outside
India or in areas exempted from the operation of this Chapter under S. 55. Such firms can institute
suits or other legal proceedings or plead set-offs, without being registered in any Court in India
otherwise having jurisdiction to entertain the suit or other legal proceedings.

Clause (b) states a rule which is a half-hearted attempt on the part of the Legislature to look at the
matter of registration from the point of view of persons engaged in business on a very small scale. It
exempts from the operation of this section suits and claims of set-off not exceeding an
unrealistically meagre amount of one hundred rupees, in respect of matters otherwise triable by the
various Small Causes Courts.

MAHARASHTRA AMENDMENTS

The Indian Partnership (Maharashtra Amendment) Act, 1984, had amended some of the provisions
of the Act in its application to the State of Maharashtra. The most important amendments were as
under:

(i) An application for the registration of a firm had to be accompanied by a true copy of Partnership
Deed.

(ii) Such an application had to be made within a period of one year from the date of the
constitution of the firm.

(iii) If the statement in respect of the registration of the firm was not sent in time, the firm could be
registered on payment to the Registrar of Firms, of a penalty of 100 per year of delay (or part thereof).

(iv) A registered firm had to use the word “(Registered)" immediately after its name, for instance, John
Paul & Sons (Registered)".

(v) Alterations in the firm name, or in the business or location of the firm, were to be intimated to the
Registrar within a period of 90 days from the date of such alteration.
(vi) Radically departing from the provisions of the Act, it was provided that no suit

(a) to enforce any right for the dissolution of a firm, or (b) for accounts of a dissolved firm, or

(c) to enforce any right or power to realise the property of a dissolved firm,

could be instituted in any Court by or on behalf of any person suing as a partner in a firm, against the
firm itself, or against any person alleged to be a present or past partner of the firm, unless (i) the firm
was registered, and (ii) the person suing was, or had been shown as a partner in the Register of Firms.

However, it was also provided that the above requirement of registration would not apply to suits and
proceedings instituted by the heirs or legal representatives of a deceased partner of a firm or to realise
the property of a dissolved firm.

It was further provided that the above requirement of registration would not apply to firms constituted
for a duration upto six months or with a capital upto 2000.

The above amendment operative only in Maharashtra was, however, struck down by the Supreme Court
in V Subramanian v. Rajesh Rao (2009 5 SCC 608), on the ground that it was unconstitutional as being
violative of Arts. 14 and 19 of the Constitution. The apex court observed that if a dishonest partner is in
control of the business, the provision would not be fair to the other partners. It observed:

"It could result in extreme hardship and injustice. An aggrieved partner is left without any remedy
whatsoever. He can neither file a suit to compel the mischievous partner to cooperate for registration,
as such a suit is not maintainable; nor can be resort to arbitration."

SUMMARY OF S. 69

The following abstract of S. 69 may prove useful: 1. Unless the firn registered and the person suing is
or has been shown in the Register of Firms as a partner of the firm, he (or his nominee or agent)
cannot bring a suit to enforce a right arising from a contract or a right conferred by this Act against
(i) the firm or (ii) against any past or present partner of the firm.

2. No suit to enforce a right arising from a contract can be instituted by or on behalf of a firm against
any third party, unless the firm is registered and the persons suing are shown as partners in the
Register of Firms.

3. The same disabilities also apply to claim of set off or other proceedings to enforce a right arising
from a contract.

4. But the non-registration of a firm does not affect the following five rights:

(i) The right of third parties to sue the firm or any partner.

(ii) The right of a partner to sue for dissolution of a firm, or for accounts of a dissolved firm, or
enforce any right or power to realise the property of a dissolved firm.

(iii) The power of an Official Assignee, or Receiver, to realise the property of an insolvent partner.

(iv) The rights of firms or partners in firms having no place of business in India.

(Vi) Any suit or set-off in which the claim does not exceed 100.