UNIT 1

SYLLABUS

Contract of Indemnity -Definition, Nature and Scope - Rights of indemnity holder -

Commencement of the indemnifier’s liability -

What is Contract Of Indemnity?

Contract of indemnity meaning is a special kind of contract. The term ‘indemnity’

literally means “security or protection against a loss” or compensation.

According to Section 124 of the Indian Contract Act, 1872  

“A contract by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or by the conduct of any other person, is
called a contract of indemnity.”  
Example: P contracts to indemnify Q against the consequences of any proceedings
which R may take against Q in respect of a certain sum of money.

Key Fundamentals

1. It is a promise to compensate for or security against damage, loss or injury.

2. In wider sense it includes all contracts of insurance, guarantee. It is not a
collateral but an independent contract.
3. It is a tool for allocating risks contingent liability.
4. Indemnity clauses, amongst other things, must be clear, specific, where
possible stipulate the circumstances under which the indemnity will arise, be
considered in light of any exclusion of liability clauses found elsewhere in the
agreement and state what damages will be payable in the event of the clause
being successfully invoked
Enforcement
1. A contract of indemnity can be enforced according to its terms.
2. Claim of Indemnity holder can include: damages, legal costs of adjudication,
amount paid under the terms of compromise
3. The measure of damages is the extent to which the promisee has been
indemnified.
4. Indemnifier should ideally be informed of the legal proceedings or should be
joined as third party
5. There is no onus to show breach or actual loss.

Comparison between the remedies on breach of contract of indemnity and

remedies under section 74 of the Indian contract Act

Damages on breach of contract under section 74 of Indian contract Act 1872

are as under-
(1) Compensatory Damages - money to reimburse for costs to compensate for
your loss.
(2) Consequential and Incidental Damages - money for losses caused by the
breach that were foreseeable. Foreseeable damage means that each side
 reasonably knew that, at the time of the contract, there would be potential
losses if there was a breach.
(3) Attorney fees and Costs - only recoverable if expressly provided for in the
contract.
(4) Liquidated Damages - these are damages specified in the contract that would
be payable if there is a fraud.
(5) Specific Performance - a court order requiring performance exactly as
specified in the contract. This remedy is rare, except in real estate
transactions and other unique property, as the courts do not want to get
involved with monitoring performance.
(6) Punitive Damages - this is money given to punish a person who acted in an
offensive and egregious manner in an effort to deter the person and others
from repeated occurrences of the wrongdoing. You generally cannot collect
punitive damages in contract cases.
(7) Rescission - the contract is cancelled and both sides are excused from further
performance and any money advanced is returned.
(8) Reformation - the terms of the contract are changed to reflect what the parties
actually intended.

Damages on breach of contract of indemnity under section 125 of Indian

contract Act 1872 is as under-

The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor—
(1) all damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor, and acted as it
would have been prudent for him to act in the absence of any contract of
indemnity, or if the promisor authorised him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contrary to the orders of the promisor,
and was one which it would have been prudent for the promisee to make in
the absence of any contract of indemnity, or if the promisor authorized him to
compromise the suit.

OBJECTIVE OF CONTRACT OF INDEMNITY

The objective of entering into a contract of indemnity is to protect the promisee
against unanticipated losses
PARTIES TO THE CONTRACT OF INDEMNITY
A contract of indemnity has two parties.
1. The promisor or indemnifier
2. The promisee or the indemnified or indemnity-holder
The promisor or indemnifier: He is the person who promises to bear the loss.
The promisee or the indemnified or indemnity-holder: He is the person whose
loss is covered or who are compensated.
In the above-stated example,
 P is the indemnifier or promisor as he promises to bear the loss of Q.
 Q is the promisee or the indemnified or indemnity-holder as his loss is
covered by P.

Nature of Contract of Indemnity –

A contract of indemnity may be express or implied depending upon the
circumstances of the case, though Section 124 of the Indian Contract Act does not
seem to cover the case of implied indemnity.
A broker in possession of a government promissory note endorsed it to a bank with
forged endorsement. The bank acting in good faith applied for and got a renewed
promissory note from the Public Debt Office. Meanwhile the true owner sued the
Secretary of State for conversion who in turn sued the bank on an implied indemnity.
It was held that – it is general principle of law when an act is done by one person at
the request of another which act is not in itself manifestly tortious to the knowledge of
the person doing it, and such act turns to be injurious to the rights of a third person,
the person doing it is entitled to an indemnity from him who requested that it should
be done. [Secretary of State v Bank of India].

The Indian Contract Act also deals with special cases of implied indemnity –
(some special cases of implied indemnity)

1. U/s 69 if a person who is interested in payment of money which another

is bound by law to pay and therefore pays it, he is entitled to be
indemnified. For instance – if a tenant pays certain electricity bill to be
paid by the owner, he is entitled to be indemnified by the owner.
2. Section 145 provides for right of a surety to claim indemnity from the
principal debtor for all sums which he has rightfully paid towards the
guarantee.
3. Section 222 provides for liability of the principal to indemnify the agent in
respect of all amounts paid by him during the lawful exercise of his
authority.
The plaintiff, an auctioneer, acting on the instruction of the defendant sold certain
cattle which subsequently turned out to belong to someone else other than the
defendant. When the true owner sued the auctioneer for conversion, the auctioneer
in turn sued the defendant for indemnity. The Court held that the plaintiff having
acted on the request of the defendant was entitled to assume that, if it would turned
out to be wrongful, he would be indemnified by the defendant. [Adamson v Jarvis].

Right of the indemnity holder – (Section 125)

An indemnity holder (i.e. indemnified or promisee) acting within the scope of his
authority is entitled to the following rights –
1. Right to recover damages – he is entitled to recover all damages which he
might have been compelled to pay in any suit in respect of any matter
covered by the contract.
2. Right to recover costs – He is entitled to recover all costs incidental to the
institution and defending of the suit.
3. Right to recover sums paid under compromise – he is entitled to recover all
amounts which he had paid under the terms of the compromise of such
suit. However, the    compensation must not be against the directions of
the indemnifier. It must be prudent and authorized by the indemnifier.
4. Right to sue for specific performance – he is entitled to sue for specific
performance if he has incurred absolute liability and the contract covers
such liability.

It is important to note here that the right to indemnity cannot be claimed of

dishonesty, lack of good faith and contravention of the promisor’s request. However,
the right cannot be negatived in case of oversight. [Yeung v HSBC]

Right of Indemnifier –
Section 125 of the Act only lays down the rights of the indemnified and is quite silent
of the rights of indemnifier as if the indemnifier has no rights but only liability towards
the indemnified.
In the logical state of things if we read Section 141 which deals with the rights of
surety, we can easily conclude that the indemnifier’s right would also be same as
that of surety.
Where one person has agreed to indemnify the other, he will, on making good the
indemnity, be entitled to succeed to all the ways and means by which the person
indemnified might have protected himself against or reimbursed himself for the loss.
[Simpson v Thomson]
Principle of Subrogation is applicable because it is an essential part of law of
indemnity and is based on equity and the Contract Act contains no provision in
contravention might with [Maharaja Shri Jarvat Singhji v Secretary of State for India]

Scope of Indemnity

In commercial Contracts the indemnity clauses are drafted in a wide manner in order
to include the third parties by whose conduct, action or negligence any loss or
anticipated circumstances occur, which are beyond the ordinary circumstances of
breach actionable under common law. In certain special cases or circumstances the
indemnity clauses might apply even when no breach of contract has occurred.
Indemnities in such cases extend into unintended obligations which the common law
might not impose otherwise.
The claim for indemnity or indemnification arises when a party (indemnifier) promises
to protect another party (indemnity holder) from any kind of loss, cost, expense,
damage or any other legal consequences caused by the conduct of the indemnifier
or any third party. Initially the basic importance of indemnity clause is to shift the
liability, in whole or in part, from one party to another party.

The provision of indemnification arises only when a prior promise is made to save a
party from the loss. The question of reimbursement arises only when there was an
anticipation of loss and in that context a promise was made to incur the loss.
Under the following section the main criterion which usually gives rise to indemnity is
“any action or conduct of the indemnifier or any other person or let’s say the third
party who may not be a party to the contract due to which the loss or any damage
that has been caused to the indemnity holder”. Section 124 of the Act it only covers
those cases where the loss or damage that has been caused by the action or
conduct of the promisor himself or any third party. It is very clear that it does not
include any such cases where human conduct is absent.

In the case of State Bank of India v. Mula Sahakari Sakhar Karkhana (2006), the
Supreme Court was of the view that whether a contract is one of guarantee or of
indemnity is a question of construction in each case. The difference between the two
types of contract are enumerated below:
 Contract of Indemnity
It refers to a Contract by which one
party promises to save the other from
loss caused by conduct of the promisor
or another person.
In contract of indemnity, the liability of
the promisor is primary.
Contract between the indemnifier and
the indemnity holder is express and
specific.
In contract of indemnity there are two
parties indemnifier and the indemnity
holder.
In Contract of indemnity there is only
one agreement i.e. the agreement
between indemnifier and indemnity
holder.
Contract of indemnity protects the
promise from loss.
In Contract of indemnity, the promisor
cannot file the suit against third person
until and unless the promisee
relinquishes his right in favour of the
promisor.
Contract of Guarantee
It refers to a Contract to perform the promise
or discharge the liability of a third person in
case of his default.
In contract of guarantee, the primary liability
is of principal debtor and the liability of surety
is secondary.
Contract between surety and principal debtor
is implied and between creditor and principal
debtor is express.
In contract of guarantee there are three
parties i.e. creditor, the principal debtor and
surety.
In contract of guarantee there are three
agreements i.e. agreement between the
creditor and principal debtor, the creditor and
surety and surety and principal debtor.
Contract of guarantee is for the surety of the
creditor.
In contract of guarantee, the surety does not
require any relinquishment for filing of suit.
The surety gets the right to file suit against
the principal debtor as and when the surety
pays the debt.

Judicial pronouncement on Indemnity

Implied Indemnity was identified in the case of ‘SECRETARY OF STATE vs. THE
BANK OF INDIA’ [1938] where an agent presented a government promissory note
in his custody to a bank with a false presentation. The bank in good trust put into use
the promissory note for a refurbished promissory note which was issued from the
Public Debt Office. In the interim time, the real owner of the note sued the Secretary
of State for conversion. The Secretary of State, in turn, prosecuted the bank on the
basis of implied indemnity where it was held that the express indemnity clause is not
necessary for face of implied right to indemnity which is beforehand existing under
the Indian Laws.
A contract of indemnity recognizes the parties, and it characterizes the types of
losses or damages covered and explain whether legal expenses in the filing of the
suit or contesting the suit are included or not. Generally, the contract also
specifies the “triggering event”; happening of which will make the indemnifier
responsible. The “triggering events” are defined with aids of terms like “arise out of”,
“in connection with”, or “occasioned by”, “acts or omissions” or “negligence”.
A Contract of Indemnity is required because a party may not be able to command all
visible features of the performance of a promise. The party can be sued for the
actions of another where the circumstances of performance were out of his authority
and control.
Indemnity is considered as a sub-class of compensation and Contract of Indemnity
as a class of contracts. The responsibility to indemnify is a willing responsibility taken
by the indemnifier.
The contract of indemnity is an actionable claim provided it is not against public
policy or unlawful to be valid.  A right of indemnity lies where one party is required to
make good certain losses experienced by the other party. No third person or an
intruder to the agreement of indemnity cannot bring legal charges against the
indemnified due to the standard of secrecy of contract as settled in the case
of NATIONAL PETROLEUM COMPANY vs. POPAT LAL by the Bombay High
Court.
Mostly, a contract of insurance is not treated as a contract of indemnity in India. But
agreements of marine insurance, fire insurance or motor insurance are regarded to
be contracts of indemnity as in a life insurance, the agreement offers a particular
sum of money upon the death of policy holder but where a policy is taken by a
creditor on the principal debtor, he becomes entitled to a precise amount of money.
IN ‘GAJAN MORESHWAR vs. MORESHWAR MADAN’ 1942 case G.Moreshwar got
a piece of land in then Bombay at lease for a long period. He transferred the lease to
M.Madan  for a limited period. M.Modan started development over the above-
mentioned plot and ordered his supplies from K D Mohan Das. When Mohandas
asked for the payment for the material he provided, the accused could not pay up.
Upon request of M Madan, G Moreshwar prepared a mortgage deed in favour of
K.D. Mohandas. The Interest rate was agreed upon, and G. Moreshwar put a charge
over his possessions. A date was pre-decided for the return of principal amount. M.
Madan had decided to repay the principal amount along with interest and to get the
mortgage deed released before a particular date. But M. Madan as per his
assurance did not pay anything to K.D. Mohan Das, and G. Moreshwar had to pay
some interest. When after several requests and intimations, M. Madan did not pay
the principal amount along with interest and also didn’t get the mortgage deed
released, G. Moreshwar legally prosecuted M. Madan for indemnity. The Privy
Council held that if indemnity holder has incurred responsibility and the responsibility
itself is absolute and without limits, the indemnity holder can ask the indemnifier to
take care of the liability and pay it off. Thus, G. Moreshwar was designated to be
indemnified by M. Madan against all debt under the loan agreement and deed of
charge.
Legitimacy of Indemnity Agreements
A contract of indemnity is one of the varieties of contracts. The principles appropriate
to contract in general are also pertinent to such contracts so that rules like free
approval or consent, the legality of object, etc. are equally relevant. As in the case of
general agreement consent to an agreement shouldn’t be by coercion, fraud,
misrepresentation otherwise the contract will be voidable at the option of the party
whose consent was so caused; the same applies to contract of indemnity also. As
per the need of the Contract Act, the element or object of the agreement must be
legitimate.
Consequential or remote/indirect losses coverage under Indemnity
A demand for damages under the Contract Act only allows looking for compensation
for any loss or damages ‘which the parties knew; when they made the contract, to be
likely to result from rupture or breach of it’ at the time of formation of contract; which
is usually termed as the ‘Principle of Contemplation of Damages’ between the
parties. Reasonable foreseeability is deduced as the genuine possibility of
happening of loss and is frequently used for the test for damages or losses.
Additionally, the damages claimed should be moderate, and thus damages may not
be tenable for loss of profit or opportunity costs.
But an indemnity claim is not bounded by such limits. Section 124 of the Indian
Contract Act specifies that a request for damages or losses is accountable to the
ordinary rules of remoteness mentioned above, but a claim for indemnity is not
subjected to same rules. So, all consequential, remote, indirect and third-party
losses can be claimed by the indemnified party until and unless notably excluded
from the indemnity clause.
Fundamental essentials of Contract of Indemnity
1. It is an absolute promise to reimburse for defined loss or injury used to ensure
that an aggrieved party has a precise remedy to correct bugs or defects in
goods or services delivered under the Contract.
2. It is an assurance to make restitution for or safeguard against damage, loss or
injury.
3. Broadly it includes all contracts of protection, security, guarantee, etc. It is not
a secondary but an independent contract.
4. It is a tool for assigning risks contingent responsibility.
5. Indemnity clauses must be clear, to the point, wherever possible it should
impose the circumstances under which the compensation will arise. It should
be considered in light of any expulsion of liability clauses found anywhere in
the agreement and should state what damages will be payable in the
occurrence of the clause being favourably conjured.

Enforcement of Contract of Indemnity

1. A contract of indemnity can be invoked according to its terms like the express
promise.
2. Damages, legal costs of judgement, the amount paid under the terms of the
agreement are some of the claims which Indemnity holder can include in its
claims.
3. A Portion of losses or injuries is the extent to which the promise has been
indemnified.
4. Indemnifier should ideally be informed of the proper account.
5. There is no burden to show breach or actual losses or damages.

SITUATIONS WHEN CONTRACT OF INDEMNITY CAN BE ENFORCED

In the United Kingdom, under common law, it is necessary for an indemnity holder to
first pay for the losses, injuries or damages and then claim for the indemnity. But in
India, there is no clear-cut provision which states that when a contract of indemnity is
implemented. There have been conflicting legal conclusions throughout.
First Indian case where the right to be indemnified was identified was of OSMAL
JAMAL & SONS LIMITED vs. GOPAL PURUSHOTHAM [1728]. But at present, a
general agreement is formed in favour of the opinion of the equity courts. In  K.
BHATTACHARJEE vs. NOMO KUMAR [1899], SHYAM LAL vs. ABDUL SALAL
[1931] and G. MORESHWAR vs. M. MADAN cases, it was decided that the
indemnified can constrain the indemnifier to place him in a position to meet liability
that may be built upon him without waiting until the indemnified has cleared the
same.
Indemnity requires that the party who will be indemnified shall not at any time be
called upon to pay. Therefore, the liability of the indemnifier starts the moment the
loss or damages in the form of liability to the indemnified becomes absolute and
without limit.

Losses or damages on the breach of contract of indemnity holder or rights of

the indemnity-holder under Sec.125 of Indian Contract Act’1872 are as follows,

1. The Promisee in a contract of indemnity, acting within the capacity of his

control, is designated to recover from the promisor all losses or damages
which he may be constrained to pay in any suit in respect of any substance to
which the promise to indemnify applies.
For e.g. if X contracts to repay or indemnify Y against the outcome of any
proceedings which Z may take against Y in respect of a particular action. If Z
does start legal proceedings against Y and as a result of outcome Y had to
pay some damages to Z; X will be responsible for reimbursing the damages
that Y had incurred in the case.
2. All costs or expenses which he may be forced to pay in any such suit if, in
bringing or protecting it, he did not contradict the orders of the promisor, and
acted as it would have been sensible for him to act in the absence of any
contract of indemnity, or if the promisor empowered him to bring or protect the
suit.
3. All sums which he may have paid under the terms of any agreements of any
such suit, if the agreement was not in contradict to the orders of the promisor,
and was one which it would have been sensible for the promisee to create in
the absence of any contract of indemnity, or if the promisor empowered him to
adjusts the suit.
Rights of Indemnifier
Rights of indemnifier were excluded from Indian Contract Act’1872. In JASWANT
SINGH vs. SECTION OF STATE, it was concluded that the rights of the indemnified
are akin to the rights of a surety under Section 141 where the indemnifier becomes
entitled to the advantage of all securities that the creditor has against the principal
debtor whether the principal debtor was apprehensive about the same or not. Where
a person agrees to repay, he will, upon such compensation, be labeled to succeed to
all the ways and means by which the person initially repaid might have secured
himself against any loss or damages; or have arranged for compensation for his loss
or damages.
Once the indemnifier pays for the losses or damages caused, he automatically steps
into the shoes of indemnified and therefore, he will have all the rights with which the
earliest indemnifier secured himself against loss or damage.

LIQUIDATED DAMAGES vs. CAPPED INDEMNITY CLAUSE:

Section 74 of Indian Contract Act deals with the idea of liquidated damages and
states that , “If a sum is mentioned in the contract as the amount to be paid in case
of such breach, or if the contract holds any other clause by means of penalty, the
party objecting of the breach is designated, whether or not actual damages or losses
is confirmed to have been caused thereby to receive from the party who has
breached the contract, a justifiable settlement or compensation not surpassing the
amount so decided or as the case may be, the penalty decided for”. 
In such a case, there is no need of leading proof for verifying the losses or damages,
unless the Court arrives at the outcome that no loss or damage are likely to occur
because of such breach or the happening of such an event.
In Fateh Chand vs. Balkishan Das, the Supreme Court held that in all cases where
there is a need in the kind of penalty, the court has jurisdiction to award such sum
only as it accepts to be fair and reasonable, but not exceeding the amount
mentioned in the contract.
But a capped indemnity clause functions on a different footing as the idea of
reasonability, foreseeability, and remoteness relevant to a damage claim is not
relevant to judgment of an indemnity claim. Therefore, the parties are more hopeful
to claim more through a capped indemnity clause rather than a liquidated damage
clause.
EXCLUSIVE REMEDY INDEMNIFICATION CLAUSE WITH LIMITATION OF
LIABILITY
To legally decide the extent of liability, parties can agree to limit their disclosure to a
well drafted and substantially finite indemnity provision largely invulnerable from the
judgment of the courts. An illustration is as follows:
1. Exclusive Remedy Clause: It should state that “indemnity provided under
this clause shall be its alone remedy in relation to the activities intended
under this agreement to the exclusion of all other rights and remedies” ; and
2. Limitation of Liability: It states that the total liability under the agreement
shall be limited to the amount and conditions mentioned for the indemnity.
At present, there is no clear law that exists on above points. But as per above
construct, the courts are likely to hold that damages as a remedy is ruled out and
the only solution is looking for indemnity subject to the limitations set out which
becomes critical in situations where an indemnified party may try to demand for
losses or damages, over and above the indemnity limit on grounds of equity or
reasonableness.
NEGOTIATING AN INDEMNITY CLAUSE
 FROM AN INDEMNIFIED PARTY’S OUTLOOK
1. It is substantial to avert usage of terms “make good” or “compensate” as the
courts can depict it as covering claims only due to actual loss or damages
suffered by the indemnified party and not cover situations where the liability
was accrued, but no payment has been made. Therefore, using the term
“Hold Harmless” will cover both the cases. Also, use of term “protect from
liability” guarantees that the indemnifier has and added the responsibility of
duty to defend cast upon him which needs the indemnifying party to protect
the indemnified against covered third-party claims and likely first party claims
depending on the language included in the provision.
2. Indemnification is a decent cure, and it should not be merely used as a sword
but should also include the responsibility to protect the indemnified party.
Therefore, the clause can provide that the right to defend the indemnified
party by the indemnifying party shall be invoked at any time when any third
party makes any claim.
3. The term “Losses includes” should replace the term “Losses means” as all
consequential, indirect and remote losses can be claimed under the indemnity
clause.
4. Terms like “result of” and “connection of” should be replaced by the term
“arising out of” which is given a widespread perception by the courts.
5. As the indemnity payments are made due to the breach of representations
and promises or breach of covenants in agreement, it can be arguably stated
that the indemnifying party absorbs the tax outcomes of any indemnifiable
loss. Indemnity payments are assumed as other income and are subjected to
30% tax. Therefore, the indemnity payments should be made in such a way
that the actual payment should equal payment due under indemnity claims
plus the amount of taxes payable.
6. It is important for an indemnity clause to be drafted in a way so that an
indemnity payment claim gets automatically triggered on the issue of a claim
notice. Further, it should also be stated that any late in making any claims or
giving a notice does not let free the indemnifying party of such responsibility.
7. It can be stated that in case the claim amount is conflicted by the indemnifying
party and arbitration or any other method of resolving dispute as mentioned in
the agreement is called upon by the indemnifying party, then the claim
amount should be deposited forthright with the arbitrator which in turn only
ensure that the indemnifying party has the ability to pay if a successful award
is decided in favour of the indemnified party.
8. Any wilful carelessness, breach or fraud committed by the indemnifying party
can be considered to be expelled from the indemnity cap if the same is pre-
decided.
 FROM AN INDEMNIFYING PARTY’S OUTLOOK
1. Baskets or deductibles are drafted to support an indemnifying party with a
promise that it will not be troubled by impractical claims. Generally, in case of
a deductible, the indemnifying party is only responsible for the amount over
and excess the deductible limit whereas, in the case of a basket, the
indemnifying party is liable for the full amount once the basket limit is hit.
2. Limitations of liability clause are given intensely strict meaning since it is an
excusable clause. Some of the exclusions which can be considered by the
parties are as:
3. Actual or Constructive knowledge qualifier: The indemnifying party can
acknowledge forbidding claims for breach of the agreement to the magnitude
the facts, matters, information or conditions relating to the claim is known to
the indemnified party.
4. Net Financial Benefit: The indemnifying party can consider etching out a
specific exclusion that it will not be responsible for any net quantifiable
financial benefit that could arise to the indemnified party from any loss or
damages suffered.
5. Contingent Liability exclusion: It should be clearly stated that the
indemnifying party will not be responsible in respect of any liability which is
contingent unless such contingent liability becomes due and payable.
6. As the indemnity is a continuity obligation, it should be clearly mentioned that
the indemnified party is not designated to recover more than once in respect
of the same matter or the same event which has promoted the loss. It should
also be stated that the indemnifying party will not be liable in respect of any
claim to the extent such losses or damages are covered by a policy of
insurance or can be recoverable from a third person.
7. It can be mentioned that the indemnifying party shall not be held responsible
in respect of any claim if proper allowance, provisions or reserve is made in
the accounts.
 8. Unless precisely mentioned in the indemnity clause, there shouldn’t be any
particular responsibility cast upon the indemnified party to diminish losses.
Therefore, the indemnifying party can discuss and provide for a duty to reduce
in the indemnity clause.
9. It is recommended to include “limitation of remedy” clause which takes into
its extent both the limitation of liability and exclusive remedy clause and
leaves no scope for any uncertainty in interpretation as contracts have
limitation of liability clauses which simply limit the liability of the indemnifier;
but doesn’t rule out other legal solution to be followed against the indemnified.
10. Survival clause should be tailor made so that it can survive the termination of
the agreement.
CONCLUSION
Indemnity is a legal discharge from the penalties or liabilities incurred by any course
of action. In simpler words, indemnity needs that one party should indemnify the
other if certain costs mentioned in the contract of indemnity are acquired by another
party.  For example, car rental companies lay down that the person hiring the car will
be responsible for the damage or losses caused to the car because of reckless or
negligible driving by the person himself and he or she will have to indemnify the car
rental company.
Recently, indemnity contracts are being executed quite frequently in the IT industry.
There are some conditions or situations in which continuation of an indemnity does
make a meaningful change for some whereas for other it does make little changes or
no changes at all. A new concept known as “Indemnity Lottery” can be found in the
law of contract that states that in civil cases of indemnity, results can never be
predicted.
A simple indemnity clause can never be an answer to liability issues. The law leans
disfavour ably towards for those who try to prevent liability or look for dispensation
from liability for their actions. The fundamental reason is that a careless party should
not be able to completely shift all claim and damages made against him to another,
non-negligent party. For e.g. A ticket to an amusement park claims that a person
entering into park can’t hold management responsible for any accident of his/her due
to malfunctioning of rides or any other events. But seldom, such a defense works in
the court of law because it is not based on a contract.

CHAPTER 1
CONTRACT OF INDEMNITY
MODEL QUESTIONS:

1. Define a contract of Indemnity? What are the rules of indemnity?

2. “A contract of indemnity is a class of contingent contract” – Comment.
3. Define Indemnity. What are the rights and liabilities of an indemnified?
4. Define contract of indemnity. Discuss the rights of indemnity holder
when sued. State when the liability of the indemnifier begins.
SYNOPSIS:

A. Definition of indemnity (Sec. 124)

B. Indemnity in English Law
C. Indemnity in Indian Law
D. Insurance contract - whether a contract of indemnity
E. Indemnity - a species of general contract
 F. Indemnity - a class of contingent contact
G. Rights of indemnity holder (Indemnified) (Sec. 125)
H. Duties of Indemnity holder(Indemnified) ?
I. Rights of indemnifier
J. Commencement of indemnifier's liability

A. DEFINITION OF IDEMNITY (Sec. 124):

A contract of indemnity is a direct contract between two persons. Here one person promises
to save another from loss. The loss is assured to be compensated by the promisor himself or
by any other person. Thus, the promisee must incur a loss, if he has to be indemnified by the
promisor.
The person who promises to make good the loss is called the indemnifier (promisor) and
the person whose loss is to be made good is called the indemnified or indemnity -
holder (promisee)
A contract of indemnity is a class of contingent
B. INDEMNITY IN ENGLISH LAW:

Indemnity in English law means - a promise to save a person harmless from the
consequences of an act. The promise may be express (in writing or oral) or implied -
inferred from the circumstances of the case.
The definition of Indemnity is wide in English Law. It includes a promise of indemnity
against loss arising from any cause whatsoever - like fire or accident.

C. INDEMNITY IN INDIAN LAW:

The definition of contract of indemnity as under the Indian Contract is not wide as of English
law, but it is narrow in application.
It includes ,
i. Express promise to indemnifier
ii. Only losses caused by the conduct of the promissor himself or by the contact of
any other person.
It does not include
i. Implied promise to indemnify
ii. Cases pertaining to losses arising from accidents not due to the conduct of the
promisor or any other person. For e.g, fire accident, perils of sea, etc.
Illustrations:
1. 'A' and 'B' go into a shop, 'B' says to the shopkeeper "Let 'A' have the goods, I will
see you paid"-. This is a contract of indemnity (Goulston Discountis Vs. Clark,
1967 2 Q.B 493)
2. 'A' contracts to indemnify 'B' against the consequences of any proceedings which 'C'
may take against *B' in respect of a certain sum of Rs. 200/-. This is a contract of
indemnity.
3. 'A' and B' claim certain goods from a railway company as rival owners. 'A' takes
delivery of the goods by agreeing to compensate the railway company against loss in
case 'B' turns out to be the true owner. There is a contract of indemnity between 'A'
and the railway company.

D. INSURANCE CONTRACT - WHETHER A CONTRACT OF INDEMNITY:

A contract of insurance is a contract of indemnity under English Law. The principle of
insurance is that it saves the promisee harmless from loss caused by accident by virtue of
the contract entered by the promisee with the insurer.
As per strict application of Sec. 124 of Indian Contract Act, the section may not apply to
insurance contracts, but Courts have held that the intention of the legislature was not
intended to be of strict application of Sec. 124 and as such, insurance contract is also really
a contract of indemnity.
E. INDEMNITY - A SPECIES OF GENERAL CONTRACT:

Indemnity is a species of general Contract. So, it must possess all the essential elements of
a valid contract.

For example, 'A' asks 'B' to cause grievous hurt to 'C' and promises to compensate 'B'
against the consequences. 'B' beats 'C' and is fined heavily. 'B' cannot recover the amount
from 'A' as the object of the contract is not legal.
F. INDEMNITY - A CLASS OF CONTINGENT CONTRACT

A contract of indemnity is really a class of contingent contacts. It means that it

is a type of contingent contract. Contingent means that which is dependent on something
else, which may or may not happen. (

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

to such contract, does-or does not happen. (Sec. 31)

Example: A contracts to pay Rs. 10,000/- if B's house is burnt. This is a contingent
contract. It is also a contract of indemnity.

G. RIGHTS OF INDEMNITY HOLDER (INDEMNIFIED) (Sec. 125):

The indemnity holder is entitled to recover from the promisor:

1. All the damages (compensation) which he is compelled to pay in a suit to which the
promise to indemnify' applied.
2. All the costs which he may be compelled to pay i n bringing or defending
such suits.
3. Any amount which he may have paid for compromise, of any such suit. Such
compromise must not be contrary to the orders of the promisor and must be
authorized by the promisor.
H. DUTIES OF INDEMNITY-HOLDER (INDEMNIFIED)

i. Duty to work prudently: Except as otherwise mentioned in the contract, the

indemnifier will not be liable for the loss caused by the negligent work of the
indemnity-holder. In other words, it is the duty of indemnity-holder to work
prudently.
ii. Duty as not to act which shall cause harm or loss:
If the indemnity-holder acting with the intention of causing any loss or damage,
the indemnifier will not liable for such loss. In other words, it is the duty of
indemnity-holder not to act as to cause harm or loss.
iii. Duty to comply with the intention of promisor:
If the indemnity-holder acting against the instruction of the other party or
promisor, the indemnifier will not be liable for the loss caused by such act
 against his instruction. In other words, it is the duty of the indemnity-holder
to comply with the intention of promisor.
I. RIGHTS OF INDEMNIFIER:
The rights of the indemnifier in a contract of indemnity is not discussed in the Indian Contract
Act. Following the principles of English Law, the indemnifier after payment of loss on behalf
of the indemnity holder gets the rights analogous to the rights of the Surety as under Sec.
141 of the Indian Contract Act.
J- COMMENCEMENT OF INDEMNIFIER'S LIABILITY
As per Sec. 125 of the Indian Contract Act, though the indemnifier is liable to compensate
the indemnified, when the liability attaches a question to be decided.
The following are the rules emanated from decided case laws:
1. One view is that the indemnifier is not liable until the indemnity holder has incurred
actual loss.
2. The other view is that indemnifier is liable even before the indemnity holder has
discharged the actual loss.
Now the first view is the settled law i.e., t h e indemnifier is not liable until the indemnity
holder h a s incurred actual loss.

Justice -Chagla observes 'if the indemnified had incurred a liability and that liability
is absolute, he is entitled to call upon the indemnifier to save him from the liability
and pay it off'.
Justice Buckley observes 'indemnity is not necessarily given, by reimbursement
after payment. Indemnity requires that the party to be indemnified (indemnity holder)
shall never be called upon to pay'.

Repeat

What is a 'contract of indemnity'?

In English Law
A 'contract of indemnity' has been defined as "A promise to save another harmless
from loss caused as a result of a transaction entered into at the instance of the
promisor".
According to Halsbury, "An indemnity is a contract, express or implied to keep a
person, who has entered into or who is about to enter into, a contract or incur any
other liability, indemnified against loss independently of the question, whether a third
person makes default".
The term is of wide amplitude and covers promises to save the promisee from loss
caused even by events or accidents beyond any one's control. The loss need not
necessarily be the result of the conduct of the promisor or any other person. There
are only two parties to a contract of indemnity, the 'indemnifier' who promises to save
harmless, and the 'indemnified' who is the person so saved, and the contract becomes
enforceable, when the other party suffers from the transaction covered by the contract of
indemnity. English law thus includes the loss caused by accidents and events also. Further
the promise to save may be express or implied.

In Indian Law
A contract of indemnity is a contingent contract. It is entered into with the object of protecting
the promisee against anticipated loss. It must have ail the essentials of a valid contract.
Hence an indemnity given under coercion or for an illegal object cannot be enforced.
Further, a contract of indemnity may be express or implied. An express contract of indemnity
is that which is expressly i.e., written or orally consented. An implied indemnity is one that a
statute or the common law may impose the obligation of an indemnity in a particular set of
circumstances.
The clause "if upon the objection of anyone, any damage or loss accrued to the vendee, the
vendor will be liable" in a sale deed is an implied indemnity.
A contract of indemnity may be oral or in writing,
Section 124 of the Contract Act, 1872 states that:
A contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person, is called
a ‘contract of indemnity’.
Illustrations:
‘A’ contracts to indemnify B against the consequences of any proceedings which C
may take against B in respect of a certain sum of 200 rupees. This is a contract of
indemnity.
This definition is slightly narrower than the corresponding English definition. The
ingredients of Section 124 are:
1. One party promises to save the other from loss caused to him.
2. Such loss may be happened to occur by the conduct of the promisor himself;
or
3. By the conduct of any other person.

So, if loss is occasioned as a result of some natural agency like fire, flood, tempest
etc., of some accident which cannot be attributed to the conduct of a person, it looks
as if it will not amount to a contract of indemnity. In this sense it seems that contracts
of insurance, to a certain extent may be excluded from Section 124. However,
contracts of Marine Insurance, Fire Insurance, Motor Insurance etc., are deemed to
be contracts of indemnity. But a contract of insurance can be described as a contract
of indemnity under English Law as it saves the promisee harmless from loss caused
by accident.
A contract of indemnity is not valid, if it is against public policy and unlawful.
Examples of Indemnity contract:
a. ‘A’ contracts to indemnify B against consequences of any proceedings which
C may take against B in respect of a certain sum of Rs. 2,000. This is a
contract of indemnity. Here A is the indemnifier, and B is the indemnified.
b. P employs A, to beat T and agrees to indemnify him against all consequences
of the act. A, therefore, beats and has to pay damages to T for so doing. P is not
liable to indemnify A because the object of the agreement is illegal.
According to the definition given by Section 124. in strict sense, 'contract of indemnity'
includes (a) only express promise to indemnify, and (b) cases where loss is caused by the
conduct of the promisor or any other promises on the conduct of promisor or any person. It
does not even cover insurance contracts. It does not cover the loss caused by act of God or
by accidents. The definition of indemnity as per Indian Law is very restrictive but not
exhaustive.
In Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, {1942 Bom. LJ 703],
Chagla, J. observed, "Sections 124 and 125 of the Contract Act are not exhaustive of the
law of indemnity and the courts here would apply the same principles that the courts in
England do..."
Indian courts, in a large number of cases, have observed that the contracts of indemnity also
include implied promises to indemnity.
In Secretary of State v. Bank of India, [(1938) 65 IA 286], B, a broker forged the
signature of A, the holder of Government promissory notes and endorsed to Bank of India.
The Bank got them renewed from the Government. A sued the government and recovered
damages. It was held that government could recover the damages from the Bank of India on
an implied contract of indemnity.
A person may undertake to save the other from loss caused to him, by the conduct of a third
person either at the request of the third person or without any request from such third
person) in the first case there would be contract of guarantee and the third person would be
responsible to the surety. In the latter case there would be a contract of indemnity and in a
contract of indemnity the indemnifier cannot be responsible for the non-performance of the
obligation of third person e.g., a debtor, in the absence of an assignment from the creditor,
sue in his own name, as there is no privity of contract between them.
The consideration or object of an agreement must, of course, be lawful. Thus an agreement
to indemnify the printer or publisher of a lebel by the writer of the same cannot be legally
enforced. Similarly an agreement by an accused person or any other person to indemnify the
person who has given bail is illegal and cannot be enforced.
Distinction between English and Indian law on indemnity

a. The English Law covers both express and implied contracts of indemnity, while
Indian Law (in Section 124 of Contract Act) covers only express contracts of
indemnity. However, implied contracts of indemnity are also covered in India by
judicial decisions.
b. In English Law. the loss may be due to the conduct of some persons or due to an
accident which is quite independent of anybody's conduct whereas in Indian Law (in
Section 124 of the Contract Act) the eligibility is the loss due to the conduct of some
person but not by accident.
c. in English Law, a contract of insurance is a contract of indemnity, but in India, a
contract of insurance is not a contract of indeminity as defined in Sec. 124, or even
by implication in a contract of life insurance.
d. Under English Law, a contract of indemnity can be assigned, however, in India, it is
an actionable claim.
Rights of Indemnity-holder
Regarding the rights of indemnity-holder when sued, Section 125 of the Contract Act states:
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor-
1. all damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;
2. all costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor, and acted as it would
have been prudent for him to act in die absence of any contract of indemnity, or if the
promisor authorized him to bring or defend the suit;
3. all sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contrary to the orders of the promisor, and was one
which it would have been prudent for the promisee to make in the absence of any
contract of indemnity, or if the promisor authorised him to compromise the suit.

In short, under Section 125, the indemnity holder can recover from the indemnified all
damages, all costs of the suit and compromise money, if any, provided he acted prudently
and with due authority of the indemnifier.
The indemnity-holder has other rights besides those mentioned in Section 125. If the
indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the
indemnifier to save him from the liability and to pay it off.
The provisions of Section 125 deal with the rights of an indemnity holder in the event of
being sued, and it is by means exhaustive of rights of an indemnity holder who has other
rights besides those mentioned in this section. Even before damage is incurred by an
indemnity holder, it would be open to him to sue for specific performance of the contract of
indemnity provided it is shown4 that an absolute liability has been incurred and the liability is
covered by the contract of indemnity.
For example, a contract of bond by scholar to reimburse the government if he failed to return
to India from London after completing his studies and then serve the government for five
years could be a contract of indemnity. The government has the right to collect the amount
of bond in the event of his failure to comply with the condition of bond from the scholar.
It is only when an indemnity holder has complied with the following essential conditions that
he would be entitled to recover from the promisor, all damages and costs, which he has
been compelled to pay in such suit:
i. he must be 'acting within the scope of his authority'.
ii. the suit must be 'in respect to any matter to which the promise to indemnify applies'.
iii. in bringing or defending or compromising such suit, the indemnity holder should have
been either:
a) authorised by the promisee; or
b) he did not contravene the orders of the promisor, or
c) in absence of such authority or orders, his acts should be acts of a prudent man.
So, at each stage the indemnity holder applies for authority or orders of the promisor, the
indemnity holder has to act as a prudent man.
Liability of the indemnified
According to the Common Law, no action could be brought against the indemnifier until the
indemnity-holder had suffered actual loss. The indemnity-holder can compel the indemnifier
to save him from the loss in respect of liability against which indemnity has been promised.
In India, Section 125 of the Contract Act provides that the indemnifier is liable to pay the
damages which may occur in future. There Ts a difference of opinion between the different
High Courts as to when the indemnified liability is to commence. The High Court of Calcutta,
Madras, Allahabad and Patna have taken the view that when a "person contracts to
indemnify another the latter may compel the indemnifier to place him in a position to meet
the liability that may be cast upon him without waiting until he (the indemnity-holder) has
actually discharged it. The High Courts of Bombay, Lahore and Nagpur, have taken the view
that the indemnifier does not become liable until the indemnified has incurred an actual loss.
However, the former view appears to be more correct and is in consonance with the English
law.

In Osman Jamal & Sons Ltd v. Gopal Purshottam, [1928 ILR 56 Cal 262], it was held
that the defendant company (being indemnifier) was liable and the liquidator to keep the
amount in trust for payment of the vendor in respect of whose supplies the company had
incurred liability.

In Gajanan Moreshwar Parelkar v. Moreshwar Madari Mantri, [AIR 1942 Bom. 302],
Chagla J observed:
"It is true that under the English Common Law no action could be maintained until actual
loss had been incurred. It was very soon realised that an indemnity might be worth very little
indeed if the indemnified could not force his indemnity till he had actually paid the loss. If a
suit was filed against him, he had actually to wait till a judgment was pronounced and it was
only after he had satisfied the judgment that he could sue on his indemnity. It is clear that
this might under certain circumstances throw an intolerable burden upon the indemnity -
holder. He might not be in a position to satisfy the judgment and yet he could not avail
himself of his indemnity till he had done so. Therefore, the Court of Equity stepped in and
mitigated the rigour of the Common Law. The Court of equity held that if his (indemnity-
holder's) liability had become absolute, then he was entitled either to get the indemnifier to
pay off the claim or to pay into Court sufficient money which would constitute a fund for
paying off the claim whenever it was made. I have already held that Sections 124 and 125,
Contract Act are not exhaustive of the law of indemnity and the courts here would apply the
same equitable principle that the courts in English do. Therefore, if the indemnified has
incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to
save him from that liability and to pay it off.

In Centax (India) Ltd. v. Vinmar Impex Inc., and others, [AIR 1986 Cal. 356], it was
observed that the enforceability of the contract of indemnity depended on the terms and
conditions of the same. The question before the court in such a case was whether the terms
of the same had been fulfilled to enable the beneficiary to enforce the same against the
Bank executing the same. In respect of such instrument executed by a Bank, the Bank was
not and should not be concerned with the underlying contract between the buyer and seller.
Duties of a Bank under any such instrument were created by the document itself but in any
case it had the power and was subject to the limitation which were given or imposed by it.
The dispute as to the sufficiency of the performance between the buyer and seller, or
between the seller and the buyer could not be the reason for withholding the payment
claimed under such instrument.
Rights of indemnifier
The Indian Contract Act is silent regarding the rights of the indemnifier. The rights of the
indemnifier are, however, virtually the same as those of the surety in contract of guarantee.
[See the topic Rights of the surety in Chapter 3 - 'Surety'].
The indemnifier cannot be made liable, if the promisee suffers damages on account of
circumstances which really do not come within the scope of the indemnity contract. The
rights of the indemnifier are in no way affected by the provisions of Sections 124 and 125 of
the Contract Act due to the judicial decisions.

CHAPTER 2
CONTRACT OF GURANTEE
(Section 126,127 & 142 to 144)
MODEL QUESTIONS:
1. Define Guarantee. What are the essential features of guarantee?
2. Explain the relationship of parties to the contract of guarantee?
3. Write short notes on: (a) Surety (b) Principal Debtor

SYNOPSIS:
A. Introduction
B. Application of contract of guarantee
C. Relationships in a contract of guarantee
D. Requisites of a valid guarantee
E. Guarantee - not a contract of uberrimae fidae
F. Invalid guarantee

A. INTRODUCTION:
According to Sec. 126 of the Indian Contract Act - a contract of guarantee is. a
contract to perform a promise, or discharge a liability of a third person in case of his
default.
The person who gives the guarantee is called the 'Surety'.

The person in respect of whose default guarantee is given is called the principal
Debtor.
The person to whom the guarantee is given is called the 'Creditor.
The guarantee may be either oral or written.
It may be express or implied. Implied means guarantee is inferred from the conduct
of the concerned parties.
Example:
A 'Surety: requests a 'Creditor' to lend Rs. 10,000/- to the ^Principal Debtor' and the
Surety guarantees the Creditor that if the 'Principal Debtor' fails to pay the amount,
he (Surety) will pay. This is a Contract of Guarantee.

B. APPLICATION OF CONTRACT OF GUARANTEE:

The uses of guarantee are that through a Contract of Guarantee, a person/(Principal
Debtor) is able to secure an employment. For instance, the Surety tells the
employer that the Principal Debtor may be trusted and in case of any default by him
‘I undertake to be responsible'.
A contract of guarantee is given by a surety for repayment of a debt by a Principal
Debtor. In ease 5 the Principal Debtor does not repay; the surety undertakes to
repay the debt.
National Highway Authority of India Vs. M/S Ganga Enterprises AIR 2003 SC
3S23 (c):
The Supreme Court held that a contract of guarantee is a complete and separate
contract by itself.
If the law regarding enforcement of an ‘on demand bank guarantee’ is very clear, the
Court cannot interfere. It can only interfere in the enforcement if the terms of the
guarantee are questioned or if there is any fraud.
Daewoo Motors India Ltd Vs. Union of India AIR 2003 SC 1786:
The appellant obtained various import licenses for which bank guarantees were
furnished from various banks. One of the bank guarantees unconditionally agreed 'to
pay the President of India and demand without any protest the amount due to him'.
When certain export obligations could not be complied with in the import license, he
had to pay the president of India. He invoiced the bank guarantee and demanded
encashment from the bank for which the bank refused. The Supreme Court held that
such encashment could not be refused by the bank.
3. A contract of guarantee is given for payment of the price of the goods sold on
credit to the Principal Debtor. In case the Principal Debtor does not pay for the goods
sold to him, the surety undertakes to pay for the sold goods. -

C. RELATIONSHIPS IN A CONTRACT OF GUARANTEE:

There are three kinds of relationships in a contract of guarantee. They are:
(i) relationship between the Creditor and the Principal Debtor,
(ii) relationship between the Creditor and the Surety
(iii) relationship between the Principal Debtor and the° Surety.
The relationships in a contract of guarantee gives rise to tripartite (three) agreements
among the Principal Debtor, the Creditor and the Surety and they are as follows:
There are three collateral contracts with triangular relationships:

1. A guaranteed debt arises by a contract between the Creditor and the Principal
Debtor, where by the Creditor gives a benefit (loan etc., to the Principal
Debtor)
2. There is a contract between the Creditor and the Surety where by the Surety
guarantees to pay the Creditor in case of default of repayment by Principal
Debtor.
3. There is a contract between the Principal Debtor and the Surety that the
Principal Debtor shall indemnify the Surety in case the Surety pays in the
event of a default by the Principal Debtor.
The above three contracts, though not expressed either in oral or writing, they are
always inferred by the conduct of the three parties namely the Creditor, Principal
Debtor and Surety.

D. REQUISITES OF A VALID GUARANTEE:

1. A contract of guarantee must have all the essential elements of a valid

contract as required by Sec. 10 of the Indian Contract Act.
2. There must be three parties namely - (a) The Principal Debtor (b) The
Creditor (c) The Surety
3. Generally, all the three parties must be capable of entering into a valid
contract. However, the Principal debtor may be an incompetent person. In
such a case the Surety is regarded as the principal debtor and is liable to pay
personally.
4. A contact of guarantee must be supported by consideration. It is not
necessary that there-should be a direct consideration between the Surety and
the Creditor.
According to Section 127 of the Act, 'anything done or any promise made for the
benefit of the Principal Debtor may be a sufficient consideration to the Surety
for giving the guarantee.
Thus, in a contract of guarantee, any benefit received by the debtor is an adequate
consideration for the Surety. .
Illustrations:
'P* requests 'C' to sell and deliver to him goods on credit. ‘C' agrees on guarantee
from ‘S' for the payment of price of the goods. ‘S’ promises to guarantee the
payment in consideration of ‘C’’s promise to deliver the goods. This consideration is
sufficient for 'S's promise.
‘A’ sells and delivers goods to B. C afterwards requests A to forbear to sue B for the
debt for a year and promises that if he does so, C will pay for them in default of
payment by B. A agrees to forbear as requested. This is a sufficient consideration for
C's promise.

‘A’ sells and delivers goods to B. C afterwards without consideration, agrees to pay
for them in default of B. the agreement is void.

5. Only if there is a principal debt or liability enforceable at law, there is a valid

guarantee. Since the purpose of a guarantee is to secure a debt or liability,
the existence of a recoverable debt or dischargeable liability is necessary.
Thus, the essence of a guarantee is that there should be someone liable as a
 principal debtor and the surety undertakes to become liable on default by
principal debtor. So, if there is no principal debt or liability, then there can be
no valid guarantee.
Example:
‘P’' owes ‘C’ a debt and 'S' gives guarantee for payment of debt after the limitation
period. 'S’ pays the amount to ‘C’. He cannot recover the amount from ‘P’ as it
cannot be enforceable.

6. A contract of guarantee requires the concurrence (consent) of all the three

parties to the contract of guarantee i.e., the Principal Debtor, the Creditor and
the Surety.
7. In Indian law, a Contract of guarantee may be either oral or written (Sec.
126). It may be express or implied. Implied guarantee is inferred from the
conduct of the concerned' parties.
However, in English law, as per Sec. 4 of the 'Statute of Frauds' a guarantee is
enforceable, only if it is "in writing and signed by the party to be charged'.

E. GUARANTEE- - NOT A CONTRACT OF UBBRRIMAE FIDEAE NO DUTY GF

DISCLOSURE:
A contract of guarantee is not a contract of uberrimae fideae i.e., utmost good faith.
A Surety cannot avoid his liability to discharge the liability of the Principal Debtor
merely on the ground of non-disclosure of any material fact to the contract of
guarantee.
In other words, the Principal debtor or Creditor need not disclose all material facts
before the contract of guarantee is entered into.
Wythes Vs. Labouchere:
The Court held that when a guarantee is given to a banker, the banker has no
obligation to inform the credit of debtor to the surety.
National Provincial Bank of England Vs. Glanusk;
'S' guaranteed the amount of ‘P' with the Bank. ‘P' had drawn this and paid off an
overdraft. The Bank was suspicious that ‘P’ was defrauding ‘S’, but did not com-
municate this to ‘S’. The; Court held that the-guarantee was not discharged on this
ground.

F. INVALID GUARANTEE:
The Surety is entitled to know the basic details of the original contract between the
Creditor and the Principal Debtor, so that he will get an idea about the nature of the
transaction for which he is answerable.
In the following cases, the guarantee given by the surety is invalid and hence cannot
be enforced against him.
1. Guarantee obtained by misrepresentation: (Sec. 142)
Any guarantee which has been obtained by misrepresentation made by the Creditor
or with his knowledge and assent, regarding a material part of the transaction is
invalid.
E.g.: A engages B as a clerk to collect money for him. B fails to account for some of
his receipts and A, in consequence, calls upon him to furnish security for his duly
accounting, C gives his guarantee for B's duly accounting. A does not acquaint C
with B's previous conduct - i.e., failure to account receipts to A. B afterwards makes
default. The guarantee given by C is invalid.
2. Guarantee obtained by concealment: (Sec. 143)
Any guarantee which the creditor has obtained by keeping silence as to material
circumstances, is invalid.
E.g., A guarantees to C payment for iron to be supplied by him to B to the amount of
2000 tons. B and C have privately agreed that B should pay five rupees per ton
beyond the market price, such excess to be supplied in liquidation of an old debt.
This agreement is concealment from A. A is not liable as a surety.

3. In cases where co-surety does not join: (Sec. 144)

Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co-surety, the guarantee will be invalid
if that other person does not join.
E.g.; A agrees with B to stand as a surety for C for a loan of Rs. 1000 provided D
also joins him as surety. D refuses to join. A is not liable as a surety.
In a fidelity guarantee, the guarantee is in the nature of insurance. In this case, all
material facts must be disclosed otherwise, the Surety can avoid the contract.
London General Omnibus Co. Vs. Holloway:
'P' engaged 'C' to collect money for him. But 'C' misappropriated some of his
receipts. ‘P’s relations made good the loss. 'C' agreed to retain ‘P’ on having a
fidelity guarantee. So, without being informed by 'C' about 'P's previous dishonesty,
gives a guarantee to ‘P’.. It was held that the guarantee could not be enforced
against 'S', because of nondisclosure of previous dishonesty.

CHAPTER 3
(DIFFERENCE BETWEEN INDEMNITY AND GUARANTEE)

Contract of Indemnity Contract of Guarantee

It refers to a Contract by which one
party promises to save the other from
loss caused by conduct of the promisor
or another person.
In contract of indemnity, the liability of
the promisor is primary.
Contract between the indemnifier and
the indemnity holder is express and
specific.
In contract of indemnity there are two
parties indemnifier and the indemnity
holder.
In Contract of indemnity there is only
one agreement i.e. the agreement
between indemnifier and indemnity
holder.
Contract of indemnity protects the
promise from loss.
In Contract of indemnity, the promisor
It refers to a Contract to perform the promise
or discharge the liability of a third person in
case of his default.
In contract of guarantee, the primary liability
is of principal debtor and the liability of surety
is secondary.
Contract between surety and principal debtor
is implied and between creditor and principal
debtor is express.
In contract of guarantee there are three
parties i.e. creditor, the principal debtor and
surety.
In contract of guarantee there are three
agreements i.e. agreement between the
creditor and principal debtor, the creditor and
surety and surety and principal debtor.
Contract of guarantee is for the surety of the
creditor.
In contract of guarantee, the surety does not
 cannot file the suit against third person require any relinquishment for filing of suit.
until and unless the promisee The surety gets the right to file suit against
relinquishes his right in favour of the the principal debtor as and when the surety
promisor. pays the debt.

CHAPTER 4
LIABILITY OF THE SURETY
(LIABILITY OF THE SURETY IS CO-EXTENSIVE WITH THE PRINCIPAL DEBTOR)
(Sec 128)

MODEL QUESTIONS:
1. Explain the nature of Surety's liability
2. Surety is a favoured debtor" - Comment.
3. Explain the rules regarding the liability oi Surety?
4. The liability of a Surety is co-extensive with that of the principal debtor" -
Discuss.
5. Explain the limit of Surety's liability,

SYNOPSIS:
A. Nature of Surety's liability
B. Rules regarding Surety's liability
C. Limitation of Surety's liability
D. Surety ~ a favoured debtor
E. Liability of the Surety in continuing guarantee

A. NATURE OF SURETY'S LIABILITY:

As per Sec, 128 of the Indian Contract Act, 1872 the liability of the Surety is co-
extensive with that of the Principal debtor unless it is otherwise provided by the
Contract'.
It means the creditor can recover the loan amount from the Surety directly without
taking steps to recover it from the principal debtor. It also means that the liability of
the surety is the same as that of the principal debtor. However, by an agreement with
the Creditor and Principal Debtor, the surety can limit his liability to a lesser amount
than that of the liability of the Principal Debtor, but for this, the creditor must agree.
Subject to the approval of the creditor, the surety can limit his liability to a lesser
amount than the liability of the Principal Debtor.
However, under any circumstances, the liability of the surety can never be greater
than that of the principal debtor.
Example: A guarantees to B the payment of a bill of exchange by C, the acceptor,
the bill is dishonoured by C. A is liable both for the principal amount mentioned in the
bill of exchange and also the interest and other incidental charges.

B. RULES REGARDING SURETY'S LIABILITY:

The following are the rules regarding the liability of the Surety:

1. The liability of a Surety is co-extensive with that of the principal debtor. This
strictly means that the contract between the surety and the creditor is an
independent contract and not a collateral one.
Subramania Vs. Narayanaswami, AIR 1951 Mad. 48 (FB);
The Court held that if the Principal Debtor’s liability is extinguished, then the surety's
liability also gets extinguished because the liability of the surety is co-extensive with
that of the Principal debtor.
In the instant case, P executes a Promissory Note with interest per annum in favour
of C for a loan of Rs. 5000/- with S as his surety. Since P was agriculturist the
interest was wiped against him by specific law. Now in a suit by C against S for
interest the Court held that the surety S, though not an agriculturist, could not be
made liable for the interest since the principal debtor was relieved from the interest
liability.

2. It is not a rule that only if the principal debtor is liable, then the surety
becomes liable. Unless there is a specific agreement between the Principal
debtor and the Surety to that effect.
3. Even it Jae original agreement is void or voidable (for e.g. minor's agreement
is void ab initio), the surety is liable as a principal debtor. Here the principal
debtor namely the minor is not liable, but the surety is liable for the loans
given to the minor. It is because the contract of the surety is not a collateral
contract, but an independent and separate contract between the Surety and
the Creditor.
4. Even if the creditor does not sue the principal debtor within the period of
limitation, if limitation period is available against surety, then he can
independently proceed against the surety.

Mahant Singh Vs. U, Ba, AIR 1939 PC 110:

P obtains a debt from C in 1980. S becomes surety for the debt in 1982. P's liability
got barred by limitation after 3 years i.e., in 1983. S's liability was barred after 3
years from 1982 i.e., in 1985. The Court held that the Surety could be sued till 1985,
even though P's liability got barred in 1983.

5. The liability of a Surety is not uberrimae fidei i.e., it is not based on good faith.
So, it is not required to make full disclosure of all material facts by the
Principal Debtor or creditor to the surety before the contract is entered into.

Wythes Vs. Labouchers (1859) 3 De. G & J. 593

The Court held that the when a guarantee is given by a Surety to the Creditor
namely the banker, there is no duty cast on the Creditor banker to inform the
intending surety of matters affecting the credit of the debtor which make the surety’s
position more hazardous.

6. When there is change of management of the Principal debtor's company, it

does no. discharge the guarantors of their liabilities to the company loans.

State Bank of India Vs. Saksaria Sugar Ltd, AIR 1986 SC 868:
The Supreme Court held that when the management of a Sugar mill was taken over
under Sugar undertaking (Taking over of Management) Act, 1978, it did not
discharge the guarantors' (sureties) liabilities towards the company's loans. The
Court further observed that in the said Act, there was no provision that when a
notification was issued under Sec. 7 (1) (b) of the Act, the remedies against the
guarantors would get suspended.
Industrial Finance Corporation of India Ltd Vs. Cannanore Spinning & weaving
Mills Ltd AIR 2002 SC 1841:
The Supreme Court held that the contract of guarantee had no relation with the
Nationalization Act. The contract guarantee is an independent contract and that both
the surety and creditor must fulfill the contractual obligation between them.

7. It is not necessary for the Creditor to exhaust his remedies against the
principal debtor before proceeding against the surety. He can straight away
sue the surety without proceeding against the Principal Debtor. However, if
there are any securities hypothecated or mortgaged with the Creditor for
realization of the loan, then he must proceed against such securities first, and
then proceed against the surety for the balance.

a. Union of India Vs. Manku Narayana, AIR .1931 SC 107B:

The Supreme Court held that the creditor must proceed against the mortgaged
property first and only. then, against the surety for the balance.
b. Syndicate Bank: Vs. A.P. Manjunath & Another 1999 (3) CCC 239 (Karn):
The Court held that if the agreement does not contain any condition that the creditor
must exhaust his remedies against the principal debtor first before proceeding
against the surety, then the liability of the surety is immediate and the Creditor can
straight away proceed against the surety without proceeding against the principal
debtor.
c. Bank of Bihar Vs. Damodar Prasad, AIR 1969 SC 297:
The Court held that before payment, the surety has no right to dictate terms to the
creditor and ask him to pursue his remedies first against the Principal debtor.

8. A discharge of the principal debtor by the operation of law does not discharge
the surety For e.g., if the principal debtor becomes insolvent, then the creditor
can sue the surety for the full amount. The surety cannot insist upon the
creditor to first proceed against the principal debtor and then proceed against
him.

Industrial Finance Corporation of India Ltd. Vs. Cannanore spinning &

Weaving Mills Ltd 2002 AIR SOW 1822:
The Supreme Court held that even if the principal debtor is discharged from his
liability, the liability of the guarantor is strict liability. The creditor's right of action
against the surety is preserved.

9. The death of the principal debtor does not discharge the surety from his
liability towards the Principal debtor's loans borrowed by the principal debtor
from the creditor during his lifetime.

10. Since the liability of the surety is co-extensive with that of the Principal debtor,
the liability of the surety cannot be limited to the principal amount, in the
absence of any provision to that effect in the contract between the Surety and
the Creditor.

Indian Overseas Bank Vs. G. Ramulu Others, 1999 (2) CCC 289 (AP):
The above view was held in this case.
C. LIMITATION OF SURETY'S LIABILITY:
The Surety can limit his liability in the loan amount given by the Creditor to the
principal Debtor. There are three ways of limiting the Surety's liability. Viz.:
a. A Surety for the entire debt
b. A Surety for a part of the entire debt.
c. A Surety for the entire debt subject to a limit.

The following problem will help to understand he principle:

P owes C Rs. 1,00,000/- on a continuing guarantee given by S. S can give the
guarantee in the following three ways:

i. ‘S’ guarantees the payment of the debt of Rs. 1,00,000/- by P to C. Here the
Surety is liable for the entire amount of Rs. 1,00,000/-.
ii. He guarantees the payment of Rs. 50,000/- in the debt of Rs. 1,00,000/- by P
to ‘C'. Here the Surety is liable only for Rs. 50,000/- and not for the balance
amount of Rs. 50,000/-.
iii. He guarantees the payment of any amount lent by C to P subject to a limit of
Rs. 50,000/-. Here the surety's liability is limited to Rs. 50,000/-

This distinction between the second and third type of guarantee is important when P
becomes insolvent. Suppose the dividend payable from the P's estate is only 10
paise in a rupee.
If the surety is for Rs. 50,000/ only in the entire debt, C can recover Rs. 50,000/-
from S (i.e., the full guaranteed amount) and Rs. 5,000/- (1/10 th of the balance of Rs.
50,000/-) from P's estate. S after making payment to C will step into C's shoes and
can recover Rs 5,000/ (being 1/10th of his payment of Rs. 50000/-) from P's estate

If the surety is for any amount subject to a limit of Rs. 50,000/-, C can recover Rs.
50,000/- from S and Rs. 10,000/- (1/10 th of the entire debt of Rs. 1,00,000/-) from P's
estate. C will, therefore, get Rs 60,000/- in all S, after payment of Rs. 50,000/- to C,
steps in to the shoes of C and can recover Rs. 5,000/- (being l/10th of Rs. 50000/-
from Ps estate.

D. SURETY - A FAVOURED DEBTOR:

Because the Surety undertakes to pay the other persons liability namely the Principal
debtor's liability, in law, he is considered a favoured debtor and hence some lenience
is shown by law towards him
The following provisions illustrate this point:
1. If there is a condition precedent to the surety's liability, then the surety is not
liable unless the condition is first fulfilled. A partial recognition of this
principle is to be found in Section 144.
Sec. 144 of the Indian Contract Act reads Guarantee on contract that creditor
shall not act on it until co-surety joins - 'When a person gives a guarantee upon a
contract that creditor shall not act upon it until another person has joined in it as co--
surety, the guarantee is not valid if that other person does not. join'

2. The Surety's liability arises only when the principal debtor makes a default. In
this sense, his liability is secondary.
 3. In a continuing guarantee, the surety is liable only for past transactions and
not for future transactions. Further he can revoke the continuing guarantee at
any time.
4. The liability of the Surety can never be greater than that of the principal
debtor. By contract, the Surety- may restrict his liability to a part only of the
principal debtor's liability.
5. A guarantor incurs liability only to the extent of the terms of the guarantee
bond.
6. Under Sec. 134 of the Indian Contract Act, the surety's liability comes to an
end if the principal debtor is discharged by the creditors. This is an important:
consequence of the surety's liability being co-extensive with that of the
principal debtor.
7. The Creditor is bound to proceed against the mortgaged property first and
then only against the surety for the balance - as per the judgment in Union of
India Vs. Manku Narayana, AIR 1987 SC 1078.
8. As per Sec. 142 of the Indian Contract Act, if the creditor has obtained the
guarantee from the Surety by misrepresentation or without his knowledge
and assent concerning a material part of the transaction, then the
guarantee is voidable at the option of the surety and so the surety is not liable
9. As per Sec. 143 of the Indian Contract Act, any guarantee which the Creditor
has obtained by means of keeping silence (concealment) as to material
circumstances is invalid and so the surety is not liable

E.g.: A guarantee to C payment for iron to be supplied by him to B to the amount of

2000 tons. B and C have privately agreed that B should pay five rupees per ton
beyond the market price, such excess to be applied in liquidation of an old debt. This
agreement is concealed from A. A is not liable as a surety.

LIABILITY OF THE SURETY IN CONTINUING GUARANTEE: (Please refer Chapter

No. 5)
 CHAPTER 5
KINDS OF GUARANTEE
SPECIFIC AND CONTINUING GUARANTEE (Sec 129 to 131)
MODEL QUESTIONS:
1. What are the types of guarantee?
2. Distinguish specific guarantee and continuing guarantee?
3. What are the rules of revocation of guarantee?
4. Explain continuing guarantee.
5. What is a continuing guarantee? How can it .be revoked? Explain with
illustrations.
6. Write a note on: (a) Kinds of guarantee (b) Continuing guarantee.

SYNOPSIS:
A. Introduction
B. Classification of guarantee
C. Rules regarding continuing guarantee
D. Revocation of a continuing guarantee

A. INTRODUCTION:
The purpose of a contract of guarantee is to enable a person to secure a loan or
goods on credit or an employment.
A guarantee may be given for:
1. Repayment of a debt
2. Payment of the price of the goods sold on credit _
3. The good conduct or honesty of a person employed an office (This is called a
Fidelity Guarantee)
A guarantee may be given for an existing debt called retrospective guarantee or a
future debt or obligation called prospective guarantee.

B. CLASSIFICATION OF GUARANTEE:

1. Specific Guarantee:
A guarantee which deals with a single transaction is called a specific guarantee or
simple guarantee. A specific guarantee cannot be revoked when the liability is
incurred. It comes to an end when the guaranteed debt is duly discharged or promise
is performed.
E.g.: A guarantees payment to B of the price of five sacks of flour to be delivered by
B to C and to be paid in a month. B delivers 5 sacks to C. C pays for them.
Afterwards B delivers four sacks to C, which C does not pay. The guarantee given by
A was only a specific guarantee and accordingly, he, is not liable for the price of the
four sacks.
2. Continuing Guarantee: (Sec. 129)
When a guarantee extends to series of transactions, it is called a continuing
guarantee. A continuing guarantee can be revoked at any time. The Surety’s liability
is discharged immediately after the revocation of guarantee. The revocation of
guarantee will be only in respect of future transactions, but the surety is liable for the
past transactions.
Illustrations:
a. A, in consideration that B will employ C in collecting the rent of B's Zamindari,'
promises B to be responsible, to the amount of Rs. 5,000/- for the due
collection and payment by C of such rent. This is a continuing guarantee.
b. A guarantees payment to B, a tea dealer to the amount of £ 100, for any tea
he may from time to time supply to C. B supplies C with tea to above the
value of £ 100 and-C pays B for it. Afterwards, B supplies C with tea to the
value of £ 200, C fails to pay. The guarantee given by A was a continuing
guarantee and he is accordingly liable to B to the extent of £ 100.

C. RULES31 REGAINING CONTINUING GUARANTEE:

A continuing guarantee depends on the language of the agreement, the subject
matter and the surrounding circumstances.
There can be a continuing guarantee for a fixed period. Such continuing guarantee
covers all continuing transactions during such fixed period.
Guarantee may be given for
(I) any part of debt
(II) entire debt and
(III) entire debt subject to a limit.
E.g.: 'C' gives a loan of Rs.800/- to 'P' on a continuing guarantee given by 'S’ 'S may
give guarantee in any of the two forms:
i. I guarantee the payment of the debt of Rs.5,000/- by T' to 'C'. Here the
guarantee is only for a part of the entire debt.
ii. I guarantee the payment of any amount lent by C to ‘P' subject to a limit of
Rs. 5,000/-'. Here the guarantee is for the entire debt subject to a limit.

The essence of a continuing guarantee is that it applies to any number of

transactions arid makes the surety liable for all such transactions for the unpaid
balance amount at the end of the guarantee.

Durga Priya Chowdhary Vs. Durga Pada Roy, AIR 1928 Cal 1204:
The Calcutta High Court held that a guarantee for the conduct of a servant appointed
to collect rents is a continuing guarantee.

D. REVOCATION OF A CONTINUING GUARANTEE:

.
A continuing guarantee is revoked by the following methods:
1. Notice - Sec. 130 of Indian Contract Act reads - a continuing guarantee may
at any time be revoked by the surety, as to future transactions, by notice to
the creditor.
Thus, the surety continues to be liable for such transactions which have already
taken place and the surety is not liable for future transactions which may take place
after the notice of revocation.

Afford Vs. Davies, 1862 (6) LT 579:

The Court held that the revocation of guarantee does not affect transactions entered
into prior to the date of revocation.
Lloyd's Vs. Harper, (1880) 16 Ch D 290:
The Court held that the employment of a servant is a single transaction. A guarantee
given for his good behaviour is not a continuing guarantee and hence it is not
revocable as long as he continues in the job.

2. By death of surety- Sec. 131 of Indian Contract Act reads - the death of the
surety operates as a revocation of a continuing guarantee, so far as it relates
to future transactions.

'The liability of the surety for previous transactions continues to remain valid.

The termination is effective only for the future transactions and it is not necessary
that the creditor must have notice of the death of the surety. Thus, for any
transaction32taking place after the death of the surety, the surety's heirs cannot be
held liable to whether the creditor knew about the death or not.

3. By substituting a new agreement in the place of original agreement,

continuing guarantee may be revoked. It is called Novation (Sec. 62)
4. The release or discharge of the Principal debtor revokes the continuing
guarantee. (Sec. 134)
5. The variation in the terms of the contract without the consent of the Surety,
revokes the continuing guarantee (Sec. 133).
For e.g.: Extension of time or a promise not to sue the principal debtor without
consent of the surety.
Khatun Bibi Vs. Abdullah, (1880) 3 All 9:
Where the payment of rent was guaranteed and the rent was increased without the
consent of the surety.
6. By arrangement (compounding) with, the Principal debtor, the guarantee
can be revoked. (Sec. 135)
7. By loss of security, the guarantee may be revoked. (Sec. 141)
8. By Creditor's act or omission impairing Surety's eventual remedy. (Sec.
139)
CHAPTER 6
DISCHARGE OF SURETY (Sec. 130 to 145)

MOST IMPORTANT
MODEL QUESTIONS:
1. Explain the various modes of discharge of Surety.
2. "When the liability of the Surety comes to an end, the Surety is discharged" -
Discuss,
3. State the circumstance in which a Surety is discharged from liability.
4. Who is surety? When is a surety discharged from liability?
SYNOPSIS:
A. Introduction
B. Discharge by revocation
C. Discharge by conduct of the creditor
D. Contract becoming void/voidable/invalid

A. INTRODUCTION:
A Surety is said to be discharged when his liability comes to an end. The Act
recognizes the following modes of discharge.
I. Discharge by revocation:
1. By notice of revocation (Sec. 130)
 2. By death of surety (Sec. 131)
3. By substitution of a new contract (Sec. 62)
II. Discharge by conduct of the creditor:
1. Variance in the terms of contract. (Sec. 133).
2. Release or discharge of Principal Debtor (Sec 134)
3. Compounding by Creditor with the Principal Debtor (Sec. 135).
Exception i – Contracting with the third person to give time to the principal debtor
(Sec. 136).
Exception ii - Creditor's forbearance to sue does not discharge surety (Sec. 137).
Exception iii - Release of one of the co-sureties (Sec 138)
33
4. Creditor's act or omission impairing Surety's eventual remedy (Sec. 139)
5. Loss of Security (Sec. 141).
III. Contract becoming void/voidable/invalid:
1. Guarantee obtained by misrepresentation (Sec. 142)
2. Guarantee obtained by concealment (Sec. 143)
3. Joining co-surety (Sec. 145)
4. Failure of consideration (Sec. 25)

B. DISCHARGE BY REVOCATION:

1. By notice of revocation: (Sec. 130)

A Surety can be discharged by giving a notice of revocation. However, such notice
will discharge only future contracts. On this basis, the guarantee given by the Surety
is of two types:
a. Specific guarantee
b. Continuing guarantee
Specific guarantee:
This deals with a single transaction. A Surety cannot discharge himself by revocation
if the liability is incurred already. However, if the liability has not been incurred, it can
be revoked by notice.
Continuing guarantee:
This deals with a series of transactions. A Surety can discharge himself by
revocation. Then he is liable only for the transactions already completed and not for
future transactions. Here revocation is done by written notice or oral notice of the
Surety.
A specific guarantee cannot be revoked if the liability has already been incurred.
A continuing guarantee may be revoked at any time by the Surety, as to future
transactions, by notice to the Creditor.
Illustrations:
a. A, in consideration of B's discounting, at A's request, bills of exchange for C,
guarantees to B for twelve months, the due payment of all such bills to the
extent of Rs. 5,000/-. B discounts bills for C to the extent of Rs. 2,000/-.
Afterwards, at the end of three months, A revokes the guarantee. This
revocation discharges A from all liability to B for any subsequent discount. But
A is liable to B for the Rs. 2,000/-, on default of C.
b. A guarantees to B, to the extent of Rs. 10,000/-, that C shall pay all the bills
that B shall draw upon him. B draws upon C. C accepts, the bill. A gives
notice of revocation. C dishonours the bill at maturity. A is liable upon his
guarantee.
Offord Vs. Davies, {1862) 6 LT 579:
Revocation becomes effective only for the future transactions, while the surety
remains liable for transactions which are already entered into.

2. Discharge by death of surety: (Sec. 131)

The death of the surety operates as termination of a continuing guarantee and
discharge of surety as to the future transactions. The properties of the surety,
however, are liable for the transactions entered into before death of the surety, but
not for transactions entered after his death. In case, the surety has no properties,
then his heirs can be sued for the liability incurred by the surety.
34
3. Revocation by substitution of a new contract: (Sec. 62)
The substitution of an old contract of guarantee by a new contract of guarantee is
called a Novation. The consideration for the new contract is only the mutual
discharge of the old contract and hence the original contract of guarantee comes to
an end. This is called discharge of surety by Novation.

C. DISCHARGE BY CONDUCT OF THE CREDITOR:

1. Variance in the terms of contract: (Sec. 133)

If any variance is made in the terms of the contract without the consent of the Surety,
then the Surety is discharged for the future transactions. It is for this reason the
Surety is considered as a favoured debtor by law.
Exceptions:
a. However, if the guarantee is given for performance of several distinct duties
for payment of different debts, then the variation in the contract relating to one
debt does not discharge the surety with regard to the other debts.
b. Similarly, in a continuing guarantee, the variance in terms of contract
discharges the surety only for future transactions entered into after such
variance.
Bonar Vs. Mac Donald:
'B' allows a customer to overdraw and the Bank incurs loss. Due to the variance
made in the contract without his consent, the Court held that the surety is discharged
from his Surety-ship and he is not liable for the losses after the principal debtor is
allowed to overdraw from the bank.

Bolton Vs. Salmon:

The defendant was a Surety for a loan and had given her property as a security. But
the Principal debtor further borrowed from the creditor and executed a new deed
consolidating all the loans. The Court held that the property given as a security by
the surety gets released and also the surety's liabilities to the creditor gets
discharged.

Khatun Bibi Vs. Abdullah., (1880) 3 All 9:

The Court held that where the payment of rent by the tenant was guaranteed by the
surety, but when the rent was increased without the consent of the surety, the surety
gets discharged immediately.

N. Sulochana Vs. State of AP, AIR 1984 AP 173:

The Court held that if there is only an attempted variation in the terms of original
contract, which does not become effective, then the surety is not discharged.

M.S. Anirudhan Vs. Thamco’s Bank Ltd., AIR 1963 SC 746:

The Court held that if the Variance in the terms of original contract is for the benefit
of the surety or does not prejudice him in anyway or is minor and insignificant in
nature, then the surety is not discharged.

Example I A becomes surety to C for B's conduct as a manager in C's bank.

Afterwards, B and C contract, without A's consent, that B's salary shall be raised,
and that he35shall become liable for one-fourth of the losses on overdrafts. B allows a
customer to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent, and is not liable to make good
this loss.
Example II C agrees to appoint B as his clerk to sell goods at a yearly salary, upon
A's becoming surety to C for B's duly accounting for money received by him as such
clerk. Afterwards, without A's knowledge or consent, C and B agree that B should be
paid by a commission on the goods sold by him and not by a fixed salary. A is not
liable for subsequent misconduct of B.
Example III C contracts to lend B Rs 5,000 on 1st March. A guarantees repayment.
C pays Rs 5,000 to B on the 1st January. A is discharged from his liability as the
contract has been varied inasmuch as C might sue B for the money before the first of
March.
But variation which is not substantial or material or which is beneficial to the surety
will not discharge him of his liability. In M.S. Anirudhan v. Thomco's Bank, the surety
guaranteed overdraft provided by the bank to the principal- debtor only upto Rs
25,000. Subsequently since the bank was willing to provide overdraft only upto Rs
20,000, the principal debtor reduced the amount in the guarantee form to Rs 20,000.
On default by the principal debtor the court held the surety liable as the alteration
was beneficial to him and it was not of a substantial nature.
By Release or Discharge of Principal Debtor [Section 134] The surety is
discharged if the creditor
makes a fresh contract with the principal debtor, by which the principal debtor is
released, or
does any act or omissions, the legal consequence of which is the discharge of the
principal debtor.
Example I A contracts with B for a fixed price to build a house for A within a
stipulated time, B supplying the necessary timber. C guarantees A's performance of
the contract. B omits to supply the timber. C is discharged from his suretyship.
Example II A contracts with B to grow a crop of wheat on A's land and to deliver it to
B at a fixed rate, and C guarantees A's performance of this contract. B diverts a
stream of water which is necessary for irrigation of A's land, and thereby prevents
him from raising the wheat. C is no longer liable for his guarantee.
Example III A gives guarantee to C for goods to be supplied by C to B. C supplies
goods to B, and afterwards B becomes embarrassed and contracts with his creditors
(including C's) to assign to them his property in consideration of their releasing him
from their demands. Here, B is released from his debt by the contract with C, and A
is discharged from his suretyship.
By Arrangement [Sec. 135] The surety is discharged if the creditor makes a
composition with, or promises to give time to, or not to sue the principal debtor
without surety's consent in a contract with Principal Debtor.
Cases where surety is not discharged
(i) Where a contract to give time to the principal debtor is made by the creditor with a
third person, and not with the principal debtor, the surety is not discharged. [Sec.
136]
Example C, the holder of an overdue bill of exchange drawn by A as surety for B,
and accepted by B, contracts with M to give more time to B. A is not discharged.
Mere forbearance on the part of the creditor to sue the principal debtor or to enforce
any other 36 remedy against him, does not, in the absence of any provision in the
guarantee to the contrary, discharge the surety.
Example B owes to C a debt guaranteed by A. The debt becomes payable. C does
not sue B for a year after the debt has become payable. A is not discharged from his
suretyship.
Where there are co-sureties, the release by the creditor of one of them does not
discharge the other nor does it free the surety so released from his responsibility to
the other sureties. [Section 138]
By Creditor's Act or Omission Impairing Surety's Eventual Remedy [Section
139] The surety is discharged if a creditor does any act which is inconsistent with the
rights of the surety, or omits to do an act which is his duty to the surety requires him
to do, and the eventual remedy of the surety himself against the principal debtor is
thereby impaired.
Example I B contracts to build a ship for C for a given sum, to be paid by instalments
as the work reaches certain stage. A becomes surety to C for B's due performance
of the contract. C, without the knowledge of A, pre-pays to B the last two instalments.
A is discharged by this prepayment.
Example II C lends money to B on the security of a joint and several promissory
note, made in C's favour by B, and by A as surety for B. together with a bill of sale of
B's furniture, which gives power to C to sell the furniture, and apply the proceeds in
discharge of the note. Subsequently. C sells the furniture. but, owing to his
misconduct and willful negligence, only a small price is realized. A is discharged from
liability on the note.
Example III A puts M as apprentice to B, and gives a guarantee to B for M's fidelity.
B promises on his part that he will at least once a month, see M make up the cash. B
omits to see this done as promised, and M embezzles. A is not liable to B on his
guarantee.
(e) By Loss of Security [Section 141] The surety is discharged from liability to the
extent of the value of security, if the creditor loses, or without the consent of the
surety, parts with security given to him.
Example A gave a loan to B on the guarantee of C as well as on the mortgage of B's
furniture. Afterwards, A cancels the mortgage. B becomes insolvent and A sues C on
this guarantee. C is discharged from liability to the value of furniture.
III. By Invalidation of Contract
Guarantee Obtained by Misrepresentation [Section 142] Any guarantee which
has been obtained by means of misrepresentation made by a creditor or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
Guarantee Obtained by Concealment [Section 143] Any guarantee which a
creditor has obtained by means of keeping silence to material circumstances is
invalid.
Example X employs Y as a clerk to collect money for him. Y fails to account for some
of his receipts and X, in consequence calls upon Z to furnish security for his duly
accounting. Z gives guarantee for Y's duly account. X does not inform Z about Y's
previous conduct. Y, afterwards, makes default. Z is not liable because the
guarantee was obtained by concealment of facts.
(c) Failure of a person to Join as Co-surety [Section 144] Where a person gives
a guarantee upon a contract that a creditor shall not act upon it until another person
has joined in it as co-surety, the guarantee is not valid if that person does not join.

37 or discharge of Principal Debtor: (Sec. 134)

2. Release
a. If the Principal debtor is released by any contract between the creditor and
the principal debtor, then the Surety is automatically discharged.
. E.g.: 'C' employs 'P' at one place on 'S' standing - Surety for P. This employment
gets terminated. 'C' employs at a different place taking security bond from another
person. 'S' is discharged.
b. If the creditor makes a compromise to accept a lesser sum from the
Principal debtor, then the Surety is discharged. But if the discharge of the
Principal debtor is by operation of law [i.e., bankruptcy (insolvency) of the
Principal Debtor] the Surety is not discharged.
c. The omission of the 'creditor to sue' within the period of limitation does not
discharge the Surety.
Mahant Singh Vs. U. Ba, AIR 1939 PC 110:
P obtains a debt from C in 1980. S becomes surety for the debt in 1982. P's liability
got barred by limitation after 3 years i.e., in 1983. S’s liability was barred after 3
years from 1982 i.e., in 1985. The Court held that S - the Surety could be sued till
1985, even though P's liability got barred in 1983.

3. Compounding by Creditor with the Principal Debtor: (Sec. 135)

If the creditor and the principal debtor make a collusive agreement, then the Surety
is discharged. Sec. 135 reads as follows:
A contract between the creditor and the principal debtor, by which the creditor makes
a composition with, or promises to give time to, or not to sue, the principal
debtor, discharges the surety, unless the-surety assents to such contract.
E.g.: P contracts to build a ship for C for a given sum to be paid by installments. As
the work reached certain stages, S becomes Surety to C for Ps due performance of
the contract. C without the knowledge of S, prepays to P the last two installments S
is discharged by this prepayment

Exceptions:
In the following cases, the surety is not discharged

i. Contracting with the third person to give time to the principal debtor
(Sec. 136)
According to Sec. 136 of the Act, ‘if a contract to give time to the principal debtor' is
made by the creditor with a third person and not with the principal debtor, then the
surety is not discharged'.
E.g. C, the holder of an overdue bill of exchange drawn by A as surety for B and
accepted by B, contracts with M to give time to B. A is not discharged.
 ii. Creditor's forbearance to sue does not discharge surety: (Sec. 137)
Mere forbearance on the part of the creditor to sue the principal debtor or to enforce
any other remedy against him, does not, in the absence of any provision in the
guarantee to the contrary, discharge the surety.
E.g.: B owes to C a debt guaranteed by A. the debt becomes payable. C does not
sue B for a year after the debt has become payable. A is not discharged from his
surety ship.

iii. Release of one of the co-sureties (Sec. 138)

According 38to Sec. 138 of the Act, 'if there are co-sureties, then a release by the
creditor of one of them does not discharge the others. Further it does not free the
released surety from his liability/responsibility to the other sureties'.
Thus, if there are more sureties than one, then the liabilities of the sureties are joint
and several. So, even if the creditor releases "any one of the sureties, it does not
discharge other sureties. Even the released surety continues to liable to other
sureties to contribute towards, the debts.

4. Creditor's act or omission impairing Surety’s eventual remedy: (Sec.

139)
If the creditor does any act inconsistent with the right of the Surety or omits to do
some act which is his duty to do so, thereby affecting the remedy of the Surety
against the principal debtor, then the Surety is discharged.
Illustration:
A puts M as apprentice to B and gives a guarantee to B for M's fidelity. B promises
on his part that he will, at least once a month, see. M make up the cash. B omits to
see this done as. promised and M embezzles. A is not liable, to B on his guarantee.

5. Loss of security: (Sec. 141)

If the Creditor loses or without the consent of the Surety, parts with any security
given to him at the time of the contract of guarantee, the Surety is discharged from
liability to the extent of the valuable security.
E.g.: C advances to P Rs. 30,000/- on the guarantee of 'S’. C has also a further
security for Rs. 20,000/- by a mortgage of 'P's land. 'C' cancels the mortgage. 'P'
becomes insolvent and 'C' sues on his guarantee. The Surety is discharged to the
amount of the value of the land i.e., Rs. 20,000/- and he is liable for only Rs. 10,000/-
,
Union Bank of India Vs. Manku Narayan, AIR 1987 SC 1078:
The creditor must proceed in the first instance against the security and then only
against the surety for the balance.

D. CONTRACT BECOMING VOID/VOIDABLE/INVALID:

1. Guarantee obtained, by misrepresentation: (Sec. 142)
As per Sec. 142 of the Indian Contract Act, if the creditor has obtained the guarantee
from the Surety by misrepresentation or without his knowledge and assent
concerning a material part of the transaction, then the guarantee is voidable at the
option of the surety and so the surety is discharged.

2. Guarantee obtained by concealment: (Sec. 143)

As per Sec. 143 of the Indian Contract Act, any guarantee which the Creditor has
obtained by means of keeping silence (concealment) as to material circumstances is
invalid and thus surety is discharged-
Illustrations:
a. A engages B as clerk to collect money for him. B fails to account for some of
his receipts and A in consequence calls upon him to furnish security for his
due accounting. C gives his, guarantee for B's due accounting. A does not
acquaint C with B's previous conduct. B afterwards makes default. The
guarantee is invalid.
b. A guarantee to C payment for iron to be supplied by mm to F ^ the amount of
200G39tons. B and C have privately agreed that B should pay five rupees per
ton beyond the market price, such excess to be applied in liquidation of an old
debt. This agreement is concealed from A. A is not liable as a surety.

3. Joining, co-surety: (Sec. 145)

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

4. Failure of consideration: (Sec. 25)

If there is a failure of consideration between the creditor and the principal debtor, the
Surety is discharged.

CHAPTER 7
RIGHTS OF SURETY (Sec. 138, 140, 141, 145 to 147)
MODEL QUESTIONS:
1. What are the rights of the Surety against the Creditor and the co-sureties?
2. Discuss the rights of the Surety?
3. The rights and liabilities of co-sureties are joint and several- Comment.
4. Discuss the rights of surety against (a) the creditor (b) the principal debtor arid
(c) the co-sureties.
SYNOPSIS:
A. Introduction
B. Rights of Surety against the Principal Debtor
C. Rights against the Creditor
D. Rights against the Co-sureties
A. INTRODUCTION:
Surety is a person who gives guarantee to the Creditor. In other words, if the
Principal debtor fails to perform the contract, the Surety becomes liable to perform
the contract because of his guarantee to the creditor. Both before and after payment
to the Creditor, the surety has certain rights against the following persons.
1. Rights against, the Principal debtor
2. Rights against the Creditor
3. Right against the co-sureties
B. RIGHTS OF SURETY AGAINST THE PRINCIPAL DEBTOR:
1. Right to be relieved from the debt:
The Surety can compel the Principal debtor to repay the creditor and discharge him
40 He has the right to be relieved from liability. It is necessary that the
from the debt.
debt amount to be paid to the Creditor must be clearly ascertained by the Surety, so
that he can compel the Principal Debtor to pay that amount and relieve him from the
liability.
2. Right of Subrogation: (Sec. 140)
When the debt is repaid by the Surety, he is entitled to sue the Principal debtor and
recover the money lawfully paid to the creditor. This is known as Subrogation.
E.g.: P has borrowed a debt from 'C’ on the surety of 'S’. Now 'C' demands payment
from ‘S' and on his refusal, C sues S for the payment of debt. 'S' defends the suit, but
the Court passes a decree against him. S pays the amount of the debt with costs to
C. Now he can recover from P the amount paid by him with costs.
Lampleigh Iron Ore Co., Ltd., Re:
The Supreme Court held that "the surety will be entitled to every remedy which the
creditor has against the principal debtor, to enforce every security and all means of
payment, to stand in the place of the creditor to have the securities transferred to
him, though there was no stipulation for that and to avail himself of all those
securities against the principal debtor\
3. Right to claim indemnity: (Sec. 145)
In every contract of guarantee, there is an implied promise by the principal debtor to
indemnify the Surety. The Surety can recover all payment from the principal debtor
which he has made lawfully.
Thus, after payment under the guarantee, the Surety becomes a creditor to the
principal debtor and can recover the amount he paid with interest. Any other damage
sustained other than the amount paid can also be recovered.

i. C lends B a sum of money and A, at the request of B accepts bill of exchange

drawn by C upon A to secure the amount. C, the holder of the bill, demands
payment of it from A and A’s refusal to pay, sues him upon the bill. A, not having
reasonable grounds for so doing defends the suit, and has to pay the amount of
the bill and costs. He can recover from B the amount of the but not the sum paid
for costs, as there was no real ground for the defending the action.
ii. ‘A’ guarantees to C to the extent of Rs 2000/- payment for rice to be supplied by
C to B. C supplies to B rice a less amount than Rs 2000/-, but obtains from A
payment of the sum of Rs 2000/- in respect of the rice supplied. A cannot recover
from B more than the price of the rice actually supplied.

C, RIGHTS AGAINST THE CREDITOR;

1. Right to compel the creditor to sue the principal debtor (before payment of
debt by the surety):
Before payment of the guaranteed debt amount, the Surety can compel the creditor
to sue the principal debtor and get the money from him. However, the surely must
indemnify the creditor for all the expenses.
If the surety has given fidelity guarantee, then he can force the creditor (employer) to
dismiss the principal debtor (employee) in case the dishonesty on the part of the
principal debtor is clearly proved.
After payment of the debt amount to the creditor, the surety gets the following rights
under Sec. 141 of the Indian Contract Act.

2. Right to Subrogation:
When the 41 surety has paid the debt to the creditor, he gets all the rights of the
creditor. Now he can sue the Principal debtor for the money. This is also known as
subrogation (Subrogated to the rights of creditor).

3. Right to securities:

i. After the payment of the debt to the creditor by the surety, he can compel the
creditor to give him all the securities obtained from the Principal debtor in
connection with the debt amount, whether the surety knows of the existence
of such security or not.
ii. a. If the creditor does not give the security, then the Surety is discharged to
that extent of the value of the security.
b. If the creditor loses or without the consent of the surety, parts with such security or
does not take necessary action on the securities within the limitation period, then the
surety is discharged to the extent of the value of the security.
M. Ramanarain (P) Ltd., Vs. State Transport Corporation AIR 1988 Bom 45:
The Court held that when certain bills of exchange were given by way of collateral
security to the creditor and when they were dishonoured, the creditor made them
useless, by not taking any legal action within the limitation period, the surety was
discharged to the extent of their value.
However, if the security is lost due to an act of God or enemies of the State or in an
unavoidable accident, then the liability of the surety does not come to an end.
Similarly, if the securities were obtained subsequent to the debt and if they are
parted with by the creditor, then the liability of the surety is not reduced in any
manner.

4. Right to defences available to the principal debtor:

The Surety can use all the defences available to the Principal debtor against the
creditor in repayment of the debt. .

5. Right to claim set off:

If the surety is sued by the creditor for the debt given to the principal debtor, then the
surety can rely on any set off or counter claim which the debtor has against the
creditor.
Right to Share Reduction in case of Insolvency of Principal Debtor. The surety has
the right to claim proportionate reduction in his liability if the principal debtor
becomes insolvent.

D, RIGHTS AGAINST THE CO-SURETIES:

 1. When a debt is guaranteed by more than one surety, then the sureties are
called co-sureties. Among co-sureties, it is unfair if one of the co-sureties
alone is compelled to pay the entire debt of the principal debtor. In case one
surety alone pays the amount, then, he can claim contribution for the excess
amount paid by him from other co-sureties. In other words, each co-surety
has equal burden as of the other sureties.
2. The liabilities of the co-sureties are joint and several Thus, after payment of
the whole debt, a Surety can compel the other co-sureties to contribute their
share of the liability.
Right to Claim Contribution If a co-surety pays more than his proportionate share
42has a right to claim contribution from the other co-surety or co-sureties.
of liability, he
Right to Share the Security If a co-surety obtains any security of principal debtor,
the other co-surety (or co-sureties) has (or have) a right to share such security.

The contribution is of two types:

a. Equal contribution by co-sureties for the same amount: (Sec. 146)
If the guarantee of co-sureties is for equal sum of money, then each co-surety must
give equal contribution.
E.g.: S1, S2 & S3 are sureties to 'C' for sums of Rs 30000/- lent to ‘P’. ‘P” makes
default in payment. S1, S2 & S3 are liable as among themselves to pay Rs. 10000/-
each.
b. Proportionate contribution for different amounts:
If the guarantee is given for different sums, then each co-surety has to give
proportionate contribution as per English law, but in Indian law, they are equally
liable, subject to the maximum amount guaranteed.
E.g.: 'X' and ‘Y’ stand sureties for the liability of 'Z. 'X' to the extent of Rs. 15,000/-
and *Y' to the extent of Rs. 30,000/-. If the default loan amount is Rs. 15,000/-, then
according to English law, ‘X’ will have to pay Rs. 5000/- and ‘Y’ Rs 10000/- and ‘Y’
Rs 10000/-. Under Indian law, ‘X’ and ‘Y’ will have to pay Rs.7500/- each.
3. Release of co-sureties: (Sec. 138)
In case of co-sureties, a release of one co-surety does not release the other co-
sureties. Further the released co-surety continues to be liable to the other existing
sureties to the extent of the amount he has guaranteed.
Liability of Co-sureties The liability of co-sureties is summarised as under:
Where there is no contract to the Where the co-sureties have agreed to guarantee
contrary different sums
The co-sureties are liable to The co-sureties are liable to contribute equally
contribute equally to the extent of subject to the maximum amount guaranteed by
default of principal debtor [Section each one. [Section 147] They are not liable in
146] proportion to the amount guaranteed by them.
(e) Matters Immaterial for the aforesaid Principal The aforesaid principal
regarding the liability of co-sureties is applicable—
whether the sureties are liable jointly or severally.
whether the sureties are liable under the same or different contracts.
whether the sureties are liable with or without the knowledge of each other.
Example I A, B and C are sureties to D for a sum of Rs 3,000 lend to E. E makes
default in payment. A, B and C are liable, as between themselves to pay Rs 1,000
each.Example II A, B and C are sureties to D for a sum of Rs 1,000 tent to E, and
there is a contract between A, B and C that A is to be responsible to the extent of
one- quarter, B to the extent of one quarter, and C to the extent of one half. E makes
default in payment. As between the sureties, A is liable to pay Rs 250, B Rs 250 and
C Rs 500.
Example III A, B and C as sureties for D, enter into three A's B’s C's
separate bonds, of different amounts—A for Rs 10,000, B for liability liability liability
Rs 20,000 and C for Rs 40,000. The liability of A, B, C will be
as under if D makes default to the extent of (a) Rs 30.000 (b)
Rs 40,000 (c) Rs 70,000.
Case (a)
(i) Equal share in default (Rs 30,000/3) 10,000 10,000 10,000
(ii) Maximum amount guaranteed 10,000 20,000 40,000
43
(iii) Actual liability [least of (i) & (ii)] 10,000 10,000 10,000
Case {b)
(i) Equal share in default (Rs 40,000/3) 13,333 13,333 13,334
(ii) Maximum amount guaranteed 10,000 20,000 40,000
(iii) Actual liability of A [least of (i) & (ii)] 10,000 — —
(iv) Equal share in remaining default to be shared by 15,000 15,000
remaining co-sureties [(Rs 40,000—Rs 10,000) / 2]
(v) Actual liability of B& C [least of (ii) & (iv)] — 15,000 15,000
Case (c)
(i) Equal share in default (Rs 70,000/3) 26,666 26,667 26,667
(ii) Maximum amount guaranteed 10,000 20,000 40,000
(iii) Actual liability of A & B [least of (i) & (ii)] 10,000 20,000 —
(iv) Remaining default to be shared by remaining co-surety 40,000
(Rs 70,000 —Rs 10,000—Rs 20,000)
(v) Actual liability of C [least of (ii) & (¡v)] — — 40,000

Effect of Release of One Co-surety [Section 138] Where there are co-sureties, a
release by the creditor of one of them does not discharge the others; neither does it
free the surety so released from his responsibility to the other sureties. However,
under English law the release of one co-surety shall release all the other co-sureties
since the liability of co-sureties under English law is only joint and not joint and
several.

PRACTICAL PROBLEMS

PROBLEM 1
A, B, C and D enter in a shop. A says to the trader, "supply the goods required
by B and if he does not pay, I will." C says to the trader, "Let D have the
required goods. I will see that you are paid." State the nature of the contract
between A and B and that of between C and D?
Solution
The contract between A and B is a contract of guarantee but between C and D is a
contract of indemnity.
PROBLEM 2
X. an auctioneer, sold certain goods on the instructions of Y. Later on. It is
discovered that the goods belonged to Z and not to Y. Z recovered damages
from X for selling his goods. Can X recover the compensation from Y?
Solution
X is entitled to recover the compensation from Y because there was an implied
promise to compensate the auctioneer for any loss which he may suffer on the
defective title for goods sold by auction. [Adamson v. Jarvis).

PROBLEM44 3
X asks Y to beat Z and promises to indemnify Y against the consequences, Y
beats Z and is fined Rs 1000? Can Y claim Rs 1000 from X?
Solution
Y cannot claim Rs 1000 from X because the object of the agreement was unlawful.

PROBLEM 4
C sells and delivers goods to P. Is the agreement of guarantee valid in each of
the following alternative cases?
Case (a): If S afterwards agrees to pay for the goods in default of P.
Case (b): If S afterwards requests C to allow a credit period of 1 year to P and
promises that if C does so. he will pay for the goods if P defaults. C agrees to
allow as requested.
Solution
Section to which the given problem relates: Section 127.
Decision and Reason:
Case (a): The agreement of guarantee Is void because such agreement was without
any consideration
Case (6): The agreement of guarantee Is valid because credit period allowed was a
sufficient consideration for S’s promise.

PROBLEM 5
C agrees to sell goods to P on the guarantee of S for payment of the price of
goods in default of P. Is the agreement of guarantee valid in each of the
following alternative cases?
Case (a): If C is a minor
Case (b): If S is a minor
Case (c): If P is a minor
Solution
Case (a): The agreement of guarantee Is void because a creditor is incompetent to
contract.
Case (b): The agreement of guarantee Is void because the surety is incompetent to
contract.
Case (c): The agreement of guarantee Is valid because the incapability of principal
debtor does not affect the validity of agreement of guarantee.

PROBLEM 6
S gives guarantee for the loans given by C to P. P owes Rs 100000 to C. P
becomes insolvent and a dividend of 20 paise in a rupee is declared. Discuss
the rights of C and S if (a) S gives the guarantee for the payment of the loan of
Rs 60.000 (b) S gives the guarantee for the payment of the loan subject to a
limit of Rs 60.000.
Solution:
Right In case of guarantee for a part of In case of guarantee for the entire debt
debt [Case (a)] subject to a limit [Case (b)J
Right of C C can recover Rs 60000 from S C can recover Rs 60000 from S and Rs
and Rs 8000 (being 20% of the 20000 (being 20% the entire debt of Rs
45
balance of Rs 40000) from Ps 100000) from Ps estate.
estate
Right of S After paying Rs 60000 to C. S can S will not get anything from Ps estate till
recover Rs 12000 (being 20% of the entire debt of Rs 100000 is paid to
Rs 60000) from Ps estate. C.

PROBLEM 7
S1, S2and S3 are sureties to C for a sum of Rs 4000 lent to P. P makes a
default the extent of Rs 3000. Discuss the liability of sureties in each of the
following alternative cases:
Case (a): If there is no contract between sureties.
Case(b): If there Is a contract between sureties that S1 to be responsible to the
extent of one- quarter. S2 to be responsible to the extent of one quarter and S3
to be responsible to the extent of two quarter.
Case (c): If sureties enter into three separate security bonds of different
amounts—S1, Rs 700. S2, Rs 1100, and S3 1200.
Solution
Section to which the given problem relates: Sections 146 and 147.
Decision and Reason:
Case (a): S1, S2 and S3, are liable to pay Rs 1,000 each because in the absence of
any contract to the contrary, sureties liable to contribute equally to the extent of
default.
Case (b): S1, S2 and S3 are liable to pay Rs 750, Rs 750 and Rs 1500. respectively,
because co-sureties are liable to contribute according to the terms of contract.
Case (c): S1 is liable to pay Rs 700 (being least of one third of Rs 3.000 and Rs
700). S2 is liable to pay Rs 1100 (being least of one half of Rs 2300 and Rs 1100)
and S3 is liable to Rs 1.200 (being least of Rs 1200 and Rs 1200).
Reason: Co-sureties are liable to pay equally subject to the maximum amount
guaranteed by each one.

PROBLEM 8
A, B and C as sureties for P enter into three separate bonds of different
amounts—A for Rs 10000, B for Rs 20000 and C for Rs 40000. Discuss the
liability of sureties if P makes default to the extent of (a) Rs 30.000 (b) Rs
40000 (c) Rs 70000.

Solution
A's B’s C's
liability liability liability
Case (a)
(i) Equal share in default (Rs 30,000/3) 10,000 10,000 10,000
(ii) Maximum amount guaranteed 10,000 20,000 40,000
(iii) Actual liability [least of (i) & (ii)] 10,000 10,000 10,000
Case {b)
(i) Equal share in default (Rs 40,000/3) 13,333 13,333 13,334
(ii) Maximum amount guaranteed 10,000 20,000 40,000
(iii) Actual liability of A [least of (i) & (ii)] 10,000 — —
(iv) Equal share in remaining default to be shared by 15,000 15,000
remaining co-sureties [(Rs 40,000—Rs 10,000) / 2]
46
(v) Actual liability of B& C [least of (ii) & (iv)] — 15,000 15,000
Case (c)
(i) Equal share in default (Rs 70,000/3) 26,666 26,667 26,667
(ii) Maximum amount guaranteed 10,000 20,000 40,000
(iii) Actual liability of A & B [least of (i) & (ii)] 10,000 20,000 —
(iv) Remaining default to be shared by remaining co- 40,000
surety (Rs 70,000 —Rs 10,000—Rs 20,000)
(v) Actual liability of C [least of (ii) & (¡v)] — — 40,000

PROBLEM 9
C agreed to sell a colour TV set to P under a hire-purchase agreement on guarantee
of S and a pledge of P’s furniture. The terms were: hire-purchase price Rs 24000
payable in 12 monthly instalments, ownership to be transferred on the payment of
last instalment. State whether S is discharged in each of the following alternative
cases:
Case (a): If after seven months, P stopped paying the instalments. C sued P for the
payment of arrears and S then gave a notice revoking his guarantee for the
remaining months.
Case (b): If after seven months. S died.
Case (c): If C without the knowledge of S agreed to increase the number of monthly
instalments from 12 to 24 of Rs 1000 each.
Case (d): If C terminated this agreement and entered into a fresh contract with P
taking a security bond from Z
Case (e): If C without the knowledge of S, allowed P 'further time for payment of one
of the instalments.
Case (f): If C did not sue for a year after the debt has become payable.
Case (g): If C without the knowledge of S transferred the ownership before the
payment of last instalment.
Case (h): If. on the Instalments being in arrears for 3 months. C terminated the
contract and seized the goods.
Case (i). If C without the knowledge of S cancelled the pledge, P became Insolvent
and C sued S for his guarantee.
Case (j): If a contract to give time to the P is made by C with T.
Solution

Case Decision Reason

(a) S is not discharged S could not revoke his guarantee for the remaining
from his liability. months because the hire-purchase agreement was an
entire indivisible transaction and could not be classified
as a series of transaction. In other words, this contract
was a contract of specific guarantee and not of
continuing guarantee (Section 130)
(b) S’s estate is liable. Death operates as a revocation of the continuing
guarantee and not of a specific guarantee (Section 131]
(c) S is discharged The terms of the contract have been varied without the
from his liability. surety's consent (Section 133)
(d) S 47 is discharged The original agreement has been terminated by C
from his liability. (Section 134)
(e) S is discharged The creditor has given further time to the principal debtor
from his liability. without the surety's consent (Section 135)
(f) S is not discharged Mere forbearance on the part of the creditor to sue the
from his liability. principal debtor does not discharge the surety (Section
137)
(g) S is discharged The creditor has transferred the ownership before the
from his liability. payment of the last instalments (Section 139)
(h) S is discharged The creditor has terminated the agreement and seized
from his liability. the goods (Section 139)
(i) S is discharged The creditor has cancelled the pledge the extent of the
from liability to the value of furniture. (Section 141)
extent of the value
of furniture.
(j) S is not discharged Contract to give time between creditor and third person
from his liability. does not discharge the surety. (Sec. 136)

PROBLEM 10
S stands as a surety for the good conduct of P who is employed in a Bank on a
monthly salary of Rs 5.000. Discuss the liability of S in each of the following
alternatives cases:
Case (a): Two months after S gave notice revoking his guarantee. Five months after
it is discovered that P has been continuously misappropriating Rs 1000 per month.
Case (b): Two months after P’s employment. S dies. Five months after it is
discovered that P has been continuously misappropriating Rs 1000 per month.
Case (c): Two months after P’s employment, bank requested P to accept a salary of
Rs 4000 and P agrees to accept. Five months after, it is discovered that P has been
continuously misappropriating Rs 1000 per month.
Case (d): P misappropriates Rs 1000 but the bank excuses him without informing S
of P’s misconduct. P again misappropriates Rs 5000. Bank asks S to pay Rs 5000.
Solution

Case Decision Reason

(a) S is liable to Pay Surety remains liable for the
only Rs. 2000 transactions already entered into prior
to notice revoking guarantee [Section
130)
(b) S’s estate is liable Surety's estate remains liable for the
to pay only Rs. transactions already entered into prior
 2000 to the death of surety [Section 131]
(c) S is liable to pay Surety is discharged as to the
only Rs. 2000 transactions subsequent to the
variance in terms of contract [Section
133)
(d) S is not liable to Surety is discharged because the
pay anything creditor failed to inform surety of P’s
misconduct (Section 139]

TRUE OR 48 FALSE QUESTIONS

State with reasons whether the following statements are True or False.

1. A contract of indemnity is not a contingent contract. (F)

2. A contract of insurance is a contract of indemnity.
3. Indemnity is given by repayment after payment by the indemnity-holder. (F)
4. An indemnifier can sue the third party in his own name. (F)
5. A contract of guarantee cannot be oral.
6. In a contract of guarantee, the principal debtor cannot be minor. (F)
7. In a contract of guarantee, the surety need not be benefitted.
8. A guarantee for payment of a time barred debt is valid. (F)
9. A contract of guarantee is a contract of uberrimae fidei. (F)
10. The liability of surety is primary. (F)
11. The liability of surety is co-extensive with that of the liability of the principal
debtor.
12. If the principal debtor cannot be held liable then the surety will also not be
liable. (F)
13. Creditor is bound to proceed first against the principal debtor before suing the
surety. (F)
14. A fidelity guarantee is a continuing guarantee.
15. A continuous guarantee can never be revoked. (F)
16. A continuing guarantee cannot be given for a part of the entire debt. (F)
17. A continuing guarantee can be given for the entire debt subject to a limit.
18. A specific guarantee cannot be revoked by notice even if the liability has not
accrued. (F)
19. A continuing guarantee can be revoked as to the past transaction by giving
notice to the creditor. (F)
20. The death of a surety puts an end to the contract of guarantee.
21. Surety's estate will be liable for the transactions taking place after the death of
surety if the creditor had no knowledge of surety's death. (F)
22. On payment of the guaranteed debt or performance of the guaranteed duty,
the surety steps into the shoes of creditor.
23. In every contract of guarantee, there is implied contract of indemnity.
24. After the discharge of liability of principal debtor, the surety has right to only
those securities which were given by the principal debtor to the creditor at the
time of contract of guarantee. (F)
25. Between co-sureties, there is equality of burden and benefit.
26. Co-sureties who have given guarantee for different amounts share the liability
proportionately. (F)
 27. A variance in terms of contract without surety's consent, discharge the surety
as to all transactions. (F)
28. Discharge of principal debtor by operation of law operates as discharge of the
surety. (F)
29. A release by the creditor of one of the co-sureties discharges the other co-
sureties. (F)
30. A release by the creditor of one of the co-sureties frees the surety so released
from his responsibility to other sureties. (F)
31. A contract between the creditor and the third party to allow more time to the
principal debtor discharges the surety. (F)
49
32. Forbearance by the creditor to sue the principal debtor discharges the surety.
(F)
33. Guarantee obtained by misrepresentation is invalid.
34. Guarantee obtained by concealment of material facts is invalid.

CONRACT LAW II

PROBLEMS UNIT 1
INDEMNITY & GUARANTEE (The Indian Contract Act, 1872)

PROBLEM NO. 1
A promises B to indemnify him against the consequences of any proceedings
which C may take against B to recover a sum of Rs. 1,000 due from B to C. Is
this a contract of indemnity?
ANSWER:
Sec. 124 of the Indian Contract Act, 1872 defines Indemnity as a direct contract
between two persons. Here one person promises to save another from loss. The
loss is assured to be compensated by the promisor himself or by any other person.
The person who promises to make good the loss is called the Indemnifier (promisor)
and the person whose loss is to be made good is called the Indemnified or
Indemnity-holder (promisee) Thus, the promisee must incur a loss, if he has to be
indemnified by the promisor.
Going by the above definition, the above case is an example of contract of
Indemnity, wherein A is the Indemnifier or promisor and B is the Indemnified or
promisee.

PROBLEM NO. 2
‘A’ Guarantees payment to B of the price of five sacks of flour to be delivered
by B to 'C'50and to be paid for in a month. B delivers five sacks flour to C. 'C'
pays for them. Afterwards B delivers four sacks of flour to 'C' which 'C' does
not pay for it. What is the liability of 'A9? Give reason.
ANSWER:
According to Sec. 126 of the Indian Contract Act, 1872, a contract of guarantee is a
contract to perform the promise or discharge the liability of a third person in case of
his default.
Guarantee is classified into two types viz. specific guarantee and continuing
guarantee. Specific guarantee deals with a single transaction. It is also known as
simple guarantee. A specific guarantee cannot be revoked when the liability is
incurred. It comes to an end when the guaranteed debt is duly discharged or
promised, is performed.
The instant case is a classic example of a specific guarantee. In this case, A
guarantees to B only in respect of five sacks of flour to be delivered to C, the
payment of which shall be made in a month's time. C makes the payment within the
time frame allotted and thus the guarantee of A is discharged.
Further to this, B again delivers four sacks of flour to C which the latter defaults in
payment.
The guarantee furnished by A was only a specific guarantee for the first transaction
and therefore, he is not liable for the price of the four sacks later delivered by B to C.

PROBLEM NO. 3
A signed a surety for his friend who obtained a loan from a nationalized bank.
As his friend did not repay the loan the bank filed a suit for recovery against A.
‘A’ objected on the basis that the bank had not exhausted its remedies against
his friend - Decide.

ANSWER:
As per Sec. 128 of the Indian Contract Act, 1872, the liability of the Surety is co-
extensive with that of the Principal debtor unless it is otherwise provided for in the
contract.
It means that the Creditor can recover the loan amount from the Surety directly
without taking steps to recover from the Principal debtor; It also means that the
liability of the Surety is the same as that of the Principal debtor.Thus, in the above
case, the action of the nationalized bank in filing a suit for recovery against A, the
Surety, for the repayment of the loan taken by his friend, is very well within their right
to do so. A's objection on the basis that the Bank has not exhausted its remedies
against his friend before filing a suit for recovery from him is not tenable as the Bank
has no compulsion as per law to do so.
Both the Principal debtor and the Surety are jointly and severally liable.

PROBLEM NO. 4
B owes to C, a debt guaranteed by A. The debt becomes payable. C does not
sue B for a year after the debt has become payable. B becomes insolvent.
Thereafter C sues A for the debt. A pleads C's forbearance to sue B for a year
as a defense. Is this a good defense?
ANSWER:
No. A cannot plead C's forbearance to sue B for a year as a defense to exonerate
his liability. As per Sec. 128 of the Indian Contract Act, 1872, the liability of the
51
Surety is co-extensive with that of the Principal Debtor unless it is otherwise provided
for in the Contract.
As decided under Bank of Bihar Vs. Damodar Prasad, AIR 1969 SC 297, the
Surety has no right to dictate terms to the Creditor and ask him to pursue remedies
first against the Principal Debtor.
A discharge of the Principal Debtor by the operation of law does not discharge the
Surety. Further, the law states that even if the Creditor does not sue the Principal
Debtor within the period of limitation, if the limitation period is available against the
Surety, then he can independently proceed against the Surety.
Thus, in the above case, even though C does not sue B for recovery of the debt for a
period of one year after its becoming due, he could very well proceed against the
Surety, A, which he has done. B having been declared an insolvent, it is now upon
the Surety A, to repay the debt guaranteed by him. He cannot plead C's forbearance
to sue B for recovery of his debt.

PROBLEM NO. 5
‘M’ is a farmer. He got a loan of Rs.20,000 from a Bank. "N" was the surety. By
way of Debt Relief Act the debt was reduced to Rs.10,000. But "M" was not in a
position to pay even the reduced amount. What is the liability of "N”?
ANSWER:
As per Sec. 128 of the Indian Contract Act, 1872, the liability of the Surety is co-
extensive with that of the Principal debtor unless otherwise provided for in the
contract.
In this context, reference is made to the case law, Subramania Vs.
Narayanaswami, AIR 1951 Mad. 48 (FB) wherein the Court held that if the principal
Debtor's liability is extinguished, then the Surety's liability also gets extinguished
because the liability of the Surety is co-extensive with that of the Principal Debtor as
stated u/s 128 mentioned above.
Therefore, in the above case, 'N', the Surety, is absolved of his liability to the extent
of Rs. 10,000/- as 'A' who is a farmer and the Principal Debtor in this case gets a
debt relief to that extent. However, as 'A' is not in a position to pay even the reduced
amount, the Surety has to answer the liability to the Bank. The Bank may invoke
recovery proceedings from 'N' to the extent of Rs. 10,000/-.

PROBLEM NO. 6
“A” guarantees the debt owned by "B" to “C"”. The debt is wiped out by a
Debt Relief Act. Is “A” liable on his guarantee?

ANSWER:
No. As per Sec. 128 of Indian Contract Act 1872, liability of the Surety is co-
extensive with that of the principal Debtor unless it is otherwise provided in the
contract.

In Subramania Vs. Narayanaswami, AIR, 1951, the Court held that if the Principal
Debtor's liability is extinguished, then the Surety's liability also gets extinguished
because the liability of the Surety is co-extensive with that of the Principal Debtor as
is clear from Sec. 128 of the Indian Contract Act, 1872. .
Going by the above, A, the Surety is not liable as the Principal debtor, B's debt to
Creditor C is wiped out under the Debt Relief Act. The liability of A is co extensive
with that of52
B.

PROBLEM NO. 7
A and B execute a joint pro-note in favour of C. In fact, 'A' executes only as
surety for B and this fact is known to C. C files a suit against A upon the note.
Discuss the liability of A.
ANSWER:
As per Sec. 128 of the Indian Contract Act, 1872, the liability of the Surety is co-
extensive with that of the Principal Debtor unless it is otherwise provided for in the
contract.
Under the rules regarding the Surety's liability, Sec. 128 states that it is not
necessary that the Creditor must exhaust his remedies against the Principal debtor
before proceeding against the Surety. He can straight away sue the Surety without
proceeding against the Principal Debtor.
The above point was established under the case law “Syndicate Bank Vs. A.P.
Manjunath & another, 1999, CCC, Kar.
In the instant case, C, who is the creditor files a suit only against A, though he is fully
aware that the pro-note is a joint one and that A is only acting as a Surety. Going by
the above provisions of law, the action of C is quite in order and 'A's liability is co-
extensive with that of B.

PROBLEM NO. 8
“B" Contracts to build a ship for "C" for a given sum, to be paid by instalments
as the work reaches certain stages. "A" becomes the Surety to "C" for "B"s -
due performance of the contract. "C" without the knowledge of "A" prepays to
"B" the last two instalments. Discuss A's position.
ANSWER:
Sec. 133 of the Indian Contract Act, 1872 is regarding Variance in terms of contract'.
It states that if any variance is made in the terms of the contract without the consent
of the Surety, then the Surety is discharged for the future transactions, which is the
reason for the Surety being termed as a favoured debtor.
Sec. 135 states further that if the creditor and the principal debtor make a collusive
agreement, then the Surety is discharged. A contract between the creditor and the
principal debtor, by which the creditor makes a composition with or promises to give
time to, or not to sue the principal debtor, discharges the Surety, unless the Surety
assents to such contract.
Keeping the above legal provision in view, 'A', the Surety of 'C' for payment to 13'for
building the ship, is discharged of his surety-ship as regards the last two instalments
since the prepayment of the instalments was not within his knowledge. The
payments were agreed to be made as per the stage of completion of the building of
the ship whereas C had prepaid the last two instalments notwithstanding the stage of
completion without the knowledge of A.

PROBLEM NO. 9
'B' owes to 'C' a debt guaranteed by 'A'. The debt becomes payable. (C' does
not sue (B' for a year after the debt has become payable. Is the surety
discharged?

ANSWER:
As per Sec. 137 of the Indian Contract Act, 1872, mere forbearance on the part of
the creditor53
to sue the principal debtor or to enforce any other remedy against him, in
the absence of any provision in the guarantee to the contrary, does not discharge the
surety.
In the above problem, 'C's act of not suing 'B' for a year after the debt has become
payable does not discharge the surety 'A'.

PROBLEM NO. 10
“ ”
A contracts with 'B' for a fixed price to build a house for 'B' within a
stipulated time.” B” supplying necessary timber, 'C' guarantees “A's per-
formance of the contract. 'B' omits to supply the timber. 'A9 could not perform
the contract. What is the liability of' C'?
ANSWER:
There is no liability to C. Sec. 139 of the Indian Contract Act, 1872 specifies that if
the Creditor does any act inconsistent with the right of the Surety or omits to do
some act which is his duty to do, thereby affecting the remedy of the Surety against
the Principal Debtor, then the Surety is discharged.
In the instant case, A is the principal debtor; B is the Creditor and C, the guarantor or
Surety. A's contract with B is for building a house for a specific price within a
stipulated time. However, C's guarantee in respect of A's completion of work within
the stipulated time period is based on the supply of timber by B.
In the above case, B omits to do his required act of supply of timber to A which in
turn led to the non-performance of the contract by A. Therefore, C is not liable for the
non-performance of C.

PROBLEM NO. 11
‘ ’
A stands as a surety for the good conduct of 'B9 who is employed in a Bank.
'B9 misappropriates some moneys. The Bank excuses him without informing
'A9 of (B9s misconduct. 'B9 again misappropriates Rs.50,000. The Bank files a
suit against *A9 on the strength of the Guarantee. Decide giving reasons.

ANSWER:
According to Sec. 139 of the Indian Contract Act, if the creditor does any act
inconsistent with the right of the surety or omits to do some act which is his duty to
do, thereby affecting the remedy of the Surety against the principal debtor, then the
Surety is discharged.
In the instant case, the act of the bank in excusing 'B' without informing 'A' of 'B's
misconduct, is omission affecting the remedy of the Surety against the principal
debtor i.e., an opportunity to the Surety to revoke his guarantee for 'B's good
conduct. Therefore 'A' is not liable for 'B's misappropriation of Rs.50,000 again.
PROBLEM NO. 12
"A" engages “B" as a clerk to collect rents from his tenants. 'B' fails to account
for the sums collected. “A” in consequence call upon “B” to furnish security
and “C” stand as security for 'B’s due. But “A” does not inform 'C' about 'B's
previous defaults. Decide whether “C” is bound by the guarantee.
ANSWER:
No. Sec. 143 of the Indian Contract Act, 1872 talks about Guarantee obtained by
concealment.
This section states that any guarantee which the creditor has obtained by means of
keeping silence (concealment) as to material circumstances is invalid and so the
54
surety is discharged.
The instant case is a classic example of the provision u/s 143. B is engaged by A for
collection of rent from his tenants and B fails to account for the sums collected. As B
proved to be unreliable, A sought for a guarantee to be furnished.
When C stood as a surety for B, he is not informed of the defaults committed by him
on previous occasion. Thus, it is concealment of a material fact which could affect
the decision of C as to whether he would stand as a surety to B or not.
In case B defaults in future again, C is not bound by the guarantee as he was
innocent of the previous record of B.

PROBLEM NO. 13
A, B and C have agreed to become liable for Rs. 10,000/-. Rs. 20,000 and Rs.
40,000/- respectively as sureties for D. D's indebtedness was Rs. 40,000/-.
What is the sum for which each of the three sureties are liable to pay?
ANSWER:
A, B and C have agreed to become liable for Rs. 10,000/-. Rs. 20,000 and Rs.
40,000/- respectively as sureties for D. D's indebtedness was Rs. 40,000/=. What is
the sum for which each of the three sureties are liable to pay?
Sec. 147 of the Indian Contract Act, 1872 deals with the Liability of co-sureties who
are bound in different sums.
Sec. 147 reads - co-sureties who are bound in different sums are liable to pay
equally as far as the limits of their respective obligations permit.
As per the above Sec. 147, the liability of the three sureties A, B and C are as
follows

A has agreed to become liable for Rs. 10,000/-. So, A is liable for Rs. 10,000/-
The balance debt amount is Rs. 30,000/-.
B has agreed to become liable for Rs. 20,000/- and C has agreed to become liable
for Rs. 40,000/-.
As per the above Sec. 147, B is liable for Rs. 15,000/- and C is liable for Rs.
15,000/-.
The facts of the Illustration (b) of Sec. 147, is similar to the facts of the problem.
The facts of the Illustration (b) of Sec. 147 is as follows
A, B and C, as sureties for D, enter into three several bonds each in different penalty
namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of
40,000 rupees, conditioned for D's duly accounting to E. D makes default to the
extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and C 15,000
rupees each.
 UNIT - II
BAILMENT AND PLEDGE

SYLLABUS

Contract of Bailment - Definition - Kinds - Rights and Duties of Bailor and Bailee -
Rights of Finder of goods as Bailee - Contract of pledge - Definition - Comparison
with Bailment - Rights and duties of Pawnor and Pawnee

CHAPTER 1 CONTRACT OF BAILMENT

DEFINITION, ESSENTIALS AND CLASSIFICATION OF BAILMENT (Sec 148).
QUESTIONS
1. Define "Bailment". What are its essentials?
2. What are the characteristic features of bailment?
3. Define and explain "Bailment"?

SYNOPSIS:
A. Introduction
B. Definition
C. Illustrations of Bailment
D. Essentials of Bailment
C. Classification of Bailment

A. INTRODUCTION:
The contracts of bailment and pledge are special classes of contracts. The Indian
Contract Act, 1872 deals with the general principles of bailment whereas the Acts
like the Carriers Act, 1865, the Railways Act, 1890, the Carriage of Goods by Sea
Act, 1925, the Carriage of Goods by Air Act deal with Special types of bailments.
DEFINITION:

Sec. 148 of the Indian Contract Act defines ' bailment:

Bailment is the delivery of goods by one person to another for some purpose. The
purpose is specified in the contract of bailment. When purpose is over, the goods
should be returned to the person who delivered it or it is disposed of according to the
directions of the person who delivered the goods.

The delivery may be actual or constructive. If the bailor puts the goods in the
custody of the bailee, it is actual delivery. If a person who has sold goods to another
but continues to be in possession of the goods, he holds the goods as a bailee of the
purchaser. This is a case of constructive delivery.

The person who delivers the goods is called bailor. The person to whom the goods
are delivered is called bailee. The transaction is called bailment. The bailor and
bailee have certain ‘rights and duties’ under the Act.

Thus, bailment is the delivery of goods for specific purpose under a contract on the
condition that the goods shall be returned to the bailor or disposed of according to
the directions of the bailor, after the purpose is accomplished.
In bailment only the possession of the goods is given to the bailee and the ownership
continues to remain with the bailor.

C. ILLUSTRATIONS OF BAILMENT:
The following contracts are contracts of bailment:
1. Giving a piece of cloth by A to B a tailor for stitching a shirt is bailment. Owner
of the cloth is the bailor and the tailor is the bailee.
2. Giving a wrist watch by A to B a repairer for repairing^ is bailment.
3. Hiring a car, motor cycle, pedal cycle by B from A is bailment. A is the bailor
and B is the bailee..
4. Giving gold ornaments by A to B, a bank, as security for loan is a special type
of bailment called pledge. A is the pledgor and B is the pledgee.
5. Car sold by B to A, but delivery has not been taken by A and the Car is lying
with the B. Here A is the bailor and B is the bailee.
6. A TV set sent by A to B, on hire purchase. Here A is the bailor and B is the
bailee.
7. Depositing luggage by A in a cloak room owned by B. Here A is the bailor and
B is the bailee.
8. Giving, cloth by A for dry cleaning to B. A is the bailor and B is the bailee.
9. Shankar Lal VS. Bharu Lai, AIR (1951) Aim 24:
The relation between a bank and a depositor money is that of a borrower and
the lender and not that of a bailor and bailee. Similarly, an agent who
possesses money on behalf of principal is not a bailee of the money
D. ESSENTIALS OF BAILMENT:

1. Agreement on some purpose:

Bailment is created by agreement between the bailor and bailee. Due to the
agreement, there is delivery of goods from the bailor to the bailee for some
purpose. When the purpose is completed or achieved, the goods are to be
returned. A finder of lost goods is an implied bailee.
2. Delivery of goods:
The delivery of goods by one person to another is necessary. Mere custody of
goods does not create relationship of bailor and bailee. E.g., a servant has
mere custody of the goods. This is not bailment.

Kaliaperumal Vs. Visalakshi:

"
A lady wanted to melt her old gold jewelry and make a new one out of it. She
employed a goldsmith for this purpose and every evening she got back the
unfinished jewellery arid kept it in a box in the goldsmith's place, but took custody of
the key of the box. One night, the gold jewellery was stolen away. As the goldsmith
had redelivered the jewellery bailed with him, it is not bailment and he was not liable.

3. Actual or Constructive delivery:

Delivery of goods, which involves change of possession, may be actual or
constructive.
Actual delivery involves the literal handing over of physical possession of the
goods by one person to another.
In some cases, delivery may be constructive or symbolic. For e.g., Handling
over the keys of a godown or a car are symbolic deliveries.
Twentieth Century Finance Vs State Of Maharashtra (2000)
The Supreme Court held that the right to use goods is a species of bailment, as
there is no transfer of ownership in such transaction. Such transactions are in the
nature of contract of bailment and the transfer in bailment is completed only upon the
delivery of goods from Bailor to Bailee.
&

Morvi Mercantile Bank. Vs. Union of India, AIR 1965 SO 1954:

Delivery of a railway receipt amounts to delivery of the goods. This is constructive
delivery.
4. Return of the goods:
As soon as the purpose is achieved, the goods shall be returned or disposed
of according to the directions of the bailor. If there is no return of the goods,
there is no bailment. But the bailed goods may be returned in an altered form
E.g., when a piece of cloth is stitched into a shirt.
5. Movable goods:
Bailment is concerned only with movable property other than money and
actionable claims.
6. Passing of; Possession and not transfer of ownership:
Only the possession of goods passes from the bailor to the bailee, and not
the ownership of property. If the property is transferred for money
consideration it becomes a sale.
7. Consideration:
The consideration is money payment either by the bailor or bailee.
E.g., Hiring cycles, car or giving vehicles for repair etc. The detriment suffered
by the bailor i.e., parting with the possession of goods is sufficient
consideration for a contract of bailment.

E CLASSIFICATION OF BAILMENT:
On the basis of reward, Bailment is classified as follows:
1. Gratuitous bailments: .<
A bailment without consideration is known as gratuitous bailment. Both the
bailor and the bailee are not entitled to any remuneration.
Eg.:
a. A lends his book to his friend .
b. 'A' leaves some goods with his friend ‘B' for safe custody.
2. Non-Gratuitous Bailments or Contract Bailments:
Some consideration passes between the bailor and the bailee.
E.g.:
a. Goods kept for hire
b. Hiring vehicles from a person

On the basis of the benefits derived by parties, bailments are classified as

follows:
1. Bailments only for the benefit of the bailor.
E.g.: delivery of things to another for safe custody.
2. Bailments only for the benefit of the bailee.
E.g.: lending a vehicle for the use of a friend.
 3. Bailment for the mutual benefit of the bailor and bailee.
E.g.: Hiring vehicles, giving things for hire.

BAILMENT
Based on Benefit Based on Reward
Exclusive benefit Exclusive Mutual Gratuitous Non gratuitous
of Bailor benefit of Benefit of Bailment Bailment
Bailee both
J, neighbour of K, Z lends a book A hires Neither Bailor Bailor or Bailee
agrees to look after to Y for furniture from nor Bailee gets gets
K’s per while he is reading. Y is B, by any remuneration e.g.
out of station. K is benefited. payment of remuneration, G gives his
benefited. hire charges, e.g. A lends his television set for
Both A and B book to his are repair to H, a
are benefited. friend. technician. H gets
paid for the job.

CHAPTER 2
DUTIES AND RIGHTS OF BAILOR AND BAILEE
(Sec 150 to 161, 163 to 167 & 180)

QUESTIONS:
1. Enumerate the duties of a bailor.
2. What are the rights and duties of bailer and bailee?
3. State what relief is available to the bailee in case of mixing of bailee's goods
with those of the bailor?
4. Define bailment and enumerate-the rights .and duties of bailee.
5. A bailee is bound to take reasonable care and nothing more - Elucidate.
6. What are the rights of the bailor and bailee against third parties? Explain.

SYNOPSIS:
A. Introduction
B. Duties of Bailor
C. Duties of Bailee
D. Rights of Bailor
E. Rights of Bailee

A. INTRODUCTION:
Bailment is the delivery of goods by one person to another for some purpose. The
purpose is specified in the contract.
After the purpose is accomplished, the goods are returned to the person who
delivered it or it is disposed of according to the directions of the person who
delivered the goods.
The delivery may be actual or constructive. If the bailor puts the goods in the custody
of bailee, it is actual delivery. If a person who has sold goods to another but
continues to be in possession of the goods, he holds the goods as a bailee of the
purchaser. This is case of constructive delivery.
The person who delivers the good is called "Bailor". The person to whom the goods
are delivered is called the "Bailee". The bailor and bailee have certain rights and
duties under the law.

B. DUTIES OF BAILOR:

1. To disclose the known faults in good bailed- (Sec. 150)

When the goods are delivered by the 'bailor he is bound to disclose the faults in his
goods. These are faults which the bailor is aware and must know would interfere with
the use of goods or put the bailee to expenses and extraordinary risk. In such cases,
the bailor must disclose such defects. If he does not disclose, then he is liable for the
loss arising to the bailee by such faults.

E.g.: If A bails certain bicycles he must disclose the defects in them which would
cause danger while riding the bicycle or risk the bailee’s life. If he does not disclose
it, he is liable for the loss arising out of the defects.

a. Goods bailed for hire: (Non-gratuitous bailor)

If the goods are bailed for hire, the bailor is liable for all losses arising out of the
faults in the goods. It is immaterial whether the bailor is aware of the existence of
such faults or not.

Read. Vs. Dean:

'B' gave 'A', a Motor launch on hire to go for a holiday on the river Thames. The
launch caught fire and ‘A’ was unable to put it out because the fire extinguishing
equipment was out of order. He was injured by the accident and suffered loss. Held
that *B was liable for non-disclosure of facts.
b. Goods bailed freely (Non gratuitous bailor):
If the goods are bailed gratuitously, then the bailor is liable only for the known
defects. If the bailment is non gratuitous the bailor is liable for the known and
unknown defects.
E.g.: 'A' lends a horse to 'B' knowing that it is vicious but not disclosing this fact. 'B' is
thrown away and injured by the horse. 'A*, is responsible for the damage to 'B’

Liability for Defects in Goods

In case of Gratuitous bailment In case of Non – Gratuitous
Bailment
Bailor is liable only for those losses which Bailor is liable for damages whether
arise due to non – disclosed risks. or not

2. Necessary expenses to be borne: (Sec. 158)

The bailee will meet the ordinary and reasonable expenses of bailment. For e.g.,
transport charges, for other extraordinary expenses, the bailor is liable. But the
parties by the terms of contract of bailment, may alter the above general principle.

3. Extra ordinary expenses to be borne (in non-gratuitous bailment):

Where the goods are bailed for reward or remuneration, the ordinary expenses need
not be borne by the bailor, but if there are some extra ordinary expenses incurred,
then it becomes the duty of the bailor to pay such extra ordinary expenses.

Expenses of Bailment
In case of Gratuitous bailment In case of Non – Gratuitous Bailment
Bailor shall repay to Bailee, all Bailor is liable to repay only extra –
necessary expenses incurred by him for ordinary expenses, and not the ordinary
the purpose of bailment expenses

4. To receive back the goods:

When the bailee returns the goods back after the term of bailment or the purpose of
bailment is over, it is the duty of the bailor to receive the goods. If he refuses to
receive the goods back, the bailee is entitled to get compensation for the necessary
expense of custody.
5. Indemnifying loss due to defective title: (Sec. 164)
If the bailor has defective title and because of this defective title, if the bailee suffers
some loss, then the bailor is liable. The defective title may be used to make a
bailment, receive the goods under bailment or give directions for disposal of the
goods bailed.
6. Indemnifying for loss due to premature termination of bailment (Sec. 159):
If the loss incurred by the bailee due to premature termination of bailment by the
bailor exceeds the benefit received from the bailment, then the bailor must indemnify
the bailee for such loss.

C. DUTIES OF BAILEE:
1. To take reasonable care of the goods: (Sec- 151)
This is the most important duty of the bailee.
 i. The bailee is bound to take reasonable care of the goods bailed to him. There
is 'no standard degree of care or negligence stipulated' for goods bailed
freely.
ii. The bailee should consider the goods as his own and he must take reasonable
care of the goods. If the bailee has taken such. Care, then he is not liable for
any loss to the bailed geode.
iii. If the bailee fails to return the goods or returns them in a damaged condition,
the burden of proof lies on him to show that there has been no negligence and
the damage was in spite of exercising reasonable care.
iv. In spite of the bailee's reasonable care, if goods are damaged or destroyed in
any way, the bailee is not liable for the loss, or their destruction (Sec. 152).
The burden of proof lies on the bailee to show that he exercised due care.

Case Laws:

a. Punjab National Bank Vs. Lakshmi I &, T Company Pvt., Ltd., AIR 2001 All
28, 30 (DB):
Certain goods were deposited by the borrower on loan with a banker as security for
the loan. The goods were stolen while in the custody of the bank. The Court held that
the liability of the Bank will not be absolved unless it is shown by it that it has taken
all possible care as a prudent owner could have taken.

b. Martin Vs. London County Council:

Martin was admitted to a hospital and his jewels were given to the hospital officials
for safe custody. Held that as the officials were bailee for reward they were liable for
the loss caused due to negligence and care.

c. Ulzton Vs. Nicols:

'A' entered a restaurant for dining. The waiter took 'A's coat and hung it behind him.
The coat was missing when 'A' finished his dinner. Held that the proprietor was
responsible for the loss.

d. Dwaraknath Vs. S.N. Rivers Railway Company:

Dwaraknath was the bailor. He bailed his goods to the Rivers Railway Company.
During the course of carrying the goods in the train the goods were destroyed by fire.
The Railway Company failed to prove that they had taken reasonable care of the
goods, and hence it was held liable to pay compensation.

e. Shanti Lal Vs. Tara Chand:

The bailee had stored food grains in the godown but it was damaged by floods very
rare to that place. The bailee was not held liable.
If the bailee does not prove that he has taken reasonable care of the goods bailed,
he would be held liable.

f. N.R. Srinivasa Iyer Vs. New India Insurance Co. Limited:

The bailor's (plaintiffs) car was destroyed in the fire which occurred in the garage
where the car was given for repair. The bailees were held liable for the loss of the
car because they were not able to prove that they had taken reasonable care.
 v. If the loss accrues due to an act of the bailee's servant within the scope of his
employment, then the bailee is liable.
vi. An involuntary bailee is a person who comes into possession of a thing
without his consent and without any of his own act; such a bailee is also
responsible for negligence.

2. No unauthorized use: (Sec. 154)

If the goods are bailed for some specific purpose, it should be used only for that
purpose. If it is used for some other purpose, and if any loss occurs to the goods by
such use, then the bailee is liable to pay compensation even though he is not
negligent.
E.g.:
a. 'A' lends a horse to ‘B’ for his own riding only. 'A' allows ‘C', his friend, to ride the
horse C though rides with care, the horse accidentally falls and gets injured. ‘B'
liable to compensate 'A' for the injury caused to the horse.

b. A hires a horse in Calcutta from B expressly to march to Benares. A rides with

due care, but marches to Cuttack instead. The horse accidentally falls and is
injured. A is liable to compensate B for the injury to the horse.

3. No deviation from the terms of the contract:

The terms of the contract must be followed by the bailee strictly. If the bailee uses
the goods in a different way, not mentioned in the terms of the contract, then the
bailor can revoke the contract, then the bailor can revoke the contract. For e.g., A
bails a cycle for hire to B for his own riding. If B gives the cycle for hire to a child to
ride it, then A can revoke the contract.

4. Not to mix the goods (Sec 155,155 & 157)

i. The bailee should not mix the bailed goods with his own goods. He must keep
the bailed goods separately from his own goods.
ii. If the bailee mixes the bailor's goods with bailor's consent, then both shall
have a proportionate interest in the mixed goods. (Sec. 155)
iii. If the bailee mixes the bailor's goods with his own goods without the consent
of the bailor then the bailee is liable for the expenses of separation of the
mixed goods. (Sec. 156)
iv. If the goods are inseparable, then the bailee should pay compensation to the
bailor for the total loss of the goods. (Sec. 157)
E.g.: 'A' bails a bag of good rice worth Rs.500/- to ‘B' without A's consent, ‘B'
mixes the rice with that of his own worth only Rs. 250/- per bag. ‘B' must '
compensate 'A' for the loss of his rice.
v. If the goods of his bailor gets mixed up due to Act of God or by an act of
unauthorised third party, then the mixture belongs to the bailor and bailee in
proportion to their shares, but the bailee has to bear the cost of the
separation.

5. To return the goods trailed: (Sec. 160 & 161)

i. When the purpose for which the bailment is made gets over, then the goods
must be returned to the bailor or delivered as per the direction of the bailor.
 ii. If there are joint bailors, the bailee may deliver the goods to any one of the
joint bailors. x
iii. If the bailee does not return the goods bailed, then he shall be liable for loss
or damage to the goods. (Sec. 161)

a. Rampal Vs. Gourishankar, AIR 1952 Nag 8:

The Court held that if a Pawnee (pledgee) refused to return the goods even after
the repayment of the debt by the pawner (pledgor) and if the goods are subsequently
stolen, then the Pawnee was liable to compensate the pawner.

-"
r
b. Shaw & Co Vs. Symmons & Sons:
'A' had delivered some books to be bound by 'B'. ‘B' was negligent as not to return it
even after 'A' pressed for the return of books. A fire broke out on B's premises and
the books were burnt. As 'B' did not return the books within a reasonable time, he
was liable for the loss even though he was not negligent.
5. To return any accretion to goods: (Sec. 163)
The bailee is bound to deliver to the bailor any increase in profit which may have
accrued from the goods bailed.
illustration:
A leaves a cow in the custody of B to be taken care of. The cow yields a calf, B is
bound to deliver the calf as well as the cow to A.

6. . Not to setup an adverse title: (Sec. 117 of Indian Evidence Act, 1872)
The bailee should act on behalf of the bailor. He cannot deny the right of the bailor to
receive them back. If the bailee delivers the goods to some other person, he must
prove that the other person has a better title to the goods. In other, words, the bailee
should not setup an adverse title against the bailor

D. RIGHTS OF BAILOR
1. Right to get back the goods: (Sec. 159).

i. The bailor has the right to get back the goods as soon as the bailment is
over. He can also give direction to the bailee to dispose of the property.
ii. Goods can be lent for money or gratuitously.

If lent gratuitously (freely), the bailor can demand their return whenever he
wants though he might have lent it for a specified time. If the bailee suffers
from loss due to premature return of goods, the bailor has to indemnify the
bailee.
2. Right to get compensation:

i. If the bailed goods are damaged by the bailor's action of negligence, then the
bailor can claim compensation from the bailee.
ii. Similarly, the bailor has the right to claim k compensation for loss caused by
the unauthorised use of the bailed goods.
iii. The bailor has the right to claim compensation due to mixing of the bailor's
goods with the bailee's goods.
 iv. If a third person wrongfully deprives the bailee of the possession of the goods
hailed, then the bailor or the bailee may bring a suit against the third person
and the proceeds may be divided between the bailor and the bailee. (Sec.
180)
3 . Right to get increase of profit: (Sec. 163)
If there is increase in the value of bailed goods, then the bailor is entitled to get the
goods along with the increase namely profits.
For e.g., 'A' bails a cow to B. If the cow delivers a call whilst in the custody of 'B', he
is bound deliver both the cow and the calf to 'A’
Standard Chartered Bank. V. Custodian AIR 2000 SC 1488:
The Supreme Court held that the Bonus shares, dividend and interest in respect of
pledged securities would be accretions to the pledged property. Such pledged
property cannot be ordered to be handed over to the pledgor.
4. Enforcement of rights in a suit:
The bailor can enforce in a suit all the duties or liabilities of the bailee as of his rights.
5. Avoidance of contract: (Sec. 153)
Regarding the goods bailed, the bailor can terminate the bailment, if the bailee does
any act, which is inconsistent or not in accordance with the terms of the bailment.
E.g.: 'A' gives his car to 'B' for his use only. B ends it to 'C', his friend. Here 'A' may
terminate the bailment.

E. RIGHTS OF BAILEE:

All the duties of the bailor are the rights of the bailee. The other rights of the bailee
are:
1. Immunity: (Sec, 166)
If the bailee has returned the goods to the bailor or to any person as per the direction
of thè bailor, the bailee is not liable for the defective title or lack of title of the bailor.
For any loss incurred by the bailee, he can claim compensation from the bailor.
2. Right to sue the wrong doers: (Sec. 180)
If a third person causes some injury to the bailed goods, the bailee can sue him in
the Court of law in the same way as the bailor can.
3. If there are several joint owners who bail the goods, the bailee may deliver the
goods to any of them. (Sec. 165)
4. Bailee's Lien:
(Refer Chapter No. 4, Page No. 77)
5. Right to enforce bailor's duties:
The bailee has the right:
i. To claim compensation for any loss arising from non-disclosure of known
defects in the goods.
ii. To claim extra ordinary expenses.
iii. To claim indemnification for any loss or damage as a result of defective title of
the bailor.
6. Right to apply to Court to stop delivery: (Sec. 167)
If any person other than the bailor claims the bailed goods, then the bailee may
apply to the Court to stop delivery of the goods to the bailor and to decide the
right title holder of the goods.
 CHAPTER 3
FINDER OF LOST GOODS (Sec. 71, 168 & 169)

MOST IMPORTANT
MODEL QUESTIONS:
1. Explain the rules relating to finder of lost goods.
2. Who is a finder of lost goods? Explain the right and liabilities of finder of lost
goods.
3. 'A finder of lost foods is a. bailee'. Discuss the statement.
SYNOPSIS:
A. Introduction
B. General rules regarding finder of lost goods
C. Rights of the finder of lost goods
D. Duties of the finder of lost goods
E. Liability of hotel keepers, inn keepers and carriers

A. INTRODUCTION:
A person who finds goods belonging to another can take them into his custody. He is
the real owner in the eyes of all the persons, except the true original owner . He need
not give the goods to anybody except the real owner. He is placed in the position of
a bailee and the person who lost the goods is placed in the position of a bailor.

Generally, a person who comes across an article need not pick.it up or take charge
of it. But if he picks it up, then he becomes a bailee.

Section 71 of the Act reads 'a person, who finds goods belonging to another and
takes them into his custody, is subject to the same responsibility as a bailee.
There is no obligation on the part of the person (finder) to take charge of the lost
goods. If he takes them, he has the responsibility of a gratuitous bailee.

Newman Vs. Bowne:

Newman was customer in A's shop. She put her coat down with a brooch and forgot
to take it back. One of A's assistants took it and kept it in a drawer. It was in the
drawer for one week. The next Monday, it was missing. The shop keeper was held
liable for not taking reasonable care of the coat and the brooch.

B. GENERAL RULES REGARDING FINDER OF LOST GOODS:

1. If the lost goods are found in a public place, the finder can keep them against
the whole world, except the true owner.
2. If any service is rendered to the lost goods without request, then the finder
cannot get compensation from the person who lost the goods.
3. Goods found on private property belong to the owner of such property. For
e.g., if gold is found in a pond, it belongs to the owner of the pond.
 4. The liability of finder is implied by law even though there is no contract of
bailment. The finder has to act as a bailee.

C. RIGHTS OF THE FINDER OF LOST GOODS:

1. Right of lien:
a. If the finder of lost goods has incurred necessary and legitimate expenses for
the troubles and also the expenses to preserve the goods like cow, calf,
vegetable, etc., then he has the right to get the amount spent by him from the
true owner, but he has no right to sue the owner for any such compensation
(Sec. 168).

b. If the true owner refuses to pay the necessary expenses incurred by him, then
the finder of lost goods can keep the goods with him, till he is paid by the true
owner. This right is known as the right of specific or particular lien of the finder
of lost goods.

However, the finder is not entitled to any compensation from the true
owner for the trouble and expenses voluntarily incurred 1y him on the
goods.

2. Right to sue for reward: (Sec. 168)

If the owner has offered a specific reward to the finder of lost goods, then the
finder of lost goods is entitled to get the reward and for this purpose he can
sue the owner. Further he may retain the goods until he receives the reward.
3. Right of sale: (Sec. 169)
The finder is not entitled to sell the goods, but he can sell them under the
following conditions:
a. If the goods found are a common object of sale. E.g., Vegetables, Rice
etc.
b. If the owner is not to be found anywhere for a reasonable period, but here,
the finder should have taken reasonable steps to find the owner.
c. If the found owner refuses to pay the lawful expenses of the finder, then
the latter can sell the goods after reasonable notice.
d. If the found goods are perishable in nature, then the finder can sell the
goods. For e.g., fruits, vegetables.
e. If the lawful expenses incurred in respect of the goods amount to 2/3 of the
real value of the goods, then the finder can sell the goods.
f. If the goods are in the danger of perishing or of losing the greater part of
their value.
D. DUTIES OP THE FINDER OF LOST GOODS:
A finder of lost goods has the same responsibility as a bailee:
1. The finder of lost goods must take reasonable care of the goods. In Spite
of his taking reasonable care if the goods are destroyed, then he is not
responsible for any loss.
2. He should not use the goods for his own purpose or his relative's or his
friend's purposes.
3. He must not mix the goods with his own goods.
4. He must try to find out the whereabouts of the true owner of the goods. If
he fails to do so, then he is treated as a trespasser and is liable for all
 consequences.
E. LIABILITY OF HOTEL KEEPERS, INN KEEPERS AND CARRIERS:
Goods left by a guest in a hotel or inn, makes the hotel keeper or inn
keeper liable as a bailee of goods.
1. The hotel keeper should take as much care of the hotel goods as a prudent
man would take of his OWE goods.
2. The-hotel keeper must keep his premises safe as to prevent theft of property
of his guests.
POSITION OF FINDER OF GOODS
According to section 71 of Indian Contract Act, a person who find goods belonging to
another and takes them into his custody, is subject to the same responsibility as a bailee.
Since the position of the finder of the goods is that of a bailee he is supposed to take the
same amount of care with regard to the goods as is expected of a bailee under section 151.
He is also subject to all the duties of a bailee, including a duty to return the goods after the
true owner is found. If he refuses to return, he could be made liable for conversion.
RIGHTS OF FINDER OF GOODS
Section 168 and 169 confer certain rights on the finder of goods.
 SECTION 168 – MAY SUE FOR SPECIFIC REWARD OFFERED:
The finder of goods has no right to sue the owner for compensation for trouble and expense
voluntarily incurred by him to preserve the goods and to find out the owner, but he may
retain the goods against the owner until he receives such compensation, and where the
owner has offered a specific reward for the return of goods lost, the finder may sue for such
reward, and may retain the goods until he receives it.
 RIGHT OF LIEN
According to section 168, a finder of goods has no right to sue the owner for trouble and
expenses voluntarily incurred by him to preserve the goods and to find the owner. He has,
however, the right of particular lien in respect of those goods. He may retain the goods
against the owner until he receives compensation for trouble and expense voluntarily
incurred by him to preserve the goods and to find the owner
 RIGHT OF CLAIMING THE REWARD, IF ANNOUNCED BY THE OWNER
It has been noted above that the finder has the right to retain the goods until he Is paid
compensation for trouble and expense voluntarily incurred by him to preserve the goods and
find the owner. In addition to that, where the owner has offered a specific reward for the
return of goods lost the finder may sue for such reward and also may retain the goods until
he receives it.
If the goods have already been found voluntarily, and then the owner of the goods promises
to compensate the finder for his past voluntary services, the contract is binding and the
owner is bound to pay the promised amount.
 SECTION 169 – WHEN FINDER OF THING COMMONLY ON SALE MAY SELL IT:
When a thing which is commonly the subject of sale is lost, if the owner cannot with
reasonable diligence be found, or if he refuses upon demand, to pay the lawful charge of the
finder, finder may sell it –
1. When the thing is in danger of perishing or losing the greater part of its value,
2. When the lawful charge of the finder, in respect of the thing found amount to two-third
of its value,
 RIGHT TO SELL THE GOODS FOUND (SEC.169)
The finder of the goods has also been given the right to sell the goods found by him under
certain circumstances mentioned in section 169.          Such a right is available to the finder
of the lost goods when the following conditions are satisfied:
1. If the owner of the goods cannot be found; or if he refuses to pay the lawful charges
of the finder, and
2. When the good is in danger of perishing its value; or when the lawful charges of the
founder in respect of the thing found amount to two-third of its value.
Rights of Finder:
Suit for specific reward [Sec.168] Right of Sale [Sec.169]
Finder of goods is not entitled to sue that If a thing which is commonly the subject
owner for compensation for trouble and of sale is lost, and
expenses voluntarily incurred in – (a) Owner cannot be found with reasonable
preserving the goods, or (b) finding out the diligence, [or]
owner. However, he is entitled to – Owner, if found, does not pay the lawful
charges of the Finder.
(a) Lien: Retain the goods against the owner Then, Finder of Goods is entitled to sell
 till he receives such compensation
(b) Suit: Sue the owner for payment of any
specific reward offered by the owner for the
return of goods lost, and retains the goods till
payment of such reward.
the same when –
(a) the thing is in danger of perishing, or
(b) the thing is in danger of losing the
greater part of its value, or
(c) The lawful charges of finder, amount
to 2/3rd of the value of the thing lost and
found.

DUTIES OF FINDER OF ANY LOST GOODS

If a person finds any lost goods, he does not become the actual of those goods. He,
in fact, becomes a special kind of bailee in the sense that he has to take care of the
goods until the actual owner of the goods is found. Thus, he possesses same duties
towards the lost goods as of a bailee, and therefore finder’s position has been
considered along with bailment. A finder of the lost goods has to observe following
duties towards the goods he possesses:
1. Duty to take reasonable care of goods (section 151 & 152)
According to Section 151, the finder of goods should take such care of the goods
as a man of ordinary prudence would take of his own goods. If he fails to act like an
ordinary prudent man, he cannot be excused by pleading that he had taken similar
care of his own goods also, and his goods have also been lost and damaged along
with those of the ordinary prudent man.
According to section 152, the finder of goods in the absence of any special
contract, is not responsible for the loss, destruction or deterioration of the goods, if
he has taken the amount of care of it described on section 151.
2. Duty not to make unauthorized use of goods (section 153 & 154)
According to section 153, termination of bailment by finder of good’s act
inconsistent with conditions: – a contract of bailment is voidable at the option of
the actual owner, if the finder of goods make any unauthorized use of the goods
found inconsistent with the condition of the bailment.
According to section 154, liability of finder of goods making unauthorized use
of goods bailed: – if the finder of goods makes any use of the goods found, which is
not according to the conditions of the bailment, he is liable to make compensation to
the owner of goods for any damage arising to the goods from or during such use of
them.
3. Duty not to mix goods (section 155 – 157)
According to Section 155, effect of mixture with owner’s consent, of this
goods with finder of good’s: – if the finder of goods, with consent of the owner,
mixes the goods of the owner with his own goods, the owner and the finder of goods
must shall have an interest in proportion to their respective shares, in the mixture
thus produced.
According to section 156, effect of mixture without owner’s consent when the
goods can be separated: – when the goods mixed can be separated, the finder and
the owner will remain the possessor of their respective shares. But the finder of
goods is bound to bear the expense of separation, and any damage arising from the
mixture.
According to section 157, effect of mixture, without owner’s consent when the
goods cannot be separated: – in case, the nature of the goods is such that the
owner’s cannot be separated from those of the finder’s good, it is deemed to be loss
of goods and the owner cannot recover compensation for the same from the finder of
goods.
4. Duty to return goods (section 160 & 161)
According to section 160, return of goods found on expiration of time period:
– it is the duty of the finder of the goods to return or deliver the goods found to the
true owner as per his directions before the expiration of the time period specified by
him.
According to section 161, finder of goods responsibility when the goods are
not duly returned: – if by the default of the finder of goods, the goods are not
returned or delivered  at the proper time, he is responsible to the loss or destruction
of goods from that time.
CONCLUSION
Finder of goods is a part of quasi contract or certain relation resembling to those
created by a contract. Here it would be worth nothing that finder of goods has the
same criteria of responsibilities and duties towards the innocent parties as given to
the bailee. This is something which is mentioned in the Indian Contract Act, 1872
under section 71.

CHAPTER 4 LIEN
(RIGHTS OF BAILEE'S LIEN) (Sec. 170 & 171)

MOST IMPORTANT
MODEL QUESTIONS:
1. Explain 'Lien' with regard to bailment.
2. Explain 'Bailee's Lien', what cue the types of lien? How is it extinguished? '
3. Distinguish 'particular lien and 'general lien'.
4. What is bailee's lien? Distinguish between general lien and particular lien.
In what category would you place the bailee's lien? Who are entitled to
general lien?
5. Explain the rules relating to the particular lien of the bailee.
6. Write short notes on: (a) Bailee's lien (b) General lien (c) Particular lien

SYNOPSIS:
A. Introduction
B. Definition
C. Particular Lien (Bailee's Lien) (Sec. 170)
D. General Lien (Sec. 171)
E. Difference between particular lien and general lien
F. Extinguishment of Lien

A. INTRODUCTION:
Lien generally means the right of the bailee to retain the goods until the due charges
for the goods are paid by the bailor.
Lien is a possessory right. So, it can be exercised, only when one person has got
possession of some goods belonging to another person. If the goods are not in
possession or the possession of the goods is lost, then there is no right of lien.

Jacobs Vs. Latour:

The Court held that lien is a personal right which continues only so long as the
possessor holds the goods.
Lien gives to a person only a right to retain the goods and not to sell them. It does
not create any ownership rights.

B. DEFINITION:
'Lien' means the right of one person to retain the goods of another until some debt or
claim of the person in possession is paid.

Sec. 170 of the Indian Contract Act defines 'Bailee's particular lien' as follows —
If the bailee has, for the purpose of the bailment, rendered any service involving
labour or skill in respect of the goods bailed, then he has a right to retain such goods
until he receives due remuneration (payment) for the services he has rendered in the
goods.
Illustrations:
A delivers a rough diamond to B, a jeweler, to be cut and polished, which is
accordingly done. B is entitled to retain the stone till he is paid for the services he
has rendered.
A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as
soon as is finished and to give a three months credit for the price. B is not entitled to
retain the coat until he is paid.
Thus, as per Section 170 of the Contract Act, the bailee's lien is a particular lien and
not a general lien and therefore it is necessary to know the kinds of lien and
differences between them.

Lien may be of two types: -

1. Particular Lien (Bailee's lien)
2. General Lien

C. PARTICULAR LIEN (BAILEE’S LIEN): (Sec. 170)

Meaning:
If the bailee has rendered any service involving the exercise of labour or skill in
respect of the goods bailed, then he has a right to retain such particular goods until
he receives the due remuneration for the service the rendered in respect of them.

i. Essentials of Particular Lien:

1. The possession must be legal and rightful.
2. The possession must be for a particular purpose i.e., for-payment of money
by the bailor.
3. The possession must be continuous.
4. The possession must be under a contract of bailment.

ii. Hutton Vs. Car maintenance Co., Ltd:

A motor company accepted to garage motor car of H for 3 years on an annual rent.
‘H' was allowed to take the car out as and when she wanted. As the rent was not
paid, the company detained the car and claimed a lien. The Court held that as H was
allowed to take out the car as and when she required, the company had no lien.

iii. Right of Particular Lien:

The right of lien arises by three ways:
1. Under Law or Act or Statute.
2. By express or implied contract.
3. In general dealings of a particular business or trade.

iv. No right of Particular Lien:

In the following cases, the bailee has no right of lien:
1. If the bailee has accepted to perform service on credit or.
2. If the bailee does not complete the work within the agreed time or
3. If the bailee voluntarily has given the goods to the bailor without getting the
charges or hire or rent, as the case may be.
4. If the bailee has not exercised any labour or skill.

a. Chand Mal Vs. Ganda Singh:

A bailee claimed lien for storage of sugar. The Court held that since the bailee's
custody is not a service involving any labour or skill as u/s 170, the bailee was not
entitled to any lien.

b. Kalloomal Tapeshwari Prasad & Co., Vs. R.C. & F Ltd. AIR 214
The Court held that lien is not allowed for mere storage of fertilizers which does not
involve any labour or skill.

v. Rules of Particular Lien:

1. Lien is available for the charges for the labour or skill exercised by the bailee,
only on the goods in which such labour or skill was exercised.
2. The bailee has a right of lien if he has used skill and labour of improvement of
any goods oi thing and not for maintaining it in its original condition.

Chand Mai Vs. Gand Singh:

A motor car owner gave it to a Company to maintain it for 3 years on a fixed annual
payment The Company claimed lien on the car to collect the balance due on thè
maintenance charges. As the company did not improve.the car, but only maintained
it, there was no lien on the car.

3. Lien is available only if the services have been performed in full by the
bailee.
4. If the goods are destroyed through no fault of the bailee, then the
bailee is entitled for payment of services performed on the goods
before the goods were destroyed.

E.g., 'A' a cycle repairer, repaired B's cycle for the charge of Rs.100/-. Before ‘B'
took delivery of the cycle, though no fault of 'A', the shop was robbed and all the
cycles were stolen. 'A' is entitled to get Rs. 100/- for the repair work.

5. The labour or skill exercised on the goods must be in accordance with the
purpose of the bailment.
6. The bailee can retain only those goods on which he has exercised some
labour or skill and for this purpose he cannot retain any other goods belonging to the
bailor.
7. The right of lien arises only when the remuneration has become due.
8. The bailee can exercise the right of particular ul only when there is no
contract to the contrary
9. The lien can be exercised only when the bailee is in possession of the goods.
Once possession is lost, the right of lien is also lost. “Lien is a personal right which
continuously only so long as the possessor holds the goods”.
10. If the bailee does not complete the work within the agreed time or a
reasonable time, then he cannot exercise his right of lien.
11. If the bailee voluntarily permits the bailor to regain possession of the goods
without payment of the charges, then he cannot exercise the right of lien.
12. Lien is available to the bailee if there is no agreement between the bailor and
the bailee for payment of price in future.

vi. Persons entitled for particular lien:

Other than bailee, the following persons can exercise the rights of particular
lien. They are- finder of lost goods, pawnee, agent and unpaid seller.

D. GENERAL LIEN: (Sec. 171).

1. Definition:
Sec. 171 reads - General lien of bankers, factors, wharfingers, attorneys and policy
brokers -
Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in
the absence of a contract to the contrary, retain as a security for a general balance
of account, any goods bailed to them, but no other persons have a right to retain as
a security for such balance, goods bailed to them, unless there is ai| express
contract to that effect.

2. Explanation:
A general lien is a right to retain any goods bailed, as a security for a general
balance of account. It is not restricted to any specific goods, but may be claimed
over all goods of the bailor in the bailee’s possession.
General lien is a right to retain all the goods of another until all the claims of the
holder are satisfied. For a general balance of account, the property of another is
retained.
In particular lien, the bailee can retain only the particular property in which the
charges are due. But in general lien, the bailee can detain any goods bailed to him.

3. Persons entitled for general lien:

General Lien is available to bankers, factors wharfingers, Attorneys of High Courts
and policy brokers.

i. Bankers:
A banker's lien extends to all bills, cheques and money paid by the customer to him
as a banker. This lien enables the banker to recover his dues by way of loan or
overdraft. By this general lien, the banker may transfer funds of the debtor to any
account of the banker's choice and to set off or liquidate the debt.
 ii. Factors:
A factor is an agent entrusted with the possession of goods for purposes of sale on
behalf of the principal. He can claim a general lien on moneys in his hands as well as
the goods in his possession for dues in his remuneration.

iii. Wharfingers:

A wharfinger is the owner of a wharf (a place from which goods are loaded in ships).
A wharfinger can enforce lien against the owner of the goods for rent of wharf.

iv. Attorneys:
An attorney who is engaged by a client is entitled to general lien until the fee for his
professional service and other costs incurred by him are paid,
R.O. Saxena Vs. Balaram Prasad Sharma AIR 2000 SC 2912:
The Supreme Court held that ail advocate has no lien on the files entrusted to him by
the client. The copies of the records, original documents contained in the files cannot
be equated with the 'goods' referred in Sec. 171 of the Contract Act. The client's files
with the advocate cannot amount to 'goods bailed'. For the litigation papers in the
hands of the advocate, there is neither delvery of goods nor any contract that they
shall be returned or otherwise disposed of.

v. Policy brokers:
An insurance agent who is employed to effect a policy of marine insurance is called
a policy broker. His lien extends to any balance on any insurance account due to him
from the person who employed him to effect the policy.
The general lien is specially enforced by Sec. 171 of the Act if there is no agreement
to the contrary.

E. DIFFERENCE BETWEEN PARTICULAR LI EN. AND GENERAL LIEN:

Particular Lien:
1. Right available to a bailee only against those goods in respect of which skill
and labour have been exercised by him.
2. It is only to retain the goods for the charge of labour employed or expense
incurred upon the goods and for no other charges.
3. It is available to the bailee, finder of lost goods, pawnee, agent and. unpaid
seller.
General Lien:
1. Right available against any property belonging to the other party in respect of
any payment lawfully due. The property must be in the possession of the
person exercising this right.
2. It is to retain any property for general balance of account.
3. It is available to bankers, policy brokers, Attorneys or High Courts, wharfingers
and factors

Basis of distinction Bailee’s particular lien Bailee’s general lien

1. Natural of right Particular lien gives right to General lien gives right to
retain only such goods in retain any goods belonging to
respect of which charges due another person for any amount
remain unpaid. due from him.
 2. Condition for Particular lien can be
exercising lien exercised only when some
labour or skill has been
expended on the goods,
resulting in an increase in
value of goods.
3. Right to whom? Every bailee is entitled to
particular lien.
F. EXTINGUISHMENT OF LIEN:
A lien is extinguished by:
1. Abandonment.
2. Payment or tender of the amount due
3. Loss or surrender of possession of the goods
4. By waiver.
Situation Explanation
1. Expiry of specified When bailment is for
period specific period, it terminates
on the expiry of the
specified period.
2. Accomplishment Where bailment is for a
of specified purpose specified purpose, it
terminates when such
purpose is accomplished.
3. Bailee’s act When bailee does some act
inconsistent with which is inconsistent with
conditions the terms and conditions of
bailment, the Bailor may
terminate the bailment.
4. Destruction of When goods bailed are
subject matter destroyed, Bailment comes
to an end.
5. Gratuitous Gratuitous Bailment can be
Bailment terminated at any time.
Also, a Gratuitous Bailment
ends by the death of either
Bailor or Bailee. (Sec162)
General lien may be exercised
even though no labour or skill
has been expended on the
goods.
General lien can be exercised
by only such persons as are
specified u/s 171. e.g.,
bankers, factors, wharfingers,
Attorneys of High Court, policy
brokers. Any other bailee may
exercise general lien if there is
an agreement to this effect.
Example
Z lends a moped to Y for a
period of 3 months April –
June. The Bailment
terminates by the end of
June.
G hires tables and chairs,
utensils, etc. from H for
organizing his son’s
engagement. G shall return
them once the engagement
functions are over.
J gives his car to K keeping
it in K’s garage. K gives it to
his son for racing. J can
terminate the bailment.
K hires a cycle from L.
When the cycle is damaged
beyond repair in an
accident, bailment ends.
Note: Where premature
termination of bailment by
the Bailor, causes loss to
the Bailee exceeding the
benefits derived by him, the
Bailor shall indemnify the
Bailee
 CHAPTER 5 PLEDGE (PAWN)
Rights and Duties of Pawnee and Pawnor (Sec. 172 to 178-A)

MODEL QUESTIONS:
1. Define a 'pledge' and state the rights and duties of the pawnor and pawnee.
2. Explain pledge. What are its essentials? Differentiate pledge from bailment.
3. Write short notes on: (a) Pledge (b) Rights and duties of pawnor (c) Rights an
duties of pawnee,
SYNOPSIS:
A. Introduction
B. Essentials of a pledge
C. Rights and Duties of Pawnee and Pawnor
D. Similarities between Bailment and Pledge
E. Difference between Bailment and Pledge
F. Difference between Pledge and Lien
G. Difference between Pledge and Hypothecation

A. INTRODUCTION:
A pledge is a special kind of bailment. Sec. 172 of the Indian Contract Act defines
pledge as, 'the bailment of goods as security for payment of debt or performance of a
promise'.

The bailor in pledge is called 'Pawnor' or 'Pledger*

In pledge, delivery of goods may be actual or constructive.
E.g.:
A needs money. So, he borrows Rs. 5,000/- from B and gives his gold ring as
security for the payment of the debt. This is a contract of pledge, A is the pawnor and
B is the pawnee,

B. ESSENTIALS OF A PLEDGE:

i. The goods or Chattel pawned or pledged must be delivered to the Pledgee.

ii. The delivery must be actual or constructive.

There are many types of delivery.

a. Handing over the keys of a godown of goods is a constructive type of
delivery.
b. If the goods are in custody of a third person and he consents to act on the
pledgee’s behalf, then it is also delivery, and it is called by atonement.
c. Also, documents, and railway receipts can be treated as delivery and
hence such pledge is valid.
iii. The delivery of goods or chattel must be in pursuance of the contract of
pledge, but delivery and advance of money need not be simultaneous.

iv. Pledge is a bailment of goods as a security:

a. For the payment of a debt.
b. For the performance of a promise.
v. Any kind of moveable property which is saleable - like documents, valuables,
etc., may be pledged.
C. RIGHTS AND DUTIES OF PAWNEE AND PAWNOR:
The rights of pawnor and pawnee are the same as that of a bailor and bailee.
However, there are some special rights of pawnee.

1. RIGHTS OF PAWNEE:

i. Right to retain: (Sec. 173 & 174)

The pawnee can retain the goods pledged until his dues are fully paid. The pawnee
can retain the goods only for the repayment of the particular debt of pledge and not
for any other debt.
Even after the pledge is created, if a subsequent advance without any security is
made, then it is presumed that the right of retention extends to such subsequent
advances also. -
Standard Chartered Bank. Vs. Custodian AIR 2000 SC 1488:
The bank subscribed right shares in respect of pledged stock. These right shares
would belong to the bank as it has paid for the shares. The Supreme Court held that
the bank would be entitled to keep them irrespective of whether there is pledge or
not.

ii. Rights to extraordinary expenses/special expenses: (Sec. 175)

The pawnee is entitled to get the extra ordinary expenses/special expenses spent by
him for preservation of the goods pledged. For such expenses, he can sue the
pawnor, but cannot retain the goods.

iii. Pawnee’s right when pawnor makes default: (Sec 176)

a. Suit against the Pawnor:
The pawnee can bring a suit against the pawnor, if he fails to pay or makes
any default in payment, of the debt in time.
b. Retention of goods as security:
In addition to the right to file a suit by the pawnee, he can retain the goods
of the pawner as security.
c. Right to sell:
The pawnee may sell the goods after giving the pawner a reasonable
notice of the sale;

The notice need not state the date, time or place of the sale.
Without notice if he sells the goods, the pawnor may sue him for
conversion. The pawnee himself may buy the goods during the sale.

d. Deficiency or surplus of sale:

If the pawnee finds that the proceeds of the sale is less than the amount, the pawnee
can recover the deficiency. If it is surplus, he has to pay the surplus to the pawnor.

iv. Right against true owner when the pawnor's title is defective: (Sec. 178-A)
If the pawnor has obtained the goods under a voidable contract (misrepresentation,
fraud, coercion, etc.), not rescinded before pledging, the pawnee gets a good title,
provided he acts in good faith and without the knowledge of the pawnor's defective
title.
2. DUTIES OF THE PAWNEE:

a) To take reasonable care (as an ordinary prudent man) of the goods

pledged to him.
b) The Pawnee must not use the goods pledged for his self-purposes and if
he uses, he is liable for all losses.
c) He must return the pledged goods on the payment of the debt.

3. RIGHTS OF THE PAWNOR:

i. Right to recover the goods: On repayment of loan, the pawnor is entitled

to recover the goods pledged from the Pawnee.
ii. Right to redeem the goods: Sometimes, the pawner may not be able to
pay the debt in time. Even if the pawnor makes default in payment of the
debt at the time specified, he may still redeem the goods pledged at any
subsequent time but before the actual sale of the goods. However, he
must pay in addition, any expenses which have arisen to the Pawnee due
to his default (Sec. 177).
iii. Safe custody of the goods: The pawnor is authorised to check and verify
whether the Pawnee, preserves the goods pledged and properly maintains
them and keeps them in safe custody.
iv. Other rights of pawnor: In addition to the above rights, the pawnor has
got all the rights of an ordinary debtor.

4. DUTIES OF THE PAWNOR:

i. The pawnor must repay the Pawnee the loan amount with interest, if any,
and redeem the goods pledged with the Pawnee.
ii. The pawnor must compensate the Pawnee for all losses for the defective
title of the pawnor.
iii. The pawnor must compensate the pawnee for all the extraordinary
expenses incurred by the pawnee for the preservation of the goods
pledged.

D. SIMILARITIES BETWEEN BAILMENT AND PLEDGE:

1. Both are created by agreement between the parties.

2. Both involve transfer of possession of goods.
3. Both have movable property (goods) as the subject matter of the contract.
4. In both, "the goods are to be returned on the accomplishment of the purpose
or after the expiry of time.

E. DIFFERENCE BETWEEN BAILMENT AND PLEDGE:

i. Pledge is the bailment of goods for a specific purpose e.g., repayment of

debt or performance of a promise. But bailment is for any kind of purpose.
ii. In bailment, the bailee can only exercise the right of lien but he cannot sell
the goods. However, in pledge, the pledgee can sell the goods after
reasonable notice to the pledger or the pawnor.
 iii. In bailment, the bailee gets only possession of the goods bailed and the
ownership continues to remain with the bailor. In pledge, the pledgee
acquires special property in the goods bailed i.e., both the right of
possession and power of sale.
iv. In bailment, the bailee may use the goods bailed for his self-purposes, but
in a pledge, the pawnee cannot so use the goods.

BASIS PLEDGE BAILMENT

1. Purpose Pledge is bailment of goods
for a specific purpose, i.e. to
provide a security for a loan
or fulfillment of an obligation.
2. Sale of Goods Pawnee, i.e. Pledgee has a
right of sale of goods pledged
on default of Pawnor. He can
do so by giving a notice to the
pawnor.
3. Use of Goods Pledgee has no right of using
goods pledged.
Bailment may be for purpose
other than by way of providing
security for a loan or fulfilment
of an obligation. It may be for
purpose like repairs, safe
custody, etc.
There is no right of sale to the
Bailee. Bailee may either – (a)
retain goods, or (b) sue the
Bailor for non – payment of
his dues.
Bailee can use the goods
bailed as per terms of
contract.

F. DIFFERENCE BETWEEN PLEDGE AND LIEN:

1. Both in pledge and lien, the possession of goods i transferred to the creditor.
In lien the creditor has no right to sell the good and the ownership of the
goods continue to remain with the debtor. In pledge, the creditor gets a right
to sell the goods in his possession on the default of payment by the debtor.
2. Lien is comparatively a passive and lessor right. The lien holder can only
enforce his claim through the law of Courts. Pledge is an active right. The
pawnee can sue and also sell the goods in addition to his right of lien.
3. Right of lien is lost with the loss of the possession of the goods. In pledge,
right to recover debt is not lost by the return of goods to the pawner.
4. Pledge is created by contract/agreement. Lien is often created by law.

G. DIFFERENCE BETWEEN PLEDGE AND HYPOTHECATION:

Both in pledge and hypothecation goods are given by way of security for
securing of loan or of performance of a promise.
In hypothecation, the debtor continues to enjoy the possession of goods,
though the ownership lies with the creditor. He has also a right to use the
goods subject to the terms of the contract. The creditor has the right to inspect
the goods at any time.
In pledge, the debtor loses the possession of the goods to the creditor and
hence he cannot use the goods.

CHAPTER 6
 PLEDGE BY NON-OWNERS (Sec. 178, 178-A & 179)
IMPORTANT
MODEL QUESTIONS:

1. Explain "pledge by non-owners'.

2. Who can pledge the goods? Is a pledge by a mercantile agent valid?
3. Write short notes on: Pledge by non- owner.
4. When is a pledge created by non- owners valid?

INTRODUCTION:
Usually, only a owner of the goods or his authorised representative can legally make
a valid pledge of the goods with another person. This is based on the principle
‘nemo dat quod non habet’ meaning that no one can pass a better title than what
he himself has.

However, in the following cases, even a non-owner can make a valid pledge:

1. Pledge by mercantile agent:

According to Sec. 2(9) of the Sale of Goods Act, Mercantile agent meens an agent
having in the customary course of business, as such agent, authority to sell goods
for the purpose of sale or to buy goods or to raise money on the security of goods'.

A mercantile agent in possession of goods or documents may pledge them while

acting in the ordinary course of business. But he must act in good faith and know
that pledger has a good title to the goods.
A pledge by mercantile agent is valid only if the following conditions are satisfied:
1. The mercantile agent must be in possession of goods or the documents of
title of goods.
2. Such possession must be with the consent of the owner of goods.
3. The mercantile agent must be acting in the ordinary course of business.
4. The pawnee must act in good faith, and must not have notice of the pawnor's
defective title.
Unlike an agent to the principal, a servant who is in possession of goods of his
master cannot pledge the goods of the master. .

2. Pledge by seller or buyer in possession of goods:

A seller in possession of the goods after sale and the buyer who gets the goods with
consent of the seller before sale, can create a valid pledge. Here the pawnee must
act in good faith and should not have notice of the sale of goods to the buyer and the
lien of the seller over the goods.

E.g.: A sells two bags of rice to B. Delivery and payment to be made in the next 8
months. Before delivering the rice, he pledges them to C, who knows nothing of the
sale and acts bonafide. The pledge valid.

3. Pledger having limited interest (Pledge by Pledgee}:

If a person, having limited interest in the goods, pledges them, the pledge is valid
only to that extent.
For example, a mortgagee, a person having lien over the goods, the finder of lost
goods etc., may pledge the goods to the extent of his interest. E.g., 'A' finds a watch
on the ground and pledges it to ‘B' for Rs. 100/-. ‘B' had to expend Rs. 25/-. for
repairing it. The real pawner can get the watch by paying Rs. 25/- to B for repairing it

4. Pledge by co-owner in possession:

Any one of the co-owners may create a valid pledge of goods with the consent of the
other co-owners.

5. Pledge by person in possession under a voidable contract:

If a person obtains possession of goods under a voidable contract, the pledge

created by him is valid.
However, the following conditions must be satisfied:

a. The contract must not be rescinded before the contract of pledge is entered
into.
b. The pawnee must act in good faith and without notice of the pawnor's
defective title.

Philips Vs. Brooks:

'A' obtained a costly ring from a jeweller 'B' pretending himself to be a respectable
person of the society. Before ‘B’ could detect the fraud committed by A. 'A' pledged
the ring with ‘C’. The Court, held that fraud makes the contract voidable and any
pledge under a voidable contract was held valid.

However, if a person is in possession of goods under a void contract, then he cannot

make a valid pledge. For example, a pledge by a minor is not valid.

CHAPTER 7
TERMINATION OF BAILMENT (Sec. 154, 159, 160, 162)

SHORT NOTES
A contract of bailment is terminated in the following ways:

1. On the expiry of the period: (Sec. 160)

If the contract of bailment is for a specific period, then on the expiry of such period,
the contract gets terminated.

2. On the achievement/fulfillment of the object: (Sec. 160)

If the bailment is for a specific purpose, then as soon as the purpose is achieved, the
contract gets terminated.

3. Inconsistent/unauthorised use of goods: (Sec. 154)

A contract of bailment is voidable by the bailor, if the bailee does any act inconsistent
with the terms of the bailment.
E.g.: 'A' lets on hire a horse to B for riding. B drives the horse with his carriage.. Now
at the option of 'A', the bailment may be terminated.

4. Destruction of the subject matter:

If the subject matter of the bailment is destroyed due to change in its nature and
becomes incapable of use- for the purpose of bailment, then the bailment gets
terminated.

5. Gratuitous Bailment or Bailment without Consideration: (Sec. 159)

Gratuitous bailment can be terminated by the bailor at any time even though there
may be specific period of bailment.
Loss accruing to the bailee due to such termination by the bailor should not exceed
the value of benefit derived by him.. If it is so, the bailor has to indemnify the bailee.

6. Death of the bailor or bailee: (Sec. 162)

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

PROBLEMS: BAILMENT AND PLEDGE

PROBLEM NO. 1
A finds a golden ring and makes reasonable efforts to discover the
true owner, but could not find him. Later the finder A sells it to B, who buys it
without knowledge that A was merely a finder. Can the true owner recover the
ring from B?
ANSWER:
Sec. 71 of the Indian Contract Act, 1872, reads as “a person who finds goods
belonging to another and takes them into his custody is subject to the same
responsibility as a bailee”.
If the lost goods are found in a public place, the finder can keep them against the
whole world except the true owner.
Sec. 169 of the Act states that the finder is entitled to sell the goods if the owner is
not to be found anywhere for a reasonable period in spite of taking reasonable steps
to find the owner.
In the above case, A takes reasonable steps to trace the true owner of the golden
ring which he found, but did not succeed. Thus, he gets a right to sell the ring to any
buyer.
B who is a buyer in good faith has no knowledge as to the status of A, who is merely
a finder of the golden ring and not the true owner. Since he buys in good faith for
value without knowing the actual fact, he acquires a bonafide title to the golden ring
and therefore the true owner cannot recover it from B.

PROBLEM NO. 2
'A’ while walking on the road found a jewel and took that Jewel to a goldsmith
'B' to know its genuinity. Goldsmith 'B' after testing refuses to return the jewel.
Decide.
ANSWER:
As per Sec. 71 of the Indian Contract Act, 1872, a person who finds goods belonging
to another and takes them into his custody is subject to the same responsibility as a
bailee.
He is construed as the real owner in the eyes of all others except the true original
owner. He need not give the goods to anybody except the real owner.
Thus, 'A' who found the jewel on the road is construed as the owner as regards
everybody except the true owner himself. Since the true owner is oresumably not
traced, 'A' is deemed to be the owner.
When the jewel is taken to the goldsmith for testing its genuinity, the goldsmith after
testing its purity bound to return the jewel back to 'A' who as for the goldsmith is
concerned, is the owner. As the goldsmith B refuses to return the jewel, 'A' can sue
for recovery of the jewel from 'B' in his own name.

PROBLEM NO. 3
Deepak gives his Radio to Gokul for repairs and Gokul undertakes to return it
duly repaired in a week's time. At the end of that period Gokul has not
completed the repairs. Deepak wants the return of the radio. Gokul refuses to
return it until he is paid for the work so far done by him. Decide.

ANSWER:
The above contract of Deepak giving his radio to Gokul for repairs is akin to a
contract of Bailment.
Sec. 148 of the Indian Contract Act, 1872 defines Bailment as 'the delivery of goods
by one Person to another for some purpose. The purpose is specified in the contract
of Bailment. When the Purpose is over, the goods should be returned to the person
who delivered it or it is disposed of according to the directions of the person who
delivered the goods.
Deepak, who gave the radio for repair is the Bailor in this case and Gokul, who
undertook to repair the radio is the Bailee.
Sec. 170 of the Indian Contract Act states that a Bailee is vested with the right of
'particular lien' on the goods bailed to him. If the Bailee has, for the purpose of the
bailment rendered any service involving labour or skill in respect of the goods bailed,
then he has the right to retain such goods until he receives due remuneration for the
services he has rendered.
However, it is very clear under this section that the bailee cannot exercise his right of
particular lien if he does not complete the work within the agreed time or a
reasonable time.

Thus, Gokul is not in a position to claim his right to retain the radio for getting the
charges for the work done till then, as he had not completed the repair work in full
within the stipulated time of one week.

PROBLEM NO. 4
‘A' transports certain quantity of butter through the train of 'B' company. The
consignment was delayed in transit due to the strike of B company. The goods
being perishable B company sold them. Can A succeed in his case against B
alleging Breach of contract?

ANSWER:

Yes. A can succeed in his case against B alleging breach of contract.

The contract between 'A' and *B' is similar to a contract of Bailment. Sec. 148 of the
Indian Contract Act, 1872 defines Bailment as the delivery of goods by one person to
another for some purpose. The purpose is specified in the contract. When the
purpose is over, the goods should be returned to the person who delivered it or it is
disposed of according to the directions of the person who delivered the goods.
In the above case, A hands over a certain quantity of butter to B's Co. for
transportation. The safe delivery of the butter to the designated person is the
responsibility of B as he is the Bailee of the goods which is clearly specified in Sec.
151 of the Act which states that a Bailee is bound to take reasonable care the goods
bailed.
The strike in B's Co. which caused the delay in transit is not the concern of A who as
a Bailor of the good to be transported, had already entrusted it to B and ought to get
the same delivered at the designated place within the specified time without delay.

In view of the above legal provisions in Bailment, A can succeed in his case against
B alleging Breach of contract for failing to deliver the butter at the stated destination.

PROBLEM NO. 5
A hires a carriage of B. The carriage is unsafe. B is not aware of it. A
is injured while using the carriage. Is B liable to A? Will it make any difference
if the bailment is gratuitous? Decide.
ANSWER:
Sec. 150 of the Indian Contract Act, 1872, brings out the duty of Bailor to disclose
the known faults in the goods bailed. That is, when the goods are delivered by the
bailor, he is bound to disclose the faults in his goods. These are faults which the
bailor is aware of and must know would interfere with the use of goods or put the
bailee to expenses and extraordinary risk If he does not disclose, he is liable for the
loss arising to the bailee by such faults.

Where goods, are bailed for hire (non- gratuitous), the bailor is liable for all losses
arising out of the faults in the goods. It is immaterial whether the bailor is aware of
the existence of such faults or not.
Keeping in view the above provisions of law, B is liable for the injury sustained by A
though he is unaware that his carriage is unsafe for use because the same was hired
by A at cost.
In the above case, if the carriage would have been used by A on gratis from B, the
latter would not be liable for the injury sustained by A due to the use of the carriage
as B was not aware of the fault in his carriage. Under gratuitous bailment, the bailor
is responsible only for non-disclosure of faults which are within his knowledge.

PROBLEM NO. 6
'A' takes a bicycle on rental basis from ‘B’ Brakes of the bicycle are not in
good condition. 'A' is injured because of brake failure. Discuss the liability of
'B'.
ANSWER:
As per Sec. 150 of the Indian Contract Act, 1872, when the goods are delivered by
the bailor, he is bound to disclose the faults in his goods. These are faults which the
bailor is aware and must know that they would interfere with the use of goods or put
the bailee to expenses and extraordinary risk. In such cases, the bailor must disclose
such defects. If he does not disclose, then he is liable for the loss arising to the
bailee by such faults.
The illustration u/s. 150 reads - If 'A' bails certain bicycles, he must disclose the
defects in them which would cause danger while riding the bicycle or risk the bailee's
life. If he does not disclose it, he is liable for the loss arising out of the defects.
If the brakes of the bicycle of 'B' are not in good condition, and if 'A' is injured
because of brake failure, 'B' is liable to compensate 'A' for loss, because brake
failure is a hidden defect, which 'B’ is bound to inform ‘A’

PROBLEM NO. 7
Sharath, as old customer, went into a Restaurant for the purpose of dining
there. When he entered the dining room, the waiter took his coat without being
asked and hung it on a hook behind him. When Sharath rose to leave the
restaurant, coat was missing. Who is liable? Decide.
ANSWER:
Sec. 151 of the Indian Contract Act, 1872, brings out the duties of the Bailee. One of
the most important duties of the Bailee is to take reasonable care of the goods bailed
to him. There is no standard degree of care or negligence for goods bailed freely.
The Bailee should consider the goods as his own and must take reasonable care of
them. If the Bailee has taken such care, then he is not liable for any loss to the bailed
goods.
In the above case, the proprietor and/or the waiter of the restaurant which Sharath
visited for dining is deemed to be the Bailee since the waiter volunteered to hang the
coat which the former was wearing. As provided for in the above section, the Bailee,
the waiter in this case, should have taken care regarding the safe keeping of the
coat, which he failed to do. Hence, the waiter and the proprietor of the restaurant in
vicarious capacity are liable to compensate for the loss of coat to Sharath as the
action/negligence of the agent is deemed to be that of the principal.

PROBLEM NO. 8
A white tiger was entrusted by 'B' to the Railway for carriage. The cage broke
by the jolts received during the journey and the tiger escaped. It killed a
bullock belonging to 'C’ and was almost immediately crushed by the engine.
Discuss the liability of Railway administration to 'B' and 'C'
ANSWER:
In the above case, ‘B' is the bailor, 'Railways' is the bailee & 'C' is a third party.
According to the Sec. 151 of the Indian Contract Act, the bailee is bound to take
reasonable care of the goods bailed to him. The bailee should consider the goods as
his own and must take reasonable care of the goods. In the event of any loss or
damage to the goods bailed whilst in his custody, the burden of proof lies on the
bailee to show that he exercised reasonable care.
In the above case, the breaking of the cage by the jolts received during the journey
and escape of the tiger is directly due to the failure of the Railways to take
reasonable care in proper maintenance of the cage. So, the Railways, being the
bailee is liable to the bailor 'B' for the death of the tiger and the third party 'C' for the
death of the bullock.

PROBLEM NO. 9
'A' lends a horse to 'B9 for his own riding only. 'B' allows 'C' his friend to ride
the horse. ‘C' rides with care but the horse accidentally falls and is injured.
Have 'A' any rights against (B'?
ANSWER:

Yes. 'A' has rights to sue ‘B’ for compensation.

Sec. 154 of the Indian Contract Act deals with Bailment. It states that if the goods are
bailed for some specific purpose, it should be used only for that purpose. If it is used
for some other purpose, and if any loss occurs to the goods by such use, then the
bailee is liable to pay compensation even though he is not negligent.

In the above case, A lends a horse to B with a specific instruction that only he shall
ride it and not any other person. B, as a bailee of the horse violates the instruction of
the bailor, A allows C to ride it.

This accords the right to A to claim compensation from B towards the injury suffered
by the horse due to the accident even though C was careful in riding the horse.

PROBLEM NO. 10
“
A’ lends his horse for riding to ‘B’. ‘A’ knows that the horse is vicious and
unsafe for riding but does not disclose the same to 'B’ ‘B’ rides the horse. ‘B’
is thrown and injured. 'B’ files a suit against ‘A’ to recover damages. Decide.
ANSWER:
Sec. 150 of The Indian Contract Act, 1872 talks about Bailor's duty to disclose to the
Bailee, the faults in the goods bailed of which the Bailor is aware and which may
expose the Bailee to extraordinary risks. If he does not make such disclosure, he is
responsible for damage arising to the Bailee directly from such faults.
Where the goods are hired freely/gratuitously, then the Bailor is liable for non-
disclosure of known defects only.

In the above case, 'A' lends his horse to B for riding, knowing that his horse is vicious
in nature, but does not disclose the fact. 'B' who was innocent of the vicious nature of
the horse rode the horse, thrown out and got injured as a result.
As 'A' had full knowledge of the nature of the horse, it was his duty to have disclosed
the fact to B before lending. As the horse was lent gratuitously. ‘A’ is liable for non-
disclosure of known faults, which he has committed. In view of the same, 'A' is
legally
bound to compensate 'B' for the injury suffered by him.

PROBLEM NO. 11
'A’ entrusted some books to ‘B’ for binding. 'B’ promised to complete the work
and return the same within ten days. ‘B’ failed to return the books within
agreed time. Subsequently the books were burnt in an accidental fire on his
premises Can A recover damages from B for the loss of his books?
ANSWER:
Sec 160 & 161 of the Indian Contract Act, 1872 deal with the duty of the Bailee to
return the goods bailed. They state that when the purpose for which the bailment is
made gets over, then the goods must be returned to the Bailor or delivered as per
the direction of the Bailor.
If the Bailee does not return the goods bailed, then he shall be liable for loss or
damage to the goods.

In the instant case, B was to return the books duly bound, to A, within 10 days' time.
Since he failed to honour his commitment and in the meantime, the books were
destroyed by an accidental fire in his premises, B is bound to make good the loss to
‘A’ even though the accident was not due to his negligence.
PROBLEM NO. 12
'A' leaves his cow to take care for a month. B accepts. But after fifteen days
sells the cow to "C". Decide.
ANSWER:
Sec. 160 of the Indian Contract Act, 1872 states that when the purpose for which the
bailment is made gets over, then the goods must be returned to the bailor or
delivered as per the direction of the bailor.
Sec. 161 of the Act specifies that if the bailee does not return the goods bailed, then
he shall be liable for loss or damage to the goods bailed.
In the above case, B's position is that of a bailee of the cow left under his care, and A
is the bailor. B is obliged to return the cow to the rightful owner after a month but on
his own sells the cow to 'C', without any authority.
According to the maxim, "Nemo dat quod non habet" which means that no one can
give a better title than what he has got, 'B' can only pass on defective title to 'C .'A'
can file a suit for damages against 'B' for violation of the contract of bailment.

PROBLEM NO. 13
A finds an article belonging to B of the value of Rs. 1,000/-. A incurs
expenditure to the extent of Rs.900/- towards safe keeping of the article and
for finding out the owner. Can A recover the amount of Rs.900 from B?
ANSWER:
Yes. A can recover the amount of Rs. 900/- from B. Sec.168 of the Indian Contract
Act, 1872 relating to 'Finder of lost goods' speaks about the rights of the finder of the
lost goods.
It states that if the finder of lost goods has incurred necessary and legitimate
expenses for the troubles and also the expenses to preserve the goods, then he has
the right to recover the amount spent by him from the true owner, but he has no right
to sue the owner for any such compensation.
If the true owner refuses to pay the necessary expenses incurred by him, then the
finder of lost goods can keep the goods with him till he is paid by the true owner.
This right is known as the right of specific or particular lien of the finder of lost goods.
Sec. 169 goes on to state further that if the true owner refuses to pay the lawful
expenses of the finder, then the latter can sell the goods after reasonable notice.
If the lawful expenses incurred in respect of the goods amount to 2 / 3 of the real
value of the goods, then the finder can sell the goods.
Going by the above provisions, A can recover the amount of Rs. 900/- spent by him
towards safekeeping of the article of B. In case B refuses to pay the same, A has the
right to sell the article as the amount spent by him on the same exceeds 2/3rds of
the value.
PROBLEM NO. 14
"A" gives some cloth to a tailor for making a suit. The tailor's charges are
settled at Rs.300. After the suit is ready. A tenders Rs.300 for the charges. But
the tailor refuses to deliver the suit till "A" pays an old debt of Rs.60. Is the
tailor entitled to do so?
ANSWER:
No. The tailor is not entitled to refuse to deliver the suit.
'Lien' is the right of one person to retain the goods of another until some debt or
claim of the person in possession is paid. There are two types of lien viz. General
lien and Particular lien.
Sec. 170 of the Indian Contract Act, 1872 defines Bailee's particular lien as: If the
Bailee has, for the purpose of the bailment, rendered any service involving labour or
skill in respect of the goods bailed, then he has the right to retain such goods until he
receives due remuneration for the services he has rendered in the goods.
Sec. 171 defines General lien as a right to retain any goods bailed, as a security for
a general balance of account. It is not restricted to specific goods but may be
claimed over all goods of the Bailor in the Bailee's possession.
In the instant case, the tailor to whom the cloth is given for making a suit is the
Bailee and ‘A’ who has given the cloth is the Bailor. As 'A' tenders the requisite
amount (Rs. 300/-) towards charges for making the suit, the tailor is bound to hand
over the suit to 'A’
The tailor's lien on the cloth given to him for making a suit is in the nature of
'Particular lien' and not General lien which right is available to Bankers, Factors,
Wharfingers, Attorneys and Policy brokers.
Further, it is to be noted that the law clearly specifies that : there is no particular lien
if the Bailee voluntarily has given the goods to the Bailor without getting the charges
or hire or rent, as the case may be and the lien can be exercised only when the
Bailee is in possession of the goods. Once the possession is lost, the right of lien is
also lost. Lien is a personal right which continues only so long as the possessor
holds the goods.
Therefore, in this case, the tailor is not entitled to retain the suit till the payment of
earlier due is cleared as he had forsaken his right of lien in the previous instance by
handing over the stitched cloth voluntarily. It is also to be noted that this right is
available on a specific instance and cannot be exercised towards any past
instance/s.

PROBLEM NO. 15
"A" gives a cloth to "B", a tailor to make a coat. "B" promises to deliver the
coat as soon as it is finished and to give three month's credit for the price.
Can "B" refuse to deliver the coat soon after it is made?
ANSWER:
‘Lien' means the right of one person to retain the goods of another until some debt or
claim of the person in possession is paid. Lien is of two types, General lien and
Particular lien Sec. 170 of the Indian Contract Act, 1872 defines Bailee's particular
lien as:
If the Bailee has, for the purpose of the bailment rendered any service involving
labour or skill in respect of the goods bailed, then he has a right to retain such goods
until he receives due remuneration for the services he has rendered in the goods.
In the above case, A has been given three months credit for the payment of the cost
of making the coat by B and the latter has also promised him to deliver the coat as
soon as it is made.
As B has given him a credit of three months for payment, he cannot exercise his
right of lien on the coat but wait for the payment until then. In other words, B has to
hand over the coat to A once it is ready and wait for the payment until the credit
period expires.

PROBLEM NO. 16
‘A’ delivered 100 barrels of mustard oil to a railway at Calcutta to deliver it at
Delhi to ‘B’. When the train reaches to Delhi, the said oil was destroyed by a
lawful authority for the reason that it was adulterated. The railway authority
failed to deliver it to 'B'.
ANSWER:
The railway authority is not liable to give compensation for non-delivery of the oil to
'B', because in the position of a Bailee to the goods bailed, bailee has to obey the
statutory laws of the land as per sec 153 of the Indian Contract Act, 1872 and for
adulterated mustard oil, the Bailee has no liability as the bailed goods were
destroyed by a lawful authority, even after taking reasonable care of goods bailed to
him.

PROBLEM NO. 17
'A' a lady took her old jewels to a Goldsmith for being converted into new
jewels. Every evening she used to receive the half-made jewels, put the same
into a box and lock the same. She allowed the locked box to remain in the
premises of the Goldsmith but kept the key in her possession. One night the
jewels were stolen. Decide whether the Goldsmith is liable to give
compensation to that lady.
ANSWER:
No. The Goldsmith is not liable to give any compensation to the lady, provided that
he has taken care as specified u/s 151 of the Indian Contract Act, 1872 and if there
is no special contract between the lady and the goldsmith as regards the liability of
the locked jewel box in the custody of the goldsmith, as contemplated u/s 152 of the
Indian Contract Act, 1872.
Sec. 151 reads: In all cases of bailment, the bailee is bound to take as much care of
the goods bailed to him as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk, quantity and value as the
goods bailed.
As per Sec 152, the bailee, only in the presence of a special contract with the bailor,
is responsible for the loss, destruction or deterioration of the thing bailed, even if he
has taken the amount of care of it as described in section 151.
In the given problem, ‘A’ a lady has allowed the locked box to remain in the premises
of the Goldsmith with the kept in her possession. There appears to be no special
contract between the goldsmith and the lady and as such, as the lady had the key of
the jewel box. In the circumstances, if the goldsmith proves that he exercised the
care as specified in Sec 151, then he is not liable for the jewels stolen in the locked
jewel box in his custody.

PROBLEM NO. 18
A's ornaments having been stolen, were recovered by the police and while in
police custody they were stolen again. Can A take action against the police.
ANSWER:
The recovery of ornaments belonging to A from a thief by the Police and keeping
them in their custody resembles bailment and hence the Police as bailey must take
reasonable care and in case of negligence on their part, they have to pay
compensation to the bailor A.
However, A cannot take action against the Police, as the ornaments were stolen
while they were in their custody, because Police function is a Sovereign function
under Art. 300 of the Indian Constitution,1950.
Art. 300 says that the Government is not liable for the tortuous acts of its
Government servants while discharging their duties.
The same view was held in Kasthurilal Rallia Ram Vs. State of U.P (1965)
AIR 1039. The facts and the decision of the Supreme Court are as follows -
Kasthurilal was arrested under suspicion that he was keeping stolen jewels. The
jewels were taken from him and kept in police custody. But after verification, it was
found that he was a bonafide person and hence released. When the jewels were to
be returned, they were found missing. A Police Constable stole them and ran away
to Pakistan. In an action by the affected party, the Supreme Court held that it was a
sovereign function and hence the State was not liable to pay compensation.
 UNIT – III
CONTRACT OF AGENCY
SYLLABUS
Agency - Definition - Creation of Agency - Kinds of Agents - Distinction between
Agent and Servant - Rights and Duties of Agent - Relation of Principal with third
parties - Delegation - Duties and Rights of Agent - Extent of Agents authority -
Personal liability of Agent - Termination of Agency.

CONTRACT OF AGENCY (Sec. 182 to 185)

MOST IMPORTANT

MODEL QUESTIONS:

1. What, is Agency? What are the essentials for the contract of Agency?
2. Explain who is an agent and distinguish between agent and a servant, agent
and independent contractor.
3. The Contract of Agency is unique in nature - Comment
4. What is a contract of Agency? What are the essentials of relationship in
agency?

SYNOPSIS;
A. Introduction
B. Definition
C. Essentials of Agency.
D. Principles of Agency
E. Tests of Agency
F. Agent and Principal
G. Difference between Agent and Servant
H. Difference between Agent and Independent Contractor
I. Difference between Agent and Bailee
J. Difference between Agent and Trustee
K. Difference between Agent and Buyer

A. INTRODUCTION:
In the present day, carrying on a business is a complex affair and an individual single
handedly cannot carry on a business successfully. He has to do things through other
persons only.
Thus, when he makes a contract through another person, he is called the principal
and the other person is called the agent and the relationship between him and the
other person is called agency.
A person who has capacity to contract may enter Into a contract with another
(i) Either by himself or
(ii) Through another person
If he adopts the latter course, he is said to be acting through an agent. An 'Agent' is
a person employed to do any act for another or to represent another in dealings with
third person.
The person for whom such act is done or who is so represented is called the
'principal'.
The function of an Agent is to bring his principal into contractual relations with third
parties. The agent is thus a link between the principal and third parties.
B. DEFINITION:
Sec. 182 of the Indian Contract Act defines an agent thus: 'An agent is a person
employed to do any act for another or to represent another in dealings with third
persons. The person for whom such act is done or who is so represented, is called
the 'Principal'.

In Krishna Vs Ganapathi, AIR 1955 Mad 648

Justice Ramaswami defines an agent thus- ‘when a person acts as a representative
of the other in business negotiations, i.e., in the creation modification, termination of
contractual obligations between that other and third person’.

C. ESSENTIALS OF AGENCY:

1. Any person who is a major and of sound mind may employ an agent. A minor,
lunatic or a drunken person cannot employ an agent. The appointment of an
agent involves a contract. So, a minor etc., cannot appoint an agent as such
persons are declared to be incapable of choosing an Agent. (Sec. 183)

K. Ramachandra Rao V. State of A.P 2005 (2) CTC 417:

The A.P. High Court held that Sec. 142 of Negotiable Instrument- Act does not
specifically state that payee in due course of dishonoured cheque should personally
file a complaint. In absence of such specific provision, complaint could be preferred
by duly appointed power of Attorney Agent of payee in due course.

2. Agency depends upon agreement and not on contract. Any person may become
an agent. So even a minor or a person unsound mind may be an agent. In such
cases, the principal is liable for acts done by such agents. No consideration is
necessary to create an agent. The principal agreeing to be represented by the
agent is sufficient for the principal to create a contract of Agency.

3. If a person intends to act on behalf of another, then agency relation is created

arid the contract between the parties need not provide that there is any such
relationship. To be an agent, one must not act on his own behalf, but must act on
behalf of his principal.

4. The person who is an agent need not have contractual capacity as he does not
make contracts on his behalf. So, even a minor may be an agent. If an
incompetent person is appointed as agent, the principal is liable to the third party
for his acts. So, in the interest of the Principal, the Agent should have contractual
capacity.

D. PRINCIPLES OF AGENCY:

The principles of agency are based on the following two rules:

1. Whatever a person can do personally, he can do through an agent. But, for acts
which are to be performed personally, the principle of agency cannot be applied.
2. He who does an act through another, does it by himself "Qui facit per alium facit
perse". It means that the acts of an agent are acts of the Principal.
E. TESTS OF AGENCY:

There are two tests to determine the existence of agency:

i. Loon Karan Vs. John & Co., AIR 1967, All 308:
The Court must examine the true nature of the relationship and the functions
and responses of the alleged agent to determine the existence of agency.
ii. To determine the existence of agency, it has to be seen whether the alleged
agent has the authority to Represent his principal in dealings with third
parties.

F. AGENT AND PRINCIPAL:

Definition of agent:
Section 182 of the Act defines an agent as 'a person employed to do any act for
another or to represent another in dealings with third persons.

For e.g., A appoints B to buy 200 bags of wheat on his behalf. Now B purchases the
wheat from C. There is a contract between A and C. Now A is the principal and B is
the agent'.

Thus, an agent has the representative capacity coupled with the power to affect the
legal relations of the principal with third persons.

Definition of principal:

The person for whom any act is done or who is so represented by an agent is called
the principal. (Sec. 182). Any person who is of the age of majority according to the
law to which he is subject and who is of sound mind can become a principal (Sec.
183). As such a lunatic or a minor or a drunken person cannot act as a principal.

G. DIFFERENCE BETWEEN AGENT AND SERVANT:

Agent
1. An agent is employed to bring the
principal into legal relations with third
person/s.
2. An agent is not subject to the direct
control and supervision of the
principal.
3. An agent is bound to follow all
reasonable orders given to him by
the principal.
Servant
A servant does not create legal relations
with third persons
He acts under the direct control and
supervision of his employer
He is also bound to follow all reasonable
orders given to him in the course of his
employment.

4. An agent has vast discretion and as He can be employed specially to act as

such, he is not a servant. an agent
5. An agent may work for several A servant usually serves only one
principals at the same time. master
6. An agent's remuneration is in the A servant's remuneration is generally by
 form of salary, commission, salary or wages
brokerage, etc.

H. DIFFERENCE BETWEEN AGENT AND INDEPENDENT CONTRACTOR:

The main difference between an agent and independent contractor is as follows.

i. Agent acts on behalf of another person called principal. He works under the
control of the principal and he represents the principal in dealing with other
persons.
The Independent Contractor, though employed to act on behalf of another,
does the work independently of the employer's control or interference. He also
does not represent his employer in dealing with third persons.

ii. Agent is paid commission, whereas independent contractor gets his payments
for contract work as the work progresses.

iii. An independent contractor generally buys his own materials, engaged his own
labour and does the work in a manner suitable to himself, whereas an agent
act§ on behalf of and on the direction of the principal. He does not invest his
own money or material or men for the work of the principal.

H. DIFFERENCE BETWEEN AGENT AND BAILEE:

1. The relationship of bailor, and bailee exists till the bailee holds some goods
belonging to the bailor. But in the case of an agent, it is not so. An agent may
hold a part of his principal's property and the principal may be liable for that
part.
2. Any agent is the representative of the principal and can contract on his behalf.
But a bailee is not considered as a representative and he cannot contract on
behalf of the bailor.
3. A bailee receives possession of the goods from the bailor for a specific
purpose. Many agents like brokers real estate agents are not bailees since
they do not get any possession of goods.
4. Bailees do not represent bailors, but agent's represent principals.

I. DIFFERENCE BETWEEN AGENT AND TRUSTEE:

1. Both the agent and trustee have fiduciary relationships with the principal and
the beneficiary respectively. Both cannot act against the interests of the
principal/ beneficiary respectively. Both, cannot make any secret profits.
2. An agent represents the principal whereas the trustee does not represent the
beneficiary.
3. However, the trustee is the legal owner of the trust property whereas an agent
is not a legal owner of the goods entrusted to him.

J. DIFFERENCE BETWEEN AGENT AND BUYER:

An independent buyer cannot be an agent, bût ax agent can become a
purchaser when he pays the price t, his pnncipal1 and discloses him the fact.
 MODES OF CREATION OF AGENCY (AGENCY BY RATIFICATION)
(Sec. 186 to 189 & 197 to 200)

MOST IMPORTANT
MODEL QUESTIONS:
1. What are the different modes by which agency is created?
2. Explain agency by ratification.
3. What are the various ways in which the relationship of agency arises?
4. Write short notes on: (a) Agency by necessity (b) Agency by estoppel (c)
Agency by holding out (d) Agency by co-habitation

SYNOPSIS:
A. Introduction
B. Agency by express agreement (Sec. 186)
C. Agency by implied agreement (Sec. 187)
a. Agency by Estoppel
b. Agency by holding out
c. Agency by Co-habitation
D. Agency by necessity
a. Agent's authority in an emergency (Sec. 189)
b. Protection of property of another
c. Wife as husband's agent of necessity
E. Agency by ratification (By confirmation or approval) (Sec. 196 to Sec.
200)
F. Agency by operation of Law

CREATION OF AGENCY
By Operation By Express By Implied Agreement By Ratification of
of Law Agreement (a) Estoppel, acts
(b) Holding Out,
(c) Necessity

A. INTRODUCTION:

Agency is created by agreement or by conduct of the principal and/or agent.

The principal authorises a person called agent to act on his behalf and such person
also agrees to act as his agent and thus the relationship of agency between them is
created.
The power of the agent to affect his principal arises by agreement and by the
conduct of the principal.
The following are the ways by which an agency is created:
1. Agency by Express agreement
2. Agency by Implied Agreement
3. Agency by Necessity
4. Agency by Ratification
5. Agency by Operation of Law
B. AGENCY BY EXPRESS AGREEMENT: (Sec. 186)
Sec. 186 of the Indian Contract Act reads - the authority of an agent may be express
or. implied.
Sec. 187 of the Act defines express authority.
An authority is said to be express when it is given by words spoken or written.
By 'express authority' it means oral or written authority. An agency by oral
agreement is generally valid.
But in the appointment for the post of 'Advocate General" a written form of authority
is essential.
In Companies, the appointment of an agent must be in writing and under the seal of
the Corporation. If the appointment of agent is by a deed, it is called Power of
attorney deed'.
Polz Vs, Leask.:
In every case, it is only by the will of the principal that an agency is created.
Co-principals may jointly appoint an agent to act for them and in such a case, they
become jointly liable to him and may jointly sue him also.
Sec. 188 speaks about the extent of agent's authority. It reads - an agent having an
authority to do an act, has authority to do every lawful thing which is necessary in
order to do such act.
An agent having an authority to carry on a business, has authority to do every lawful
thing, necessary for the purpose or usually done in the course, of conducting such
business.

Illustrations:
a. A is employed by B, residing in London, to recover at Bombay a debt due to
B. A may adopt any legal process necessary for the purpose of recovering the
debt and may give a valid discharge for the same.
b. A constitutes B his agent to carry on his business of ship builder. B may
purchase timber and other materials and hire workmen for the purpose of
carrying on the business.

C. AGENCY BY IMPLIED AGREEMENT: (Sec. 187)

Sec. 187 of the Act defines Implied authority.
An authority is said to be implied, when it is to be inferred from the circumstances of
the case, things spoken or written or conduct of the agent and principal in the
ordinary course of dealings
It means the agency is inferred from circumstances. It arises from the conduct,
situation or relationship of parties.

Illustration:
A owns a shop in Serampur, himself living in Calcutta and visiting the shop
occasionally. The shop is managed by B and he is the habit of ordering goods from
C in the name of A for the purposes of the shop and paying for them out of A’s funds
with A’s knowledge. B has an implied authority from A to order goods from C in the
name of A for the purposes of the shop.

Smith Vs. Moss, 1940 1 KB 424:

The court held that if mother allows her son to drive a car and also pays the
maintenance expenses of the car, then the son becomes an implied agent of the
mother. So, the mother is liable for the fault of his son in her capacity as principal.
Hewitt Vs. Bonvin 1940 1 KB 188:
The borrower of a car is not regarded as an agent of the lender.

Agency by implied agreement is of three types:

a. Agency by estoppel
b.Agency by holding out
c. Agency by co-habitation

a. Agency by Estoppel:
If a person by conduct or words, spoken or written, willfully makes another person to
believe that a certain person is his agent, then he is prevented from denying
subsequently the fact of agency.
Thus if ‘P' by words spoken or written or by his conduct holds out 'A' as having
authority to enter into contract on his behalf, ‘P', will be bound by the contracts made
by ‘A’.

This type of creation of Agency is called "Agency by Estoppel" or holding out. After
the acts are done by the Agent, the Principal cannot deny agent's authority.

Sometimes an agent may do something without the principal's authority. The

Principal is bound by such act, or obligation if the principal has by his words or
conduct induced such third persons to believe that such acts were within the scope
of the agent's authority.

'P' entrusts A' with negotiable instruments endorsed in Blank. 'A' sells them to ‘T’ in
violation of orders from 'P. The sale is valid and binding.
Pickering Vs. Busk, 1812 KB 15, 13 RR 364:
'A' purchased a hemp through a broker 'B' and allowed it to remain in the custody of
the broker. B's business was buying and selling hemp. B sold the hemp for certain
price. The Court held that the sale was binding on ‘A’ as 'A' was the principal and ‘B'
was an agent by estoppel.

b. Agency by holding out:

If a person by some positive conduct permits another person to enter into contract on
behalf of him then the first person is liable for all the acts in the course of
employment of the second person,

For e.g., 'A' by his conduct authorizes 'B' to enter into a contract for ‘A’ Now 'A’ is
liable ‘for all the acts in the course of employment of ‘B’.

Kashinath Vs. Nisakar Rout:

A tahsildar was appointed to manage the landlord's agricultural lands. The tahsildar
let out the lands to some tenants on certain terms. The appointment of tahsildar
created an appearance of authority which included the right to enter into tenancy
agreements. The Court held that such tenancy agreements entered into by the
Tahsildar would bind the principal namely the landlord.

Difference between Estoppel and Holding out:

a. Estoppel: It includes -
1. Negative conduct/act of the principal.
2. Negligence on the part of principal.
3. Negative acts of the principal.

b. Holding out
1. Positive conduct of the principal.
2. Intentional or willful act by the principal.
3. Positive act of the principal.

c. By Co-habitation (Husband and wife):

There are two situations where the wife lives with her husband and where the
wife lives, separately.
i. When the wife lives with her husband:
When a man and a woman live as husband and wife, then the wife can get all
necessaries on credit from a shopkeeper. The husband is liable to the shopkeeper
for the articles sold to the wife.
This co-habitation liability extends to lovers and mistresses but not to prostitutes.
To make the husband binding for the credit purchase made by the wife, the following
are the conditions:
1. The husband and wife should be living together.
2. The husband and wife, must be living together in a domestic establishment
(leading a family life as husband and wife) of their own. Mere fact of marriage or
merely living together is not sufficient.
3. The wife can make her husband liable for the expenses of her own necessaries,
suited to the style in which the husband chooses to live.
4. The wife «can make her husband liable only for supply of necessaries.
Pacquin Ltd., Vs. Beauclerk:, 1906 AC 148:
If these (above four) conditions are fulfilled, then it is immaterial whether the trader
did or did not know that the buyer was really a married woman.

Girdhari Lal VS. Crawford:

The husband can escape liability to pay to the trader by proving the following:
a. That he has expressly forbidden his wife from buying things on credit (loan).
b. That he has expressly warned the trader not to supply goods on credit to his wife.
c. That the trader knew that the wife had been given sufficient money to buy the
goods,
d. That the wife was already supplied with sufficient quantity of articles.
e. That the goods purchased were not necessaries.

ii. When the wife lives separately:

a. If the wife is living apart, she can claim reasonable maintenance. This applies to
cases where the wife is deserted by the husband for no fault of hers.
b. If she is living apart without any justification, she cannot get this benefit.
c. If the wife is forced to live separately from her husband, then she can buy
necessaries of life on credit.
d. Under law, a husband is bound to maintain his wife and if he does not maintain,
wife is treated as the implied agent of her husband and hence husband is liable
for necessaries supplied on credit.

D. AGENCY BY NECESSITY:

In Jebera Vs. Ottoman, 1928, AC 269:

Agency of necessity develops from an original and subsisting agency and only
applies itself to unforeseen events not provided for in the original contract.
Thus, in certain circumstances, the law may compel a person to act as an agent for
another person without the Principal’s consent. Such agency is called as 'agency by
necessity'.
It arises under the following three circumstances:
a. Agent's authority in an emergency
b. Protection of property of another
c. Wife as husband's agent of necessity

a. Agent's authority in an emergency: (Sec. 189)

Sec. 189 of Indian Contract Act speaks about agent's authority in. an emergency.
An agent has authority in an emergency, to do all such acts, for the purpose of
protecting his principal from loss as would be done by a person of ordinary prudence
in his own case, under similar circumstances.

Illustrations:
i. An agent for sale may have goods repaired if it be necessary.
 ii. A consigns provisions to B at Calcutta, with directions to send them
immediately to C at Cuttack. B may sell the provisions at Calcutta, if they
will not bear the journey to Cuttack without getting spoilt.

When an agent exceeds his authority in emergency, agency of necessity is

created.
Following are the conditions for 'emergency’.
i. The agent must not be in a position to communicate with the Principal.
Communication must be practically impossible.
ii. He must have taken reasonable and necessary steps to protect the interest of the
principal.
iii. He must have acted bonafide, with the interests of all the parties concerned.
iv. An actual emergency must exist.
v. That the course taken was the only one practicable in emergency.

E.g., directs 'A' at Madras to send certain goods immediately to T' at Bombay. A'
may sell the goods at Madras if they will not bear the journey to Bombay without
getting spoilt.

b. Protection of property of another:

If a person is entrusted with some property of another which he has to protect, an
agency of necessity arises. Here, there may not be an express agreement.
E.g., The master of a ship becomes an Agent of necessity for the Cargo owner and
he can take any step to preserve them, i.e., he can dispose off the damaged or
perishable goods without, getting authority from the owner of the goods.

Great Northern Railway Vs. Sheffield:

A horse was sent in train. When it arrived at the destination no one took its delivery.
The railway company had to feed the horse, and thus acted as an agent of necessity
and so could recover compensation for the amount spent on feeding the horse.

Couturier Vs. Hastie:

The master of a ship found that the cargo of the ship was perishing. He sold the
goods for the best price available at the nearest port. The Court held that the sale
was valid and binding on the 'Cargo-owner'.

c. Wife as husband's agent of necessity:

A husband is bound to maintain his wife, if he does not do so, she is
entitled to pledge her husband's credit for necessaries of life i.e., get the necessary
articles on credit from a shop keeper suitable to their living style. Here the wife is the
agent and the husband, the principal. He ls bound by her acts. If the wife is living
with the husband, there is an implied authority for the wife to buy articles of house
hold necessity.
If the husband deserts the wife for no fault of her and does, not maintain her, she is
entitled to get necessaries. The husband can be sued by the creditors concerned as
the wife is regarded in such circumstances an agent of necessity. '

E. AGENCY BY RATIFICATION (BY CONFIRMATION OR APPROVAL):

 (Sec. 196 to Sec, 200) (Ex post facto Agency)

i. Sec. 196 - Right of person as to acts done for him without his authority -
Effect of ratification:
Where acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to disown such acts. If he
ratifies them, the same effects will follow as if they had been performed by his
authority.

ii. Sec. 197 - Ratification may be expressed or implied:

Ratification may be expressed or may be implied in the conduct of the person
on whose behalf the acts are done.
Illustrations:
a. A, without authority buys goods for B. Afterwards B sells them to C, on his own
account B's conduct implies a ratification of the purchase made for him by A.
b. A, without B's authority, lends B's money to C. Afterwards B accepts interests
on the money from C. B's conduct implies a ratification of the loan.

iii. Sec. 198 - Knowledge requisite for valid ratification:

No valid ratification can be made by a person whose knowledge of the facts of
the case is materially defective
iv. sec. 199 - Effect of ratifying unauthorized act forming part of a transaction:
A person ratifying any unauthorised act done on his behalf ratifies the whole of
the transaction of which such act formed a part.

v. Sec 200 - Ratification of unauthorised act cannot injure third person:

An act done by one person on behalf of another without such other person's
authority, which if done with authority, would have the effect of subjecting a
third person damages or of terminating any right or interest of a third person,
cannot, by ratification, be made to have such effect.

Illustrations:
a . A not being authorised thereto by B, demands on behalf of B, the delivery of a
chattel, the property of B from C, who is in possession of it. This demand
cannot be ratified by B, so as to make C liable for damages for his refusal to
deliver.
b . A holds a lease from B, terminable on three months’ notice. C, an
unauthorised person, gives notice of termination to A. The notice cannot be
ratified by B, so as to be binding on A.
Explanation:
i. When a person acts for another without the knowledge or authority of
second person then the second person either may accept the first person's
act or reject his act. If he accepts it, he is said to have ratified that act.
For e.g., 'A' enters into contract on 01-03-1997 on behalf of 'B' and
without the knowledge of ‘B’, B can now accept or reject the contract
entered by 'A’. If ‘B' ratifies the contract on 01-04-1997, the contract
becomes valid and it relates back to 01-03-1997 itself.
 ii. The effect of agency by ratification is that, it relates back to the original date
on which is entered into by the agent. It is based on the maxim:' 'Omni rati
habitio retro rahitur et mandato priori acquiparatur'.
It means "ratification of an act already done has a retrospective effect''.

iii. Ratification may be express or implied on the Conduct of the person on

whose behalf the acts are done.
E.g., 'A' lends P's money to T without P's knowledge Afterwards ‘P' accepts
interest from T. P's conduct is an implied ratification of the loan lent by ‘A’ to
‘P’

iv. Essentials of valid ratification:

1. The agent must state that he is acting for the principal at the time of entering into
the contract. The contract must be entered into the name of the principal.

Bolton Partners Vs. Lambert:

The Managing Director of a company without the company's authority, acting
as its agent accepted an offer from a third party. The company ratified the offer
and
hence the party was bound to carry out the offer.
2. At the time of entering into contract by the agent the principal must be living. The
legal heirs cannot ratify the contract. A company may ratify the contract entered
by the promoters on its behalf before its incorporation.

Kelner Vs. Baxter:

Baxter was an agent of a company to be established in future. Baxter entered
into a contract for the purchase of a hotel from Kelner. The Court held that the
contract could not be ratified, because the Principal i.e., the company, was not
in existence at the time of entering into the contract.
3. The principal must have the contractual capacity, both at time of contract and
ratification. If the principal is incompetent to enter into the contract, he cannot
ratify it. (Should not be a minor or a lunatic)
4. The contract entered into by the agent must not be void. Void contract can never
be ratified.
5. The principal must have the knowledge of the terms of the contract. If not, the
ratification is not valid.
E.g., 'A' has authority to buy goods at the market rate. He buys it at a high rate,
but 'P' accepts it and ratifies it. Later on, ‘P' learns that the goods belong 'A'
himself. The ratification is not binding on 'A', as it was not done with knowledge of
facts.
6. The Principal must ratify the whole contract. There should not be any partial or
incomplete ratification.
7. The Principal must ratify the contract within a reasonable period, a ratification
after an undue delay is invalid.
8. Ratification can be made only if the interests of a third party are not affected.
E.g., T holds a lease from ‘P' terminable on two months’ notice. 'A', an
unauthorised person, gives notice of termination to T. The notice cannot be
ratified by P as to be binding on T.
9. Ratification must be communicated to the party who is sought to be bound by the
act of the agent.
10. The acts which the Principal is incapable of doing, cannot be ratified. E.g.,
company cannot ratify the acts of the directors which are ultravires the powers of
the company.
11. Ratification relates back to the date of the act of the agent. So, it is called 'Ex post
facto' (retrospective) Agency.
E.g., 'A' purports to be P's agent and without his knowledge accepts an offer by
T, but withdraws it even before P comes to know of it. P ratifies the act
subsequently after coming to know of it. This ratification results in a contract
and binding on T.
*.-
v. No ratification:
In the following cases, ratification is not possible:
1. An agent purporting to act for a principal not in existence.
2. If the principal is incapable of entering into a contract.
3. If full knowledge of the fact is not disclosed to the Principal.
4. If the act to be ratified is void or illegal.
5. If the whole of the transaction is not ratified.
6. If ratification is not communicated to the person sought to be bound by the act
of agent.
7. For the acts towards which the principal has no power to do.
8. If the third party is put to damages by the ratification.
vi. Effects of ratification
a. It creates the relationship of principal and agent between the person ratifying
the act and person performing the act.
b. It creates a contractual relationship between the principal and the third party
through ratification of the act of agent,

F. AGENCY BY OPERATION OF LAW:

a. When the company is formed, its promoters are its agents.
b. A partner is the agent of the firm and so his acts bind the firm and other
partners as well.

CHAPTER 3
CLASSIFICATION OF AGENTS
[Sec. 2(9)]

IMPORTANT
MODEL QUESTIONS

1. What are the different types of agents?

2. Classify the different types of agents based on their functions.
3. Write short notes on: a. Factor b. Broker c. Del credere agent.

SYNOPSIS:
A. Classifications of agents by their power of authority
1. Special agent
2. General agent
3. Universal agent
 B. Classifications of agents by the nature of work/functions.
1. Commercial or Mercantile agent.
i. Factor
ii. Auctioneer.
iii. Broker
iv. Commission Agent
v. Banker
vi. Del credere agent.
2. Non-Commercial agent.

A. CLASSIFICATIONS OF AGENTS BY THEIR POWER OF AUTHORITY

Sec 182 of the Indian Contract Act defines an agent: ‘An agent is a person
employed to do any act for another or to represent another in dealings with
third persons. The person for whom such act is done or who is so represented
is called the ‘Principal’.

Agents are classified on the basis of their powers of authority exercised by

them and they are as follows:
1. Special Agent
2. General Agent
3. Universal Agent

Again, agents are classified on the basis of their functions and nature of work
performed by them and they are as follows:

1. Commercial or Mercantile agent.

i. Factor
ii. Auctioneer
iii. Broker
iv. Commission Agent
v. Banker
vi. Del Credere Agent
2. Non-commercial agent

1. Special Agent:
Special agent is appointed to perform a special or particular act or transaction. He
represents the Principal in some particular transaction. Such an agent has only a
limited authority and it comes to an end as soon as the act is performed. He cannot
bind his principal in matters other than for which he is employed.
For e.g., an agent employed to sell a house or »n agent employed to bid at an
auction.
2. General Agent:
General agent has authority to do all acts connected with a particular trade, business
or employment. Such authority of the agent is continuous until it is determined
(terminated).
The acts of the agent fully bind the principal. Further even if the agent exceeds the
authority and acts, it is binding on the principal provided the third parties do not have
notice of his extent of authority.
For e.g., The manager of a firm having an implied authority to bind his principal by
doing anything necessary for carrying on the business of the firm.

If the employer has informed him about the limit of authority etc., he should act within
the scope of the authority.

3. Universal Agent:
The authority of universal agent to act on behalf of the principal is unlimited. If he is
acting legally and is abiding the laws of the land, then his acts bind the principal.
Here, it is such as a business man giving blanket power of attorney to the agent to
do anything that has to be done while he is in the service.

B. CLASSIFICATIONS OF AGENTS BY THE NATURE OF WORK/FUNCTIONS:

1. Commercial or Mercantile Agents
2. Non-commercial or Non-mercantile Agents

1. Commercial or Mercantile Agents:

Mercantile agent means "agent who has authority 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 in
the customary course of business".
Certain mercantile agents are not covered under the above definition and hence
these agents are dealt separately as under:
a. Factor:
Factor is a mercantile agent who is entrusted with the possession of goods for sale.
He has the discretion to sell the goods in his own name and also on credit. He .has
also the authority to receive the price and give a good discharge to the purchaser.

For any balance of account between him and the Principal, the factor has the right of
lien. If a factor in possession of goods or document, etc., pledges or sells them with
the owner's consent, then it is binding on the principal, whether the principal has so
authorised him or not.
Folkes Vs. King:
The plaintiff, the owner of a motor car delivered it to a mercantile agent to sell it for a
value not less than pounds 575. The agent sold the car to the defendant, who bought
it in good faith for 340 pounds.
The agent misappropriated, this amount and hence the plaintiff sued ttie defendant
for the recovery of the car. It was held that the defendant had a good title to the car,
as he had the possession of the car through the agent who sold it with the Plaintiffs
consent and that he was not aware of the minimum price for sale of the car as
pounds 575.
b. Auctioneer:
Auctioneer is an agent appointed by the seller to sell goods by public auction for
commission as remuneration. He is given authority to sell the goods on payment of
price. The auctioneer is an agent of the seller till sale, but after sale he becomes an
agent for the buyer.
He can receive the price of the goods sold and also can sue the buyer for price in his
own name. If the auctioneer has acted within the limits of his apparent authority, then
the principal is liable for the acts of auctioneer. *
i. Mcmanus Vs. Fortescue, 1907:
If the auctioneer fixes reserve price and informs the bidders he sells it at below the
reserve price, then the sale is not binding on the principal, even if the sale is effected
by mistake or oversight.
ii. Rainbow Vs. Hawkins, 1904:
The owner of a pony engaged the defendant for sale of a pony at an auction, subject
to a reserve price of £ 25.. The defendant by mistake stated that there was no
reserve price and he sold the pony to the plaintiff for 15 guineas.
Subsequently, he discovered the mistake and again auctioned it for a higher price. In
a suit by the plaintiff, it was held that the defendant had implied authority to sell
without reserve and hence the sale was binding on the owner.
c. Broker:
Broker is an agent employed to buy or sell goods on behalf of another. He is an
agent of both the buyer and the seller, and is employed to bring both the parties to
meet.
Thus broker is an agent employed to make bargains and contracts in matters of
trade, commerce or navigation between other parties for a compensation called
brokerage commission.
A broker is not given possession of goods, and so has no right of lien, but as per
Sec. 171 of the Act, only a policy broker has a lien on the policy for the amount due
to him. However, no broker can act or sue in his own name.
The broker puts the particulars in a book and sends it to both the parties. If they
agree, there is a binding contract. If they do not agree, there is no binding contract.
There are many types of brokers namely stock brokers, insurance brokers, cotton
brokers, wheat brokers, estate brokers and others.
d. Commission Agent:
Commission agent is generally appointed by the Principal to buy and sell goods on
the most favourable terms in the business transactions with other parties.
He may or may not be entrusted with the possession of goods. For the work he
does, he is given a monetary remuneration called commission.
e. Banker:
A banker is an agent of his customer. He receives money and repays it by honouring
the cheque of the person from whom he received the money.
Thus, the relationship between the Banker and the Customer is that of a creditor and
debtor. He has the additional duty to honour the cheques of the customers.

f. Del Credere Agent:

Del credere agent is an agent who for extra commission guarantees his principal
about the solvency of the third parties and that they shall perform their obligations as
regards the contract. The extra commission is called del credere commission.
Thus, he acts as a Surety and is liable to pay the Principal even if the third parties
become insolvent. The Del credere agents thus take the risk of bad debts on their
heads and for shouldering this risk, they are paid extra consideration.
Though he does not guarantee the performance of the contract, he guarantees the
payment of money by the purchasers to the principal.

2. Non-commercial or Non-mercantile Agents:

Non mercantile agents are agents who do not come within the purview of the term
mercantile agents as defined in the Sale of Goods Act.
They include Attorneys, Solicitors, Insurance Agents, Clearing and Forwarding
Agents, a wife, etc.

CHAPTER 4
DUTIES (LIABILITIES) AND RIGHTS OF AGENT AND PRINCIPAL
(Sec. 190, 211 to 219, 222 to 225 6s 270) ;
IMPORTANT
MODEL QUESTIONS:
1. What are the rights and duties of an Agent and a Principal?
2. The duties of the agent are the rights of the principal' - Comment.
3. Write short notes on: (a) Duties of agent (b) Rights of agent (c) Duties of principal
(d) Rights of principal
SYNOPSIS:
A. Duties of Agent
B. Rights of Agent
C. Duties of Principal
D. Rights of Principal

A. DUTIES OF AGENT:
An agent has to do a number of duties to his principal and it varies in types and
decrees according to the nature of agencies and nature of transactions.
The duties are broadly described as below.
1. Agent - to work as per principal's directions: (Sec. 211)
The agent should carry out the work according to the lawful directions and
instructions given by the principal.
If he does not follow the directions, he should make good any loss by the principal.
E.g.,
i. An agent is instructed to insure goods. Due to negligence, he fails to do
so. He is liable to compensate the Principal for the goods lost. The agent
must carry out the work for which he is appointed and this duty is called
duty to execute mandate.
ii. A broker in whose business goods should not be sold on credit, sold
goods to a dealer on credit. Hie dealer became insolvent and so the
principal, incurred loss. The broker was liable to compensate the loss of
the principal.
iii. The principal instructed his agent to keep the goods in a warehouse at a
particular place, but the agent kept the goods in a warehouse at a different
place. The Court held that even though the other warehouse was equally
safe, when the goods were lost by fire, the agent is liable to compensate
the principal.
In case, the principal has not given any specific directions, then the agent
must work according to the customs which prevail in doing the kind of
business at the place where the agent conducts such business. For e.g.,
when the custom prevailing in the trade is -'no sale on credit', but if the agent
sells on credit, then he is liable to compensate the loss of the principal in case
the buyer becomes insolvent.
2. Agent - to work with reasonable care, skill and diligence: (Sec. 212)
An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar businesses. The standard of
care depends on the nature of business.
The agent is liable to compensate his principal for the direct consequences of his
neglect, but not for any remote loss or damage caused by his negligence
In case of any difficult situations, where he cannot decide, then he must
communicate with the principal and get his instructions and act.
Examples:
i. A, an agent for the sale of goods, having the authority to sell on credit,
sells to B on credit, without making the proper and usual inquiries as to the
solvency of B. B, at the time of such sale, is insolvent. A must make
compensation to his principal in respect of any loss thereby sustained;
ii. A, a merchant in Calcutta, has an agent B in London to whom a sum of
money is paid on A's account, with orders to remit. B retains the money for
a considerable time. A, in consequence of not receiving the money,
becomes insolvent. B is liable for the money and interest from the day on
which it ought to have been paid, according to the usual rate and for any
further direct loss such as losses by variation of rate of exchange but
nothing else.
iii. A, an insurance broker, employed by B to effect an insurance on a ship,
omits to see that the usual clauses are inserted in the policy. The ship is
afterwards lost. In consequence of the omission of the clause, nothing
could be recovered from the underwriters. A is bound to make good the
loss to B.
iv. A engages B, an advocate to file a suit in a Court of law for the recovery of
some amount due from P. B files the suit in a wrong Court or without
paying proper Court fees as a result on which the suit was dismissed, B is
liable to make good the loss to A, because the professional skill expected
of an advocate was absent.

3. Agent - to give proper accounts: (Sec. 213)

An agent is bound to give proper account to the principal on his demand.
i. S. Paul &, Co., Vs. State of Tripura, AIR 1984 Cal 378:
The Court held that in rendering accounts, the agent has the duty to produce
vouchers in support of the expenses incurred by him.
ii. Narandas Vs. Papamma AIR 1967 SC 333:
The Court held that when all the accounts are in the possession of the
principal, the agent has an equitable right to sue the principal to show the
accounts to him.
iii. Suraj Kapur Vs. Nitin Castings Ltd, AIR 1987 Delhi 149:
The Court held that when an agent was appointed to get orders for supply of
goods, his commission had to be paid as and when the principal received
payments for supplies and the agent had the right to demand accounts from
the principal regarding the supply details.

4. Agent's duty to communicate with principal: (Sec. 214)

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in
communicating with his principal and in seeking to obtain his instructions.
5. Agent - not to deal agency business on his own account: (Sec. 215 &
216)
If an agent deals with the business of agency on his own account without the
principal's consent, then the principal may.
i. Repudiate the transaction if there is any dishonest concealment of facts.
 ii. Repudiate the dealings which are disadvantageous to him.
Similarly, without the knowledge of his principal, if an agent deals the agency
business on his own account, then the principal can claim any benefit which may
have resulted to agent from the business transactions. (Sec. 216)
Illustration:
i. A directs B, his agent, to buy a certain house for him. B tells A it cannot be
bought and buys the house for himself. A may, on discovering that B has
bought the house, compel him to sell it to A at the price he gave for it.
ii. 'P' directs 'A* to sell P's estates. ’A’ finds out that there is a mine in the
estate. Without informing it, he sells it to 'A'. Afterwards 'P' comes to know
of it. ‘P’ may repudiate the sale.
iii. A directs B to sell A's estate. B buys the estate for himself in the name of
C. A, on discovering that B has bought the estate for himself, may
repudiate the sale, if he can show that B has dishonestly concealed any
material fact or that the sale has been disadvantageous to him.
6. Agent - to pay the principal all sum of money: (Sec. 218 & 217)
An agent is bound to pa}' to his principal all sums received on principal's account
(Sec. 218)
However, an agent may deduct the following expenses in the amount payable by the
principal.
i. Advances made.
ii. Expenses properly incurred in conducting the principal's business.
iii. Remuneration payable to him for acting as agent (Sec. 217).
Even for money received on principal's behalf under an illegal or void contract, he
has to account to the principal for such money.
7. Agent - to protect and preserve the agency interests on principal's death
or insanity: (Sec. 209)
When an agency is terminated by the principal's death or principal becoming of
unsound mind, then the agent is bound to take, on behalf of the representatives of
his principal, all reasonable steps for the protection and preservation of the interests
entrusted to him under agency.
8. Agents duty to give information to the principal:
It is the duty of the agent to give information to the principal which he might receive
during the agency. Due to failure to give information to the principal, if a loss is
suffered by him, then the agent must compensate the principal.
Knowledge of the agent is the knowledge of the principal:
(Doctrine of Imputation)
The Indian Contract Act, 1872 defines agency as a consensual and fiduciary
relationship in which one person's (agent) actions have power to affect the legal
relations of another person (principal);
In the common law of agency, when an agent has knowledge of certain matters, it is
deemed that principal also knows such matters. This is known by the doctrine ~
Doctrine of Imputation.
Doctrine of Imputation is relevant to a principal's legal relations with third parties.
When a third party, with whom the agent deals on the principal's behalf, has
conveyed certain information to the agent, then he (third party) has a right to assume
that the agent has reconveyed the information to the principal and that the principal
is aware of such information.
As per the doctrine of imputation the principal's knowledge or lack of knowledge of a
fact is material to determining the principal's rights and duties to a third party and
vice versa.
Courts apply the doctrine of imputation regardless of the nature of relationship
between a principal and an agent, and regardless of whether the principal knows the
fact which the agent already knows; The principal may be an individual or an
Organization, such as a corporation or partnership.
Imputing an agent's knowledge to the principal has traditionally been justified on the
basis of an assumed identity between agent and principal and, separately, on the
basis that an agent has a duty to provide information to the principal that is material
to the agent's work.
The agent's breach of his (agent's) duty to provide the principal with information does
not generally create a defence for the principal. In case the principal contends that
he has no knowledge of the information which was conveyed to his agent, the
burden of proof is on the principal to establish the same.
Though the doctrine is considered as irrational, and out dated, still it is followed in
the law of agency.
9. Agent - not to make secret profits:
Secret profit means any advantage obtained by the agent over and above his agreed
remuneration/commission. The agent has gained this advantage by virtue of his
position as agent.
The agent's relationship with the principal is of fiduciary nature and hence absolute
faith is necessary in the conduct of agency business. E.g., Acceptance of bribe is a
secret profit made.
If the agent makes such secret profit from the other party out of the contract on
behalf of the principal, then the principal may:
1. Recover the amount from the agent.
2. Sue him and the third party.
3. Refuse to pay commission to the agent.
4. Dismiss the agent.
5. Repudiate the contract with the other party.

i. Reading Vs. The King, 1951 AC 507:A military officer took bribe and
allowed the goods to pass was held liable to pay the same to the King.
ii. Andrews Vs. Ramsay & Co., 1903 2 KB 635:
The Court held that when an auctioneer receives from the buyer additional
commission over and above what his principal pays him, then the agent is
bound to give the commission to the principal.
iii. Shipway Vs. Broadwood:
A principal agreed to buy horses from a dealer if his veterinary surgeon
certified them as being sound. The dealer bribed the surgeon and obtained
a certificate, But the horses turned out to be unsound. The Principal could
reject them and get back the money;
10. Agent - not to setup adverse title:
The agent must not set up his own title or title of third parties over the goods
received from the principal. If he does so, he is liable for conversion. He cannot
dispute the title of the principal unless he proves a better title in the third person or
himself.
11. Agent's duty to avoid conflict of interest:
An agent must act on the interest of the principal. He must not put himself in a
position where his duty and personal interest conflict with each other.
He occupies fiduciary position and hence should not do anything which brings
conflict between his personal interest and his duty.
Armstrong Vs. Jackson:
The principal instructed his stockbroker to buy the shares of a particular company.
Instead of buying the shares in the open market, the agent sold his shares to the
principal. The Court set aside the sale of such shares.
12. Agent - not to use information obtained in the course of the agency
against Principal:
An agent must not use any information obtained by him during the course of agency
business against his principal. If he so uses and due to this, if the principal suffers
some loss, then the agent must compensate the principal. Further the Principal may
obtain an injunction to prevent the agent from using such information against him.
13. Agent- not to delegate authority:
An agent cannot delegate his authority to another person. It is known by the latin
maxim "delegatus non potest delegate", meaning that the delegate (agent) should
not further delegate his functions to another delegate (agent). So an agent cannot
lawfully employ another to perform the acts which he has personally undertaken to
perform.
Exceptions to the rule - not to delegate:
The following are the four exceptions:
i. If the very nature of the work makes it necessary for the agent to appoint a
sub agent, then it is allowed.
ii. If there is a custom of trade to appoint a sub agent then the agent can
appoint a sub agent. In general, purely ministerial functions can be
delegated.
iii. If the Principal has consented for the appointment of a sub agent, then
sub-agent may be appointed under an agent.
iv. If the acts are purely ministerial in nature, then the agent can delegate
such acts to another person
B. RIGHTS OF AGENTS:
1. Right of Retention: (Sec. 217)
The agent has the right to retain money due to him out of the money received from
the principal. For advances made, expenses properly incurred, his remuneration for
conducting the business, the agent has the right of retention. He can retain only such
money as is in his possession.
2. Right to receive remuneration (Sec. 219 & 220).
Sec. 219 reads as follows - in the absence of any special contract, payment for the
performance of any act is not due to the agent until the completion of such act.
However, an agent may detain moneys received by him on account of goods sold
(although the whole of the goods consigned to him for sale may not have been sold
or although the sale may not be actually complete).
The following are the rules regarding agent's remuneration:
a. The agent is entitled to get his remuneration by an agreement. If there is no
agreement, then the agent should be given reasonable remuneration.
Payment of remuneration is possible, only when the agent's act is complete.
Green Vs. Barxlett:
The agent was appointed to sell a house. An auction was held but no purchasers
came forward. One of the persons who attended the auction obtained the address of
the principal and without the agent's intervention, finalised the sale of the house. It
was held that the agent is entitled to his commission as the sale was the result of his
work.
b. The transaction for which the agent claims remuneration must be the direct
result of his services. If it is not so, he is not entitled to any remuneration. If
the agent's services are only remotely connected with the transaction, he
cannot get any remuneration for it.
Tribe Vs. Taylor:
The principal wanted his agent to introduce a purchaser of his premises or a source
of investing his capital. The agent introduced one Mr Wood, who offered money by
way of loan. The agreed remuneration was paid to the agent. After this, Mr. Wood
became the principal's partner and advanced more money. The Court held that the
"agent could not claim compensation on the second loan advanced.
c. A principal can sell his property by himself or he may even refuse to sell.
Luxor Ltd Vs. Cooper:
The agent was offered commission if he brought about the sale of the principal's
cinemas. The principal refused to sell to the customer introduced by the agent. The
agent claimed his commission, but it was held that the principal could sell his
property by himself and the agent was not entitled to any commission.
d. If any agent is guilty of misconduct in the business of agency, then he is not
entitled to any remuneration for that part of the business. (Sec. 220)
For e.g., 'P' employs 'A' to recover Rs.10,000/- due to 'P' from 'T'. Due to A's
misconduct, the money is not recovered. 'A' cannot get any remuneration for his
services and A must compensate the loss of 'P'. *
3. Right of Lien: (Sec. 221)
An agent has the right lo retain the goods or property of the principal whether
moveable or immoveable, until he gets the commission or money due to him.
The agent is entitled only for particular lien. But by a special contract, an agent may
have general lien extending to all claims out of the agency.
The agent however has no right to sell the property of the principal on the basis of
his lien.
The lien is lost when the agent waives his right. The waiver may arise out of an
agreement express or implied or may be inferred from conduct of the agent
inconsistent with the right.
The agent's lien is not terminated even when the property has been obtained from
the principal by unlawful means or by fraud or misrepresentation.
4. Right of indemnification: (Sec. 222)
The agent has a right to be indemnified against any consequence of lawful acts done
by him due to the authority given by the principal and also for any injury due to the
principal's neglect-
E.g.: A, an agent, seized goods of T, a third party, at the command of P, the
principal. Although the goods had been seized improperly, it was shown that A had
acted bonafide. It was held that A was entitled to be indemnified.
5. Right to be indemnified against consequences of acts done in good
faith: (Sec. 223)
Where one person employs another to do an act and the agent does the act in good
faith, then the agent has a right to be indemnified against the consequences of that
act, even though such act causes an injury to the rights of third persons.
The right of agent to be indemnified does not extend to unlawful acts (Sec. 224).
Therefore, if one person employs another to do a criminal act, then the principal is
not liable to the agent to indemnify him against the consequences of such act.
6. 6, Right of compensation: (Sec. 225)
The agent has to be compensated for any ¡injury due to the negligence or want of
skill by the principal.
For example, 'A' as a bricklayer in building a house, and puts up the scaffolding
himself. The scaffolding is unskilfully put up and in consequence, 'A' is injured P
must compensate 'A'.
7. Right of stoppage in transit:
In the following two cases, this right can be exercised:
i. If the. agent has bought goods for his principal by incurring a personal
liability, he has right of stoppage in transit against the principal.
ii. If the agent is personally liable to the principal for the price of the goods
sold, he stands in a position of an unpaid seller towards the buyer and can
stop the goods in transit on the insolvency of the buyer.
C. DUTIES OF PRINCIPAL:
The duties of a principal towards his agents are the rights of the agent against the
principal.
In addition, the principal owes the following duties to an agent.
i. The Principal has to indemnify the agent against the consequence of all
lawful acts done by such agent in exercise of his authority.
ii. If the principal employs an agent to do an act which done in good faith
may cause injury to some third person, the principal has to indemnify the
agent. If the principal employs an agent to do a criminal act, the principal is
not liable to indemnify the agent.
iii. The Principal must compensate his agent in respect of injury caused to
such agent by the principal's neglect or want of skill.
iv. The principal should pay the agent the commission or other remuneration.
D, RIGHTS OF PRINCIPAL:
The principal can enforce all the duties of the agent which are indirectly the rights of
the principal.
Further he has the following remedies against the agent.
1. The Principal can recover damages from the agent, if there is any loss due to
the negligence by the agent in following the directions of the principal or lack
of skill and care on the part of the agent.
2. If the agent makes any secret profit out of the agency without the knowledge
and consent of the principal, then the agent has to hand over such profit to the
principal. The principal need not give the agent any remuneration for such
transactions.
3. If the agent acts as a principal himself and not like an agent, the principal can
resist the agent's claim for indemnity against liability incurred by him in such a
transaction.
4. The principal has the right to check that the agency business is conducted
according to his instructions or according to the prevailing custom of trade.
5. The principal has the right to compensation for loss or any profit accruing,
owing to departure froin instructions.
6. The principal is entitled to get proper accounts or demand.
7. The principal is entitled to claim the benefit, arising from a transaction entered
into by the agent on his own account.
 8. The principal is entitled to receive all moneys due to him, subject to
permissible deductions by the agent.
9. The principal can refuse to pay the remuneration if the agent is guilty of
misconduct.

CHAPTER 5
DELEGATION OF AGENT'S AUTHORITY
(Sub Agent and Substituted Agent)
(Delegatus Non Potest Delegare)
(Sec. 190 to 195)
IMPORTANT
MODEL QUESTIONS:
1. Explain when an agent can delegate his authority to others.
2. Explain the rule "delegatus non potest delegare" arid state the exceptions to
the rule.
3. Distinguish between sub agent and substituted agent.
SYNOPSIS:
A. Introduction
B. Sub agent (Sec. 191)
C. Relationship between Principal and Sub-Agent (Sec. 192 & 193)
D. Substituted Agent (Sec. 194)
E. Difference between Sub agent and Substituted agent
A. INTRODUCTION:
Generally, an agent is not given powers to delegate his authority to another person
without the consent of the Principal.
This rule is based on the maxim "delegatus non potest delegare" which means that,
a person to whom authority has been given cannot further delegate that authority to
another person. Further, the principal while appointing an agent to act on his behalf,
depends on his skill and competence and so does not generally like any other
person than the agent doing the work.
B. SUB AGOENT:(See. 191)
A sub-agent is a person who is employed by and acting under the control of the
original agent in the business of agency.
So, he is an agent of the original agent. The relation between the original agent and
the sub-agent is that of the principal and agent.
Sec. 190 of the Act provides that an agent cannot lawfully employ another person to
perform acts which he has expressly or impliedly undertaken to perform personally
by himself. It. is because the contract of agency is of a fiduciary character i.e., the
confidence reposed by the principal on the agent. So, the agent generally has no
authority to further delegate his authority to any other person.
To this rule, the following are the exceptions:
In these cases, an agent can delegate his authority] to a sub agent.
1. If there is a custom of trade to appoint a sub agent.
2. If the nature of work necessitates the appointment of a sub-agent. E.g., A
banker who is authorised to let a house and collect rents may entrust the work
to an estate agent.
a. If the agent appoints a sub agent with the knowledge of the principal
who does not object to it.
b. If the unforeseen emergencies make the appointment of a sub agent
necessary.
c. If the nature of authority is such as to necessitate appointment of sub
agent.
d. If the act to be done does not involve the use of the discretion and it is
ministerial only.
e. If the power of delegation can be inferred from the conduct of both the
principal and agent.
f. If the principal expressly permits the agent for appointment of a sub-
agent.
g. If the. principal knows that the agent intends to appoint a sub agent,
but still he does not object to it. Then it amounts to implied consent of
the principal.
C. RELATIONSHIP BETWEEN PRINCIPAL AND SUB-AGENT: (Sec. 192 &
193)
The legal relation between the principal and the sub agent depends upon the
question whether the appointment of the sub agent is proper or improper.
If the sub agent is properly appointed:
1. The principal is bound by the acts of the sub agent.
2. The agent is responsible to the principal for the acts! of the sub agent. So if
the sub agent misappropriates principal's money, then the agent is liable to
the principal.
3. The sub agent is responsible to the agent for his acts but not to the principal.
However, sub agent is liable to principal in case of fraud, misrepresentation
etc., and the principal can either sue the agent and/ or sub agent.

If the sub agent is not properly appointed:

1. The agent is responsible for the acts of the sub agent to the principal and third
parties.
2. The principal is not responsible for acts of the sub agent.
3. The sub agent is not responsible to the principal, but only to the agent.

D. SUBSTITUTED AGENT: (Sec, 194)

He is otherwise called co-agent
 1. Substituted agent is a person named by the agent for the principal. He
is an agent for the part of the agency entrusted to him. He is named by
the agent but at the request of the principal. Here the agent must hold
an express or implied authority from the principal to name another
person to act an agency business. So, such person is an agent of the
principal for that part of the world entrusted to him.
E.g., "P' authorises 'A', a merchant in Calcutta to recover the money
due to 'P' from T. 'A' instructs A's solicitor to take legal proceedings
against T for the recovery of the money. A's solicitor is a substituted
agent of 'P'.
2. The agent must exercise reasonable care as of a man of ordinary
prudence in selecting the substituted agents for his principal. If he does
so, then the agent is not responsible to the principal for the negligent
acts of the substituted agent so named.
E.g., 'P' instructs a merchant 'A' to choose a ship for him. A employs a
surveyor of good reputation to choose a ship for P. The surveyor makes
the choice negligently and the ship is un- seaworthy. 'A' is not responsible
for this to P. But the surveyor is responsible.

E. DIFFERENCE BETWEEN SUB AGENT AND SUBSTITUTED AGENT

Sub Agent Substituted Agent

1. Works under the control of the agent. Works under the control of the
principal.
2. There is no privity of contract between There is a privity of contract between
the sub agent and the principal. the principal and substituted agent.
3. The principal and the sub agent Here both can sue each other.
cannot sue each other directly.
4. The agent is responsible for the acts The agent is not responsible for the
of the sub agent acts of the substituted agent to the
principal.
5. The agent can delegate his works to The agent cannot delegate his work to
his sub agent. the substituted agent.

CHAPTER 6
EXTENT OF AGENT'S AUTHORITY
OR
RELATIONS OF PRINCIPAL WITH THIRD PARTIES
(UNDISCLOSED PRINCIPAL) (Sec: 187, 189, 226 to 236)
IMPORTANT
MODEL QUESTION:
1. Explain agent's authority. To what extent can an agent act to build the
principal.
2. Explain the express and implied authority of the agent.
3. What is the authority of an agent in emergency?
 4. What is agent's Ostensible or Apparent authority? When does it bind the
principal?
5. Explain the liability of the principal for the agent's wrongful acts.
6. Explain the circumstances under which the agent is personally liable.
7. Write short notes on: (a) Unnamed principal (b) Undisclosed principal.
SYNOPSIS:
A. Introduction
B. Actual or real authority (Sec. 186 & 187)
i. Express authority (Sec. 186)
ii. Implied authority (Sec. 187)
C. Ostensible or Apparent authority ;
D. Authority in emergency (Sec. 189)
E. Authority of special agents
F. Extent of agent's authority (Sec. 188)
G. Agent exceeding authority (Sec. 227 & 228)
H. Liability of principal for agent's wrongful acts (Sec. 238)
I. Rights and liabilities of undisclosed principal.
J. Personal liability of agent

A. INTRODUCTION:
The right or capacity of an agent to bind the principal is known as the 'authority of an
Agent'. When the agent has done any act agreed upon between himself and his
principal, then he is said to bind the principal.
If the acts of the agent are within the scope of the authority given to him by the
principal, then such acts bind the principal. In law, such acts done by the agent are
deemed to have been done by the principal himself.
The contracts entered by the agent's acts which are within the. scope of his authority
is enforceable against the principal.
This is explained in Sec. 226 of the Indian Contract Act which reads as follows
-
"Contracts entered into through an agent and obligations arising from acts done by
an agent, may be enforced in the same manner and will have the same legal
consequences, as if the contracts had been entered into and the acts done by the
principal in person"

Illustrations:
i. A buys goods from B, knowing that he is an agent for their sale, but not knowing
who is the principal. B's principal is the person entitled to claim from A. the price of
the goods and A cannot, in a suit by the principal, set off against that claim a debt
due to himself from B.
ii. A, being B's agent, with authority to receive money on his behalf, receives from C
a sum of money due to B. C is discharged of his obligation to pay the sum in
question to B.

The authority of the agent to bind the principal is divided as under:

i. Actual or real authority (Sec. 186 & 187)
a. Express authority (Sec. 186)
b. Implied authority (Sec. 187)
ii. Ostensible or apparent authority (Sec. 188)
iii. Authority in emergency (Sec. 189)
 iv. Authority of special agents

B. ACTUAL OR REAL AUTHORITY: (Sec. 186 & 187)

Actual or real authority of an agent is the authority actually conferred on him by the
principal. Such authority may be either express or implied.
i. Express authority: (Sec. 186)
The authority is express, when it is given by words spoken or written. A power of
attorney given to an agent is an example of express authority.

Attwood Vs. Munnings:

When a principal went abroad, he authorised his agent to carry on his business and
his wife to accept bills on behalf of his business. But his wife accepted bills on behalf
of the business conducted by the agent alone. The Court held that the principal was
not bound by it, as the business was not done on behalf of him.
However, this decision is criticised as the agent and third pafity had acted in good
faith for his sake.
So, now the law is changed that only if the third party had an opportunity to know the
limits of the agent's authority, then the principal is not bound by agent's acts even if a
third party suffers due to such agent's acts.
Reckitt Vs. Barnet:
The agent gave a cheque to a car dealer to purchase a car for himself, (out of the
principal's money). As it was the duty of third party to enquire whether the agent can
use the principal's money for his own purpose. The Court held that the principal was
not liable.

Similarly, the power of the agent to draw or endorse bills or notes does not authorise
him to borrow loans from third parties.

ii. Implied authority: (Sec. 187)

An authority is implied when it is to be inferred from the circumstances of the case.
Authority may be implied from the situation of the parties, the circumstances of the
particular case, the usage of trade or business or the conduct of the principal.
E.g., 'A' appoints 'B' his agent to carry on his business of publishing. 'B' purchases
papers and other materials and hires printers for carrying on the business. The
principal is bound by such purchases.

C. OSTENSIBLE OR APPARENT AUTHORITY:

Ostensible or apparent authority is the authority of an agent as it appears to others.
In other words, ostensible or apparent authority means that the agent has the
authority to do all such things which are usually done in that type of business.
For example, if it is the usual practice in the business to sell goods on credit, then
selling goods on credit by the agent is deemed to be within the scope' of his
apparent authority.
Watteau Vs. Fenwick, 1893, 1 QB 346:
The Court held that when it is said that an agent's act was within the scope of his
apparent authority, all that it means is that the act appeared to be authorised.
Sec. 188 of the Indian Contract Act defines the extent of the (Ostensible) authority of
an agent.
It reads - 'an agent having authority to do an act has authority to every lawful thing
which is necessary to do such act.
An agent having an authority to carry on a business has authority to do every lawful
thing necessary for the purpose of usually done in the course of conducting such
business.
Examples:
a. A is employed by B, residing in London to recover at Bombay a debt due to B.
A may adopt any legal process necessary for the purpose, of recovering the
debt and may give a valid discharge for the same.
b. A appoints B as his agent to carry on his business of a shipbuilder. B may
purchase timber and other material and hire workmen for the purpose of
carrying on the business.
Rules regarding ostensible authority:
1. If the act of an agent exceeds his actual or real authority but if it is within the
scope of his apparent or ostensible authority, then the principal is liable by the
act of the agent.
Examples:
a. The board may limit the monetary authority of a Managing director to a certain
value, but his ostensible authority includes all the usual authority of a
managing Director.
b. 'A' writes to 'B' that 'C' is his agent to sell his car. 'A' also has instructed 'C' to
only obtain the best offer from B and not to sell the car. But here, 'C' sells the
car for certain amount. This sale is binding on A. Here 'C' has ostensible
authority but not actual authority to sell.

Ryan Vs. Pilkington, 1959, 1 WLR 403:

A real estate agent was instructed by owners to fix a buyer for sale of a property.
The agent got a buyer and also accepted from him a deposit as agent of the owners.
The Court held that the agent had acted within the scope of his ostensible authority
though he was not authorised to accept deposit from the buyer.

2. An apparent authority once created continues to exist. It gets terminated only

by a notice to the third party and it cannot be terminated by private notice to
agent alone. '
Ryan Vs. Smas, 1848, 12 QB 460:
A man lived with his mistress, as husband and wife. He paid for all the mistress's
purchase. The Court held that the man was liable for the purchases made by her
even after he had left her, because the shop keeper was not informed of this fact.

3. If the third party knows of the limitation of the agent's ostensible authority, the
principal will not be liable for such act of the agent.
E.g., A sends goods to B for sale and gives him instructions not to sell below a fixed
price. C, an outsider is ignorant of B's instructions and so enters into a contract with
B to buy the goods at a price below the reserved price. Now A is bound by the
contract, but if C is already aware of B's instructions, then A is not liable.

D. AUTHORITY IN EMERGENCY: (Sec. 189)

Sec. 189 reads as under -
An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary
prudence, in his own case, under similar circumstances.
Illustrations:
 a. An agent for sale may have goods repaired if it be necessary.
b. A consigns provisions to B at Calcutta., with, directions to send them
immediately to C at Cuttack. B may sell the provisions at Calcutta, if they will
not bear the journey to Cuttack without spoiling.

E. AUTHORITY OF SPECIAL AGENTS:

The special agents are (a) factor (b) auctioneer (c) broker (d) commission agent (e)
banker and (f) del credere agent ,.
All the above agents are entrusted with work of specialised nature and hence they
have ostensible or apparent authority as to the usual customs and usages of the
trade. For the authorities of special agents.
(Please refer Chapter No. 3, Page No. 127)

F. EXTENT OF AGENT'S AUTHORITY: (Sec. 188)

The extent of an agent's authority, whether express or implied or ostensible or
apparent depends upon -
1. The nature of the business or trade he is appointed to do
2. Things which are usually done in carrying on the business
3. Things which are incidental to the business
4. The usual customs and usages of the trade
Dingle Vs. Hares
An agent was authorised to sell artificial manure. He had no authority to give any
warranty about the manure, but he gave warranty to the buyer that the manure
contained 30% phosphate of lime. When the warranty given by the agent turned out
to be false, the buyer sued the principal. The Court held that the principal was liable,
because it was usual in the manure trade to give such warranty.
G. AGENT EXCEEDING AUTHORITY (Sec. 227 & 228)
Sec. 227 & 228 speaks about the liability of the principal, when an agent exceeds his
authority and act.
Sec. 227 - principal how far bound, when agent exceeds authority:
When an agent does more than he is authorised to do and when the part of what he
does, which is within
his authority, can be separated from the part which is beyond his authority, so much
only of what he does as is within his authority is binding as between him and his
principal.
It means if the excess act of the agent is separable from his authorised acts, then the
principal is liable only for the authorised acts.

Illustration:
A, being owner of a ship and cargo, authorises B to procure an insurance for Rs.
4,000/- on the ship. B procures a policy for Rs. 4,000/- on the ship and another for
the like sum on the cargo. A is bound to pay the premium for the policy on the ship,
but not the premium for the policy on the cargo.
Sec, 228 - principal not bound when excess of agent's authority is not
separable:
When an agent does more than he is authorised to do and what he does beyond the
scope of his authority cannot be separated from what is within it, the principal is not
bound to recognise the transaction.
It means that if the excess act of the agent is not separable from his authorised acts,
then the principal is not at all liable but only for the authorised acts.
Illustration:
A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one
sum of Rs. 6,000/-. A may repudiate the whole transaction.

H. LIABILITY OP PRINCIPAL FOR AGENT'S WRONGFUL ACTS: (Sec. 238)

Sec. 238 of the Contract Act lays down the law of liability of the principal for the
wrongful acts of the agent.
The Section provides -
Effect on agreement of misrepresentation or fraud by agent -
Misrepresentations made or frauds committed by agents acting in the course of their
business for their principals, have the same effect on agreements made by such
agents as if such misrepresentations or frauds had been made or committed by the
principals, but misrepresentations made or frauds committed by agents, in matters
which do not fall within their authority do not affect their principals.
Illustrations:
a. A, being B's agent for the sale of goods, induces C to buy them by a
misrepresentation, which he was not authorised by B to make. The contract is
voidable, as between B and C, at the option of C.
b. A, the captain of B's ship, signs bills of lading without having received on
board the goods mentioned therein. The bills of lading are void as between B
and the pretended consignor.
Rules regarding principal's liability for agent's wrongful acts:
1. The wrong must have been committed in the course of the .principal's
business.
2. Though the particular act is not authorised by the principal if it. is done in the
course of carrying on the authorised business, the principal is liable.
3. For agent's torts - The doctrine of respondent superior (let the superior
answer) is applied to make the principal liable where the agent commits a tort
while engaged in the business of the principal or while acting in the course of
and within the scope of his agency.

I. RIGHTS AND LIABILITIES OF UNDISCLOSED PRINCIPAL:

The principals are divided into three types:
1. Named principal
2. Unnamed principal
3. Undisclosed principal

1. Named Principal:
Here, the principal's existence and name are disclosed by the agent to
outsiders/contracting parties.
The following are the rules for liability/non-liability of the principal:
a. The principal is liable for the agent's acts with third parties when they are
done.
i. within the scope of his authority
ii. in the course of his employment as an agent
iii. necessary for the proper execution of his authority
So, contracts entered into through an agent will have the same legal consequences
as if the contracts have been entered into by the principal himself.
 b. When an agent exceeds his authority, the principal is liable for that part of the
work which is within his authority, and which can be separated from the part
which exceed his authorities. (Sec. 227)
c. If the acts exceeding his authority cannot be separated from the rest of the
acts which are within agent’s authority, then the principal can repudiate the
whole contract. (Sec. 228)
d. The named principal is bound by the notice given to or Information obtained
by the agent in the course of the business of the principal. (Sec. 229)
e. If the principal creates belief with the contracting party that an agent's
unauthorised acts are authorised, it is treated as an 'agency by estoppel' and
binding on the named principal. (Sec. 237)
f. The principal is liable for the misrepresentations or frauds committed by the
agent in the-course of his business for the principal. (Sec. 238) .
2. Unnamed, principal:
Here, the principal's name is not disclosed to outsiders/contracting parties.
If the agent who contracts for a. principal doesn't disclose the principal's name, even
then the principal is liable for the contract of the agent, unless there is a trade
custom or usage which makes the agent personally liable.
If the third-party contracts with the knowledge about the existence of the principal,
then he cannot sue the agent. In case, the agent does not disclose the identity of
principal, then the agent is personally liable. .
3. Undisclosed principal:
Here the agent neither discloses the existence of his principal, nor his representative
character to outsiders/contracting parties. The third party gets an impression that the
agent is contracting in his individual and independent capacity.
The following are the rights of the contracting parties against for the undisclosed
principal:
a. Principal's position:
When an undisclosed principal is subsequently discovered or he himself intervenes,
the contracting party may sue the principal or agent or both. The principal may
require performance of the contract but he must allow the third party the benefits of
all payments made by the third party to the agent. (Sec. 231)
b. Agent's position:
The agent has all the rights of an agent against the principal, but personally liable to
the third party. He may be sued and he can sue the third party in his agent's
capacity.
c. Position of third party:
i. The third party may either sue the agent or principal or both.
ii. If the principal is "disclosed before - completion of the contract, then the
other party may refuse to fulfill the contract on the ground that he would
not have entered into the contract had he known who the principal was or
that the agent was not the principal. (Sec. 231)
iii. The third party can claim set off against the agent. The^ principal can only
obtain such performance as is subject to the right and obligations existing
between the agent and tha other party to the contract. (Sec. 232)
d. Pretended Agent:
A person who falsely represents himself to be the authorised agent of a principal is
known as a pretended agent. He may induce a third party to deal with him by such
pretence. In such cases, the person who posed as agent is liable to make
compensation to the third party for his loss or damage. The agent has no right to
proceed against the third party for the contract.

J. PERSONAL LIABILITY OF AGENT:

Generally, on a contract entered into by an agent, only the principal can enforce it
and can also be held liable. The Indian Contract Act Sec. 230 specifies that an agent
cannot be personally held liable and cannot enforce a contract entered into by him
on behalf of his principal (Unless it is expressed in the contract).
But in the following cases, an agent is held personally liable:
1. The third party may sometimes enter into a contract with the agent stipulating
that the agent will be personally held liable iri case of breach of contract. In
such a case, if the agent agrees to such condition, then he is personally liable.
2. If the agent acts exceeding his limit of authority fixed by the principal, then he
is personally liable.
3. If the trade or custom makes the agent personally liable unless there is
contract to the contrary, then he is personally liable.
4. If the agent acts for an incompetent principal (E.g., minor or a lunatic), then
the agent is held personally liable.
5. If an agent signs his name in the contract without disclosing that he is acting
as an agent, then he is personally liable.
6. If the agent acts on behalf of a principal (merchant) residing abroad (in case
of sale or purchase of goods), then he is personally liable. However, he can
be excluded from liability by an express provision in the contract.
7. If the agent acts on behalf of an undisclosed principal, then he is personally
liable. However, if the principal is discovered by the third party, then the
principal is also liable.
8. If the agent acts for a principal not in existence. E.g., contracts entered into by
an agent on behalf of promoters of a company to be incorporated, then the
agent is personally liable.
9. By mistake or fraud, if an agent receives money from a third party, then he is
personally liable to pay it back. Similarly, if he gives money to a third party by
mistake, then he can also get it back.
10. If the agent has interest in the subject matter of the contract, it is said that his
authority is coupled with interest. In such a case, the agent has right to sue or
be sued to the extent of his interest in the subject matter.

CHAPTER 7
DETERMINATION OF AGENCY
OR
TERMINATION OF AGENCY (Sec. 201 to 208)

MOST IMPORTANT
MODEL QUESTIONS:
 1. a. Discuss the different modes in which the authority of an agency may
terminated b. State the effect of death, insanity and insolvency of
principal or agent on a contract of agency
2. a. When is agency irrevocable? b. What is "authority coupled with
interest"? Is it recoverable?
3. 3.Whait are the various methods by which agency is terminated?
Discuss the effect of such termination.

SYNOPSIS:
A. Introduction
B. Modes of Termination of Agency (Sec. 201)
C. Effect of Termination
D. Irrevocable Agency

A. INTRODUCTION:
Termination of agency means bringing the relationship between the principal and the
agent to an end.

B. MODES OF TERMINATION OF AGENCY: (Sec. 201)

Like any other contract, agency can be terminated by two methods -
I. By act of Parties II. By operation of Law

Modes of termination of Agency:

I. BY ACT OF PARTIES
1. Agreement
2. Revocation by the Principal
3. Revocation by the agent
4. Renunciation of business by agent or principal
II. BY OPERATION OF LAW:
1. Performance/Completion of agent’s business
2. Expiry/Efflux of the time
3. Death of either party (or) Insanity of either party
4. Insolvency of the other party
5. Destruction of the subject matter
6. Principal becoming an alien enemy
7. Dissolution of a company
8. Termination of sub agent's authority

A. BY ACT OF PARTIES:
1. Agreement:
As the relationship of the principal and agent is created by an agreement, it can also
be brought to an end at any stage or at any time by mutual agreement.

2. Revocation by the principal: (Sec. 203)

The principal can terminate the agency by revoking the authority given to the agent
at any time before the authority has been exercised so as to bind the principal. This
is done by giving a notice to the agent before the act is begun. If the agency is a
continuous one, then notice should be given both to the agent and the third parties.
3. Revocation by the agent:
By express renunciation by the agent, the termination is done by giving reasonable
notice to the principal. If the agency is for a particular period, then for any loss due, it
must be paid to the Principal.
The revocation may be express or implied by the conduct of the principal.
For e.g., 'P' employs 'A' to let out his house.to 'P' later let it out himself. This is an
implied revocation of A's authority.
Revocation is subject to the following four rules:

a. Revocation operates prospectively (Sec. 204)

Even if the agent has partly exercised his authority and done part of the
work, the principal can revoke the agency only for the future work.
Illustration:
A, authorises B to buy 1000 bales of cotton on account of A and to pay for
it out of A's money remaining in B's hands. B buys 1000 bales of cotton in
his own name, so as to make himself personally liable for the price. A
cannot revoke B's authority so far as regards payment for the cotton, but
only for future transactions.
b. Notice of revocation: (Sec. 206)
When an agency has been created for a fixed period, then a reasonable
notice is necessary to terminate the agency.
c. Liability to compensate: (Sec. 205 & 206)
If the agency is terminated without reasonable notice, then any loss to the
agent must be compensated by the principal. If an agency has been
created for a fixed period, then compensation is payable to the agent for
its premature termination and without sufficient cause.
d. Agency coupled with interest (Sec. 202)
When the agency is coupled with interest i.e., when the agent has
personal interest in the subject matter of agency, then the agency cannot
be revoked. It is called irrevocable agency.
Illustration:
A gives authority to B to sell A's land and to pay himself out of the proceeds, the
debts due to him from A. A cannot revoke this authority, nor can it be terminated by
his insanity or death.
4. Renunciation of business by agent:
An agent can renounce an agency business by giving a reasonable notice to the
principal. However, if the agency is for a fixed period, then for the renunciation of
agency by an agent without sufficient cause, the agent has to compensate the
principal.

B. BY OPERATION OF LAW:
1. Performance of the contract/Completion of agency business:
If the agency is for particular object, then the agency gets terminated when
the object is accomplished or when it becomes impossible.
2. Expiry of time:
If the agency is for a fixed p£hod, then it comes to an end as soon as the
period is over, even if the work is not over.
3. Death or insanity:
Death or insanity of the agent or the principal terminates the agency. The
agent must take reasonable steps for the protection and preservation of
interests entrusted to him upon the death of the principal (Sec. 209)
 4. Insolvency: (Sec. 201)
If the principal becomes insolvent, then the agency gets terminated.
Though the Act is silent on this aspect, it is accepted view that insolvency
of an agent terminates the agency.
5. Destruction of subject matter:
An agency which deals with a particular subject matter gets terminated,
when the subject matter is destroyed.
For example, A's vehicle is to be insured and 'P' appoints 'A' to effect it.
Before 'A' could do so, the vehicle is destroyed in an accident.
6. Principal becoming an alien enemy:
If the agent and the principal are aliens (residing in enemy nations), even
then the agency is valid if both
the countries are in peaceful terms. But if war breaks out between the two
nations, then the agency gets terminated automatically.
7. Dissolution of a company:
If a company is dissolved, an agency with or by the company comes to an
end.
8. Termination of sub agent's authority: (Sec. 210}
It the agent's authority is terminated, then the sub agent's authority is also
put to an end.

C. EFFECT OF TERMINATION:
a. Termination of agency:
1. The termination takes effect for the agent and third parties as
and when they come to know of it.
E.g., A an agent is authorised to sell the goods on behalf of B.
Subsequently B revokes A's authority to sell. Before the letter of
revocation is received by A, A sells the goods. The sale is binding on
the principal.
2. The revocation of agency as regards the agent and third
parties may take effect at different times. Only after public
notice, as far as third parties are concerned, the revocation of
agency takes place.
3. If an agent enters into a contract with a third party even after
the termination of his authority knowingly, but if the other party
without knowing the termination of agency acts in good faith,
then the agent's act is binding on the principal.
E.g., 'P' entrusts with 'A' negotiable instruments endorsed in blank. 'A'
sells them to 'T' in violation of orders from P. The sale is good.

b. Termination of sub agency: It is terminated as soon as the main

agency is terminated.
c. Termination of substituted agency: Even if the authority of the agent
is terminated, .the authority of the substituted agent will not
automatically be terminated.

D. IRREVOCABLE AGENCY:

When an agency cannot be terminated, then it is said to be irrevocable.

 1. Agency is coupled with interest: (Sec. 202)
If an agency is created for accruing some benefits to the agent other than his
remuneration, then it is said to be coupled with interest. Such an agency cannot
be terminated.
2. Agent has incurred a personal liability:
When an agent has incurred a personal liability, then the principal cannot
revoke the agency exposing the agent to the risk he has incurred.
3. Agent has partly exercised his authority: (Sec. 204)
The principal cannot revoke the agency, if the agent has partly exercised his
authority regarding the acts already performed in the agency.

PROBLEMS:
LAW OF AGENCY (The Indian Contract Act, 1872)

PROBLEM NO. 1
‘A’ entrusts to 'B' a minor with a diamond ring worth Rs. 75,000/- instructing
him not to sell it for an amount below Rs. 70,000. B sell it to ‘C’ for Rs. 50,000.
Examine the position of A, B and C.
ANSWER:
The role of B is that of an Agent acting on behalf of the Principal, A. In this regard,
reference is made to Sec. 11 of the Indian Contract Act, 1872 which talks about the
competency of persons who can enter into a contract. It reads, "Every person is
competent to contract who is of the age of majority according to the law to which he
is subject, and who is of sound mind and is not disqualified from contracting by any
law to which he is subject"
It is clearly spelt out in the law that a contract with a minor is a void, which means it
is not enforceable.
Under such circumstances, at the outset, B is not competent to act as an Agent of A
to sell the diamond ring. Even providing he does act as such, C's contract with B for
purchase of the diamond ring is a void contract as he has transacted with a minor
who has acted on behalf of another person. The question of the price for which the
ring was sold is immaterial here since the contract as such stands void.

PROBLEM NO. 2
Kamala purchased one bag of raw rice from the seller on credit as her
husband on office earning Rs.25,000 per month left the house of urgent office
duty without making allowance to his wife by over sight. He returned after one
month and refused to settle the bills with the seller. Is the seller entitled to any
remedy?
ANSWER
Yes.
Sec. 187 of the Indian Contract Act, 1872, defines (Express and) Implied authority of
Agents. An authority is said to be implied when it is to be inferred from the
circumstances of the case and things spoken or written in the ordinary course of
dealing may be accounted circumstances of the case.
It means, the agency is inferred from circumstances. It arises from the conduct,
situation or relationship of parties. One of the types of agency by implied agreement
is 'agency by co-habitation'.
When a man and a woman live as husband and wife, then the wife can get all
necessaries on credit from a shopkeeper. The husband is liable for the articles sold
to the wife subject to the fact that they must be living together in a domestic
establishment of their own.
In the case cited above, Kamala purchased one bag of rice on credit as her husband
was away from home on official work and she was not having money for paying the
shopkeeper. As per the provisions of Sec. 187 of the Indian Contract Act, 1872, the
wife has implied authority to act on behalf of her husband and the husband is liable
to pay for any credit purchase made by her in respect of day to day necessaries.
Thus, the shopkeeper is entitled to proceed against Kamala's husband legally by
filing a case for recovery of the price of one bag of rice.

PROBLEM NO. 3
‘D’ a carrier discovers that a consignment of tomatoes owned by 'E’ has
deteriorated badly before the destination is reached. He, therefore, sells the
consignment for about a third of the market price. 'E' sues ‘D' for damages.
Decide.

ANSWER:
As decided in the famous case law, Jebara Vs. Ottoman, 1928, AC 269, Agency of
necessity develops from an original and subsisting agency and only applies itself to
unforeseen events not provided for in the original contract. Thus, in certain
circumstances, the law may compel a person to act as an agent for another person
without the principal's consent. Such agency is called as 'agency by necessity'.
Sec. 189 of the Indian Contract Act speaks about agent's authority in an emergency.
An agent has authority in an emergency to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary
prudence, in his own case, under similar circumstances.
Going by the above provisions laid down under this section, ‘D', the Carrier has
acted as an agent of 'E' who has entrusted a consignment of tomatoes for transit.
Since ‘D' apprehended that the tomatoes may get spoilt before they reach the
designated destination, he acted with prudence and disposed off the tomatoes for
one third of their value which otherwise would have been totally destroyed.
As 'D' has acted within the permissible limits of his authority, 'E' has no case against
him and 'D' is not liable to compensate 'E’.

PROBLEM NO. 4
"A" directs "B" a solicitor to sell his estate by auction and to employ an
auctioneer for the purpose. 'B’ names (C' as an auctioneer to conduct the sale.
Discuss the legal position of *C\
ANSWER:
Sec. 190 of the Indian Contract Act, 1872, provides that an Agent cannot lawfully
employ another person to perform acts which he has expressly or impliedly
undertaken to perform personally by himself.
However, this rule has some exceptions where if the nature of work necessitates the
appointment of a sub-agent, then the Agent has the authority to do so. In the given
problem, since A has authorised B to employ C, C's employment is legal and as per
Sec. 191, his position is that of 'Sub Agent'.
Sec. 191 defines a Sub-Agent as a person who is employed by and acting under the
control of the original agent in the business of agency. The relation between the
original agent and the sub-agent is that of the Principal and Agent.
Accordingly, in the instant case, A the Principal directs B, his Agent to sell his estate
by auction and for this purpose appoint an auctioneer. Since sale by auction involves
a procedure and is handled by experts in that field, B employs C for the purpose.
The legal position of C, as a sub-agent of A is that: C is responsible to B for his acts
and not to A. However, he is responsible to A in case of fraud, misrepresentation
etc., and A can either sue B and/or C in this regard.

PROBLEM NO. 5
'A’ without authority buys goods for 'B’. 'B' sells part of these goods to 'X' on
his account. As regards the rest of the goods he denies A's authority to buy
for him. 'A’ contends that (B' is bound by the purchase. Discuss and decide.
ANSWER:
Sec 196 of the Indian Contract Act, 1872, states that where acts are done by one
person on behalf of another, but without his knowledge or authority, he may elect to
ratify or to disown such acts. If he ratifies them, the same effects will follow as if they
had been performed by his authority.
Sec. 197 states that Ratification may be expressed or implied in the conduct of the
person on whose behalf the acts are done.
Sec. 199 states that a person ratifying any unauthorized act done on his behalf
ratifies the whole of the transactions of which such act formed a part.
The effect of agency by ratification is that, it relates back to the original date on
which it is entered into by the Agent. It is based on the maxim 'Omni rati habitio retro
rahitur et mandato priori aequiparathur' It means that "ratification of an act already
done has a retrospective effect".
Now, going by the above provisions of the sections of the Act, A's act of buying
goods on behalf of B was without any authority given by the latter. However, B sells
a part of those goods to X which gives the effect of ratification of A's act which is
implied by his conduct. Since B has ratified A's act already by selling a part of the
goods, now he cannot deny authority to A to buy for him.
A's contention is quite in order as the ratification of B has a retrospective effect, in
that, the entire transaction of purchase of goods by A has got ratified and hence B is
liable for the whole purchase by A.

PROBLEM NO. 6
‘X' holds, a lease from 'V’, terminable on 3 months' notice. 'Z' an unauthorized
person, gives a notice of termination to ‘X’ Can the notice be ratified by 'Y'?
ANSWER
No.
The above instance is a classic case under Sec. 200 of the Indian Contract Act,
1872 which states that Ratification of unauthorized act cannot injure third person.
An act done by one person on behalf of another, without such other person's
authority, which if done with authority, would have the effect of subjecting a third
Person to damages or of terminating any right or interest of a third person, cannot by
ratification, be made to have such effect.
The above provision means that an act of an unauthorized person which shall give
rise to damages or termination of any right on the part of a third person cannot be
ratified by the person on whose behalf it was acted upon (by the unauthorized
person).
In the above case, ‘Y' is the lessor and ‘X' is the lessee and thus the contract is
between them for a lease terminable on 3 months' notice. ‘Z’ without any authority
from ‘Y’ gives a notice of termination of the lease to ‘X' which if given with authority
would have the effect of termination of lease. This act of cannot be ratified by Y as it
shall injure in the process.

PROBLEM NO. 7
‘A who owes Rs.50,000/- to ‘B' appoints him an agent to sell his landed
property with an instruction to appropriate the amount due to him and to hand
over the balance 'A’. Can ‘A’ revoke.
ANSWER:
No. As per Sec. 202 of the Indian Contract Act, 1872 when the agency is coupled
with interest, i.e., when the Agent has personal interest in the subject matter of
agency, then the agency cannot be revoked. It is called Irrevocable Agency.
In the above case, 'A* owes ‘B’ Rs. 50,000/- and appoints him as an Agent to sell his
landed property and adjust the amount owed to him out of the sale proceeds. Thus,
on the part of ‘B’, there arises an agency coupled with interest as he is interested in
appropriating the money due to him from the transaction of sale and pay only the
balance back to ‘A’.
In view of the above provision, ‘A’ cannot revoke the authority given to 'B' as the
latter is an Agent coupled with interest.

PROBLEM NO. 8
‘P’ gives authority to ‘A’ to sell ‘P’s land and to pay himself, out of the
proceeds, the debt due to him from ‘P’. Subsequently ‘P’ revokes the authority
given to ‘A’. Advise 'P’
ANSWER:
Sec. 202 of the Indian Contract Act, 1872 states that if an agency is created for
accruing some benefits to the agent other than his remuneration, then it is said to be
coupled with interest.
When the agency is coupled with interest, i.e., when the agent has personal interest
in the subject matter of agency, then the agency cannot be revoked. It is called an
irrevocable agency.
Thus, in the instant case, 'A', the agent of 'P' has personal interest in the subject
matter, which is the land as he needs to appropriate the amount due to him from ‘P’.
Since it is an agency coupled with interest, ‘P' cannot revoke the authority given to
'A’. The revocation by 'P' would hold no sanctity and 'A' would nevertheless continue
to be authorized for sale of the land.

PROBLEM NO. 9
‘A’ gives authority to 'B' to sell ‘A's land and to pay himself out of the proceeds the
debt due to him from 'A'. ‘A’ wants to revoke the authority before the sale. Can he do
so?
ANSWER:
(Please Refer Problem No. 7 & 8 above)
 PROBLEM NO. 10
Owner *A’ hands over the horse to his Agent ‘B' and instructed not sell under
any circumstances. But his agent 'B' sells to 'C’ for Rs.50,000/- and
misappropriated the money. Decide.
ANSWER:
Sec. 211 of the Indian Contract Act, 1872 talks about the duty of an agent to work as
per the principal's directions.
It states that the agent should carry out the work according to the lawful directions
and instructions given by the principal. If he does not follow the directions, he should
make good any loss to the principal.
In the instant case, the principal, 'A' instructs his agent, to retain the horse in his
custody and not to sell the same under any circumstances. The agent 'B' goes
against the direction of his principal by not only selling away the horse for a value of
Rs. 50,000/- but also misappropriating the money so got.
The owner, 'A' may file a suit for damages from 'B' for violating his instructions and
for misappropriation of the money got from the sale of the horse

PROBLEM NO. 11
'A’ an agent of 'B’ sells the goods to ‘C’ without proper enquiry as to the
solvency of 'C’ who was insolvent at the time of sale. Principal wants to sue
the agent. Advise the principal.
ANSWER:
According to Sec. 212 of the Indian Contract Act, 1872, an agent is bound to conduct
the business of the agency with as much skill as is generally possessed by persons
engaged in similar businesses. The agent is liable to compensate his principal for the
direct consequences of his neglect.
In the above case, 'A', the agent of ‘B' has sold the goods to ‘C' without proper
inquiry as to the solvency of ‘C' who was insolvent at the time of sale. Thus, 'A' has
failed to conduct the business of agency with reasonable care. So, the principal ‘B'
can successfully sue the agent.

PROBLEM NO. 12
"A" directs his agent "B" to buy a certain house for him. "B" tells "A" that it
cannot be bought. Later "A" discovers that "B" has bought the house for
himself. What is the remedy open to "A"?
ANSWER:
Sec. 215 of the Indian Contract Act, 1872 brings out the duty of the Agent as not to
deal agency business on his own account.
As per Sec. 216 of the Indian Contract Act, 1872, if an Agent deals with the business
of agency on his own account without the Principal's consent, then the Principal may:
 Repudiate the transaction if there is any dishonest concealment of facts;
 Repudiate the dealings which are disadvantageous to him;
In the above case, B who is the Agent of A initially states that the house specified by
A cannot be bought but has on his own account bought the house for himself. Since
it is concealment of a fact which also goes against the interests of the Principal, A
may compel B to sell it to him at the same price he bought as provided for u/s 216 of
the Indian Contract Act.

PROBLEM NO. 13
 'A' directs ‘B’ to sell his estate. 'B’ on look over the estate before selling it,
finds a mine on the estate unknown to ‘A’. ‘B’ informs 'A' that he wishes to buy
the estate for himself, but conceals the discovery of the mine. ‘A’ allows 'B' to
buy in ignorance of the existence of the mine. Decide.
ANSWER:
Sec. 215 of the Indian Contract Act, 1872 specifies the duty of the Agent as to not
deal with agency business on his own account.
If an agent deals with the business of agency on his own account without the
principal's consent, then the principal may:
 Repudiate the transaction if there is any dishonest concealment of facts.
 Repudiate the dealings which are disadvantageous to him.
In the instant case, A is unaware of the presence of the mine on the estate which he
puts up for sale. B, the agent of A deliberately conceals the fact of existence of the
mine and obtains the consent of A to buy the estate himself to take benefit of the
presence of the mine. As this is a clear case of dishonest concealment of a material
fact on the part of the Agent to benefit himself, A has the power to repudiate the
contract as brought out under the above section of the Act.

PROBLEM NO. 14
Bala entrusts to Bhavani, an agent, her articles for sale. Bhavani sells them for
Rs. 25,000 and also receives Rs. 1,000 as secret commission. Bhavani pays
Rs.25,000 to Bala. Bala claims the secret commission received by Bhavani.
Decide.
ANSWER:
The Agent's relationship with the Principal is of fiduciary nature and hence, absolute
faith is necessary in the conduct of agency business.
As provided u/s 216 of the Indian Contract Act, 1872, If an Agent, without the
knowledge of his principal, deals in the business of the agency on his own account
instead of on behalf of on account of his principal, the principal is entitled to claim
from the Agent, any benefit which may have resulted to him from the transaction.
The Principal has the right to recover the amount from the Agent or sue him and the
Third party or refuse to pay commission to the Agent or dismiss the agent or
repudiate the contract with the other party.
As such, it is clear that Bhavani who is the Agent of Bala has acted in violation of the
rules implicit in an Agency agreement, by accepting a secret commission of Rs.
1000/- from the Buyer. Therefore, Bhavani is legally bound to pay the commission to
Bala else the latter has the right to take recourse under any of the above avenues
open to him under the law.

PROBLEM NO. 15
‘B’ entrusts to 'A’ an agent his articles for sale. 'A' sells them from Rs.2,000
and also receives Rs.500 as secret commission. A pays Rs.2,000 to B. 'B’
claims the secret commission received by A. Decide.
ANSWER:
The Agent's relationship with the Principal is of fiduciary nature and hence, absolute
faith is necessary in the conduct of agency business.
As provided u/s 216 of the Indian Contract Act, 1872, If an Agent, without the
knowledge of his principal, deals in the business of the agency on his own account
instead of on behalf of on account of his principal, the principal is entitled to claim
from the Agent, any benefit which may have resulted to him from the transaction.
The Principal has the right to recover the amount from the Agent or sue him and the
Third party or refuse to pay commission to the Agent or dismiss the agent or
repudiate the contract with the other party.
As such, it is clear that ‘A’ who is the Agent of B has acted in violation of the rules
implicit in an Agency agreement, by accepting a secret commission of Rs. 500/- from
the Buyer. Therefore, ‘A’ is legally bound to pay the commission to B else the latter
has the right to take recourse under any of the above avenues open to him under the
law.

PROBLEM NO. 16
‘A’ an agent of B was authorized to sell manure, but he had no authority to
give any warranty about the manure. Yet, he warranted to the buyer that the
manure contained 30% of Phosphate of lime. The warranty turned out to be
false. Now can the customer file the suit against 'B’, the principal? Why? Give
reasons.
ANSWER:
The Principal is liable for the wrongful acts of the Agent as provided u/s 238 of the
Indian Contract Act, 1872.
The above section provides that misrepresentation or fraud committed by agents in
the course of their business for their principals, have the same effect on agreements
made by such agents as if such misrepresentations or fraud had been made or
committed by the principals. But misrepresentations made or fraud committed by
agents, in matters which do not fall within their authority do not affect their principals.
In the instant case, A was authorized to sell manure but was not vested with the
authority to give any warranty about its composition etc. Yet, A exceeded his
authority and gave a warranty to the buyer which proved to be false.
The customer in this situation cannot file a case against the principal as the latter is
not responsible for the warranty given whereas his agent A is liable as he had acted
outside the scope of his authority.

PROBLEM NO. 17
Preethi who owes Rs. 1,50,000 to Buvana appoints her as agent to sell her
landed property at Chennai. Buvana has also been instructed to appropriate
what is due to her and hand over the balance to Preethi. Can Preethi revoke
the authority given to Buvana?
ANSWER:
As per Sec. 202 of the Indian Contract Act, 1872, Preethi cannot revoke the authority
to sell her landed property at Chennai given to Buvana, because it is an agency
coupled with interest of the agent.
Sec. 202 reads -
When the agency is coupled with interest i.e., when the agent has personal interest
in the subject matter of agency, then the agency cannot be revoked.
It is called irrevocable agency. The facts of the Illustration of Sec. 202 are similar to
the given problem.
The facts of the illustration are:
A gives authority to B to sell A's land and to pay himself out of the proceeds, the
debts due to him from A. A cannot revoke this authority, nor can it be terminated by
his insanity or death.
 UNIT 4
THE INDIAN PARTNERSHIP ACT, 1932
SYLLABUS

Indian Partnership Act - Definition - Nature, Mode of determining the existence of

Partnership - Relation of Partner to one another - Rights and duties of partner —
Relation of partners with third parties - Types of partners – Admission, Retirement ,
and Expulsion of partners Dissolution of Firm - Registration of Firms.

CHAPTER 1
DEFINITION, ESSENTIALS AND NATURE OF PARTNERSHIP (Sec. 4)

IMPORTANT

MODEL QUESTIONS.
1. Discuss the essential elements of a "partnership".
2. Discuss the essential elements of partnership. What are the' tests for
determining the existence of partnership?
3. Define partnership and discuss the mode of determining its existence.
4. Write Short Note on (a) Partnership (b) Partnership Deed.
SYNOPSIS:
A. Definition
B. Explanation
C. Characteristics of partnership
1. Association of tivo or more persons
2. Agreement
3. Business
4. Sharing of Profits
5. Mutual Agency
D. Formation of partnership
E. Partnership Deed

A. DEFINITION
i. Section 4 of the Indian Partnership Act, 1932, defines partnership as follows:
Partnership is the relation between two or more persons who have agreed to share
the profits of a business carried on by all or any one of them acting for all.
ii. The English partnership Act defines partnership as "the relation which
subsists between persons carrying on business in common with a view of
profit".
iii. Sir Fredrick Pollock defines 'Partnership' as - The relation which subsists
between person who have agreed to share the profits of a business carried on
by all or any of them on behalf of all them.

B. EXPLANATION
1. The 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 the 'firm's name'.
2. Law does not confer legal personality to- the firm and hence has no
independent personality apart from its partners. Only for the purposes of
assessment of income tax, firm is separately dealt with from the partners
constituting it.
3. A firm cannot become a member of another Partnership firm though its
partners can join any other firm as partners.
4. There are four essential features of a partnership, namely -
a. That it is the result of an agreement
b. That it is organised to carry on a business
c. That the persons concerned agree to share the profits of the business
d. That the business is to be carried on by all or any of them acting of all

C. CHARACTERISTICS OF PARTNERSHIP:

1. Association of two or more persons:

The term "person" here does not include firms and limited companies, As such two
partnerships, though all the partners of the firms may form a partnership out of their
respective firms, provided their number does not exceed the statutory limit. The
number of partners in a firm carrying on banking business should not exceed 10 and
in any other business 20. If the number exceeds 20 any partnership becomes an
illegal association.
Partnership is a special type of contract. Since partnership is a contract, there should
necessarily be more than one person.
In M. Kasam Vs. Commissioner of Income Tax, ILR 1937 (2) Call 160, the Court
observed to constitute a partnership, there should be a plurality of persons. Just as
no man can contract with himself, similarly no man can become a partner with
himself.
A Partnership has its source in a contract. It is not a creature of law arising from
status as m the c Hindu Joint family trading concern.
In Mahabir Cold Storage Vs. C.I.T., AIR 1991 SC 1357, the Court observed under
the Indian Partnership Act, 1932, the partnership firm registered is neither a person
nor a legal entity. It is merely a collective name for the individual members of the
partnership. A firm as such cannot be a partner in another firm though its partners
may be partners in another firm in their ' individual capacity".

2. Agreement:
The partnership relation is one of a contractual nature and it springs from an
agreement. The agreement may be express (i.e., oral, written) or implied.
Section 5 declares that a partnership is created by contract and not by status.
An agreement to create a partnership may arise from the conduct of the parties
concerned.
Pratibha Rani V. Suraj Kumar, (1985) 2 SCC 370:
The Supreme Court held that a wife entrusting her stridhana (personal property) to
her husband does not amount to an agreement of partnership even though the
husband was using the property for running a business. The husband was therefore
neither a partner nor a joint owner of the property
He could be punished for criminal breach of trust he misappropriates the wife's
money.

3. Business:
A partnership can be formed only for the of carrying on business. Business includes
every trade, occupation and profession. The Word "Business" conveys the idea of a
running business, involving numerous transactions.
In Smith Vs. Anderson (1880) 15 Ch D 247:
James LJ said' 'business' refers to any activity which if successful would result in
profit.

Gibson Vs. Lupton, 9 Being 297 (1832) 2 RR LJ CP 4:

The Court held that when certain persons joined in the purchase of wheat with the
intention of dividing among themselves and paying for it equally, since they were not
interested in profit or loss, they were not partners.
The idea involved in a partnership is joint operation for making gains. Therefore,
societies for religious or charitable purposes are not partnerships. Similarly,
voluntary associations for the purpose of carrying on temporary functions of a social
character are also not partnership.
A partnership may exist in a single business venture. It may be temporary or
permanent, but the business must be in existence.

4. Sharing of Profits:
The object of partnership must be to make profit. If any person claiming to be a
partner is deprived of his rights to share in the profit of the business, he is not a
partner, as his carrying on of business is not for profit.
The division of profits is an essential condition of the existence of a partnership.
There was a time when sharing of profits was considered to be the final test for the
determination of the existence of a partnership.
Now the rule is changed and it states that every man who receives profits need not
necessarily be a partner. Sharing of profits is only a prima facie evidence of the
existence of a partnership, but it is a conclusive evidence.
5. Mutual agency:
The definition of partnership in section 4 concludes with the words that the business
may be carried on 'by all or any of them acting for all'. Thus, the person carrying on
the business acts not only for himself but for others also.
A partner is both an agent and the principal. A partner is an agent of the firm in his
dealings for the business of the firm. He can bind the firm by his acts within the
scope of his authority done in firm's name and for the. purpose of the firm.
A partner is a principal concerning the other partners. The relation among
themselves is that of principals and agents for one another.

D. FORMATION OF PARTNERSHIP:
The Partnership agreement may be made orally or in writing or may be implied. All
the essentials of a valid contract must be present. Free consent competency of the
partners, lawful object and other formalities should be complied with.
A minor may be admitted to the benefits of partnership with the consent of all the
partners. Consideration is not necessary to create partnership.
The agreement of partnership may be express or implied. The documents which
contain the agreement for partnership is called the partnership deed.
Any person who is a major, of sound mind and not disqualified from contracting by
any law, may enter into partnership.

E. PARTNERSHIP DEED:
The agreement creating a partnership may be express (oral or written) or implied,
i.e., may be inferred from the conduct of the partners and outsiders or from the
circumstances of the case.
If the Partnership Agreement is in writing, then it is called Partnership Deed. It must
be stamped as required by the Indian Stamp Act 1889. The partnership deed is not a
public document like the Memorandum or Articles of Association of a company.

CONTENTS OF A PARTNERSHIP DEED:

The partnership deed must contain the following particulars:
1. The name and address of the firm and partners
2. The nature of the business.
3. The term or duration of partnership
4. The amount of capital to be invested by each partner.
5. The drawings that can be made by each partner.
6. The interest on capital and charge on drawings.
7. Rights, duties and remuneration of partners.
8. The ratio of sharing the profits/losses.
9. The basis of calculation of goodwill at the time of admission, retirement and
death of a partner.
 10. The maintenance of proper books of accounts, the preparation of balance
sheet, etc.
11. Settlement of amounts on the dissolution of the firm.
12. The procedure in case of disputes among the partners, i.e., arbitration clause,
etc.

CHAPTER 2
PARTNERSHIP AND OTHER ASSOCIATIONS
IMPORTANT
MODEL QUESTIONS:
1. Distinguish 'Partnership' from 'Co-ownership' and joint Hindu family firm.
2. Define 'Partnership' and distinguish the same from 'Co-ownership' and 'Joint
Hindu Family Firm' and 'Incorporate Companies'.

SYNOPSIS:
A. Difference between Partnership and Joint Hindu fam
B. Difference between Partnership and Co-ownership
C. Difference between Partnership and Company

A. DIFFERENCE BETWEEN PARTNERSHIP AND JOI HINDU FAMILY:

The following are the points of distinction between a Joint Hindu family firm and
Partnership.
1. Creation:
Partnership is the result of an agreement or ac parties. Joint Hindu Family firm is
created by operation of law.
2. Agency:
In a partnership, each partner is principal aswell as agent. This is known as mutual
agency.
In a Joint Hindu family, each member is not an agent for the other.
3. Liability:
Every partner is personally liable for the debts and liabilities of the firm to an
unlimited extent.
In a Joint Hindu Family, only Karta or Manager is liable for its debts and liabilities.
4. Accounts:
Every partner is entitled to ask for the accounts of past losses and profits.
A member of Joint Hindu Family cannot ask for it.
5. Death:
Death of a partner automatically dissolves the partnership.
Death of a member of Joint Hindu family does not have the effect of dissolving the
business.
6. Minors:
A Minor cannot become a partner is a partnership firm. He can only be admitted to
the benefits of partnership.
A minor becomes entitled to an interest in the Joint Hindu family by his birth.
7. Dissolution by separation:
A joint Hindu family business may at any time be dissolved by intimation of definite
and unequivocal intention on the part of a member to separate himself from the
family and enjoy his share severally. An ordinary partnership on the other hand
cannot be dissolved before expiry of the term except under certain circumstances.
 8. New members:
The admission of new members in a partnership requires the consent of existing
members.
Every male member born in the family becomes a coparcener in the family business.
9. Restrictions of powers:
The powers of a partner may be restricted on agreement between themselves.
Hindu law confers wide powers on the Karta of the family.
10. Males and Females:
In a partnership, both males and females can be partners.
In Joint Hindu Family business, only males can be co-partners.
11. Registration:
Registration of the partnership is not compulsory, but expected to be registered for
certain advantages.
Registration of Joint Hindu Family business is not required.
12. Implied authority:
In partnership, implied authority vests equally in all the partners.
In Joint Hindu Family business, only Karta has the implied authority.
13. Maximum number of members.
In Partnership maximum number of members is 20
In Joint Hindu Family business there is no restriction on the maximum number of
members.

B. DIFFERENCE BETWEEN PARTNERSHIP AND CO-OWNERSHIP:

S,No. Partnership Co-ownership

1 It arises by an agreement.
2 It is a sharing of profits and losses.
3 The consent of other partners is
necessary for transfer of a share
4 A partner is an agent of other
partners
5 It is working for gain
6 A partner cannot sue for division of
the partnership property.
7 A partner has a lien on the
partnership property for expenses
incurred by him on such property.
8 In partnership, the number of
members cannot exceed the
maximum limit.
9 The object of partnership is to carry
on some lawful business and earn
profits.
10 Partnership is formed under Indian
Partnership Act, 1932
11 In partnership, a partner cannot get
the firm's property divided in its
existing state.
It may arise by any other way-
No sharing of profits and losses.
Not necessary.
A co-owner, is not an agent of other
co-owners.
Not necessary.
A Co-owner can sue for division of
the Co-ownership.
A Co-owner has no such lien.
In co-ownership, there is no
restriction on the number of
members.
Co-ownership is not meant for
business purposes
There is no such act governing co-
ownership.
ln co-ownership, a co-owner can
demand the division of property.
C. DIFFERENCE BETWEEN PARTNERSHIP AND COMPANY:
S. No. Partnership Company
1. Partnership governed by the Indian Company governed by the Indian
Partnership Act, 1932. Companies Act, 1956.
2. Not a separate legal body. A separate legal body.
3. No limited liability. Unlimited liability.
4. Joint and several liability No joint and several liabilities.
5.. A partner is an agent of other A shareholder is no an agent of othe
partners shareholders.
6. Transfer of share only with the Consent is not necessary for
consent of the other partners. transfer of share
.
7. Death of a partner dissolves Death of a shareholder does not
partnership. dissolve the company
8. Registration is not compulsory Registration is compulsory.
9. The minimum number of member is The minimum number of members
2 and maximum number is 20 and is 2 in private company and7 in
10 in case of banking business. public company, In a private
company, the maximum number of
members is 50 and in the case of
public company, the number is
unlimited.
10. All the partners have a right to take The shareholders cannot manage
part in the management of the affairs of the company, but only
business. elected directors.
11. No legal formalities are required for A company can change its objects
the winding up of partnership. and powers only with the permission
of Court.
12. No audit of accounts. Audit of accounts is compulsory

CHAPTER 3
MODE OF DETERMINING THE EXISTENCE OF PARTNERSHIP
OR
TESTS TO FIND OUT THE EXISTENCE OF PARTNERSHIP
(Rule in Cox Vs. Hickman)

MOST IMPORTNAT
MODEL QUESTIONS:
1. "The sharing of profits is only a prima facie evidence of partnership" -
comment.
2. "The relation of partnership arises from contract and not from status"
substantiate the statement with illustration. b. Discuss the mode of
determining the existence of partnership.
 3. Discuss the essential elements of partnership. What are the tests for
determining the existence of partnership?
4. Define partnership and discuss the mode of determining its existence.

SYNOPSIS:
A. Introduction
B. Rules to determine the existence of partnership A. introduction:

A. INTRODUCTION
Partnership is the relation between two or more persons who have agreed to share
the profits of a business by all or any of them acting for all. So, in order to determine
the existence of partnership, the agreement between them should be looked into.
But if there is no agreement constituting partnership among the partners, sec.6 of the
Indian partnership Act sets out some rules to determine the existence of partnership.

B. RULES TO DETERMINE THE EXISTENCE OF PARTNERSHIP.

1. Agreement.4 (Sec. 4 & 5)
Sec-4 of the Partnership Act defines 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.
To constitute a partnership, there must be an agreement between persons. Without
an agreement, there
cannot be a partnership. Thus an agreement is the basis of partnership.
Sec. 5 of the Partnership Act states, 'the relation of partnership arises from contract
and not from status'.

The Partnership is only a contract. In other words, it springs from an agreement to

create partnership. The partnership may be either expressed or in writing.
Partnership does not arise from status. It is a special type of contract.

In Haji Isa Vs. Sarnbai, AIR l938 Nag. 324:

It was observed that 'an agreement is sine qua non (most fundamental) of every
partnership which may be oral or in writing. It may be expressed or implied.

2. Sharing of profits:
Though the following persons share the profits of a partnership business, they do not
become partners.
i. Joint owners sharing gross returns:
The joint owners of property who share the profits or gross returns arising out of the
property do not become partners.
ii. Lender of money receiving profits:
A person who has lent money to a person or firm engaged in business and has
agreed to take in addition to his interest, a portion of the profits of the business does
not become a partner in the business.
iii. Servant or agent receiving profits:
Sometimes a servant or agent of a business is allowed in addition to his regular
remuneration a portion of profits of the business, but by this he does not become a
partner in the business.
iv. Widow or child of deceased partner:
On the death of a partner, the surviving partner sometimes agree to give a share in
the profits to the widow or the child of the deceased partner. Such a widow or child
does not become a partner in the firm.
v. Seller of goodwill:
A person who sells his business along with th goodwill is sometimes given a share in
the profits of the business. But such a person does not become a partner in the
business.

a. Waugh Vs. Carver:

Some persons shared the profits of a business. The question arise whether these
persons were partners or not because of their sharing of profits. The Court held that
Sharing of profits is a prima facie evidence of partnership.
b. Cox: Vs. Hickman:
A partner assigned his share to another person. He shared the profits of the
business. The firm incurred loss. The Court held that the assignee was not liable
because he was not a partner. This case was a deathblow to the sharing of profits
test, which was in vogue for nearly sixty years.
According to this case, three principles are essential to find out the existence
of partnership. They are:
i. By whom the business was carried on.
ii. By whom the liability was incurred.
iii. Under whose management, profits were made.

c. Mullow, March & Co Vs. Court of Madras:

A creditor advanced a loan to a partnership business. He also shared the profits of
the business. The court held that the creditor was not a partner even though he
shared the profits. This is another deathblow to the 'sharing of profits test'.
In this case, the following principle was laid down to find out the existence of
partnership. The real intention and conduct of the business must be considered to
decide whether they are partners or not. This is known as intention and conduct test.

The following persons are not partners:

1. The members of a Hindu Undivided Family, carrying on family business.
2. A Burmese Buddhist husband and wife carrying on business.
Thus, Section 6 of the Indian Partnership Act lays down the rules in Mullow, March
and co. So, the real relationship, conduct and intention of the parties are important to
decide the existence of a Partnership.

Mutual agency:
Sec. 4 of the Partnership Act says that the business may be carried on 'by all or any
of them acting for all'.
This clearly establishes the principle of implied agency as a test to find out the
existence of partnership. The partner who is conducting the affairs of the business is
considered as the agent of the remaining partners. The relationship betweei partners
is governed by the law of agency.

This concept of mutual agency is the true test of the existence of partnership. This
relationship of principal and agent distinguishes a partnership business from co-
ownership, joint Hindu family business as well as an agreement to share profits of
the business.
Stocker Vs. Brocklebank, 1851 (42) ER 257:
The defendant agreed to pay 40% of the profits his business to the manager. The
Court held that the manager was only a servant and not a partner, as the was no
mutual agency among them.

CHAPTER 4
KINDS OF PARTNERSHIP AND KINDS OF PARTNERS
(Sec. 7& 8)

A. KINDS OF PARTNERSHIP

SYNOPSIS
1. Partnership at will
2. Partnership for a fixed term
3. Particular partnership
4. Limited partnership
5. Sub partnership

1. PARTNERSHIP AT WILL
According to section 7 of the Act, partnership at will is a partnership when-
a. No fixed period has been agreed upon for the duration of the partnership or
b. There is no specific provisions as to the determination of the partnership in
the partnership agreement.

The partnership comes to an end at the will of any of the partners. If a partner gives
a notice that he likes to dissolve the partnership, then the partnership is dissolved.

2. PARTNERSHIP FOR A FIXED TERM:

It is partnership for a particular period. After the expiry of the period, the partnership
comes to an end.
The partners may, however, continue to carry on the business after the expiry of the
fixed period. In such a case the mutual rights and duties of partners remain the same
as they were before the expiry of the fixed period and the partnership becomes
partnership at will.

3. PARTICULAR PARTNERSHIP:
It is a partnership of doing a particular business or venture. The partnership comes
to an end as soon as the business or venture is completed.
But if such a partnership is continued after the completion of the particular
adventure, It becomes a partnership at will and the rights and obligations of the
partners will be the same as those in the original
adventure or undertaking.

4. LIMITED PARTNERSHIP:
It is a partnership between a company and partnership. The partner's property is
called his personal property and is not liable for the loss in the limited partnership.
He has no right of management of the business. The limited partnership cannot be
dissolved by notice. This type of partnership exists only in England.

5. SUB PARTNERSHIP:
When the original partner transfers his interest in the partnership to another, then the
second person becomes a sub partner. He has no general rights, but only assigned
or transferred rights.
A partner may transfer his interest in the firm by sale, mortgage or charge. The
transfer may be absolute or partial. It does not, however, entitle the transferee,
during the continuance of the firm to do the following acts.
a. To interfere in the conduct of the business of the firm.
b. To check accounts of the firm
c. To inspect the books of the firm

On transfer of interest by a partner, the transferee only gets entitled to receive the
share of profit of the transferring partner.
If the firm is dissolved or if the transferring partner ceases to be a partner, then the
transferee is entitled to receive the transferring partner's share in the assets of the
firm.

B. KINDS OF PARTNERS

SYNOPSIS:
1. Actual or ostensible partner
2. Dormant or sleeping partner
3. Nominal partner
4. Partner in profits only
5. Sub partner
6. Partner by estoppel or holding out

1. ACTUAL OR OSTENSIBLE PARTNER:

Any person, who becomes a partner by an agreement and participates actively in
conducting the business, is called an Actual Partner. An actual partner is an agent of
all other partners and binds himself and other partners for all acts of the firm.

2. DORMANT OR SLEEPING PARTNER:

He is a partner who does not take an active part in conducting the business. Like
other partners he invests capital and shares in the profits of the business. He is also
liable for the debts of the firm but his existence is kept as secrete like an undisclosed
principal. A sleeping partner need not give public notice for retirement.

3. NOMINAL PARTNER:
He is a partner who lends his name to. the firm, but does not have any real interest
on it. He does not
invest, nor share in the profits or take part in the conduct of the business. A nominal
partner is known to the world, but a sleeping partner is not known to the world. A
nominal partner does not share in the profits of the business but a sleeping partner
shares in the profits, and both are liable for all the acts of the firm.
 4. PARTNER IN PROFITS ONLY:
Some partners agree to share only the profits and shall not be liable to contribute
towards the losses. This happens when a person has large capital at his disposal but
is not prepared to take risk of loss. He shall not bear the loss but continue to be
liable for all the acts of the firm. If the firm incurs huge loss, and the other partners
does not have sufficient resources, he has to contribute towards the loss, as the
liability of the partners is joint and several and unlimited.

5. SUB PARTNER:
If a partner agrees to share his profits from the firm with a third, person, the third
person is known as Sub partner. A sub partner cannot represent himself as s partner
of the firm and has no rights against the firm. He is also not liable for the acts of the
firm.

6. PARTNER BY ESTOPPEL OR HOLDING OUT:

A person who is not a partner may be liable for the debts of the firm as if he were a
partner. Such a partner is called partner by estoppel or holding out.
Conditions for liability of partner by estoppel:
1. The person must have represented himself to be a partner either by words
spoken or written or by his conduct.
2. 2.He must have allowed himself to be to be represented as a partner,
knowingly.
3. 3. The other person must have acted on the faith of such representation, and
given credit to the firm.
4. 4. If a retiring partner does not give a public notice of his retirement and the
other partners use ruse his name as a partner, he will be personally liable, on
the ground of holding out.
5. 5. Incoming partner (Sec. 31) : When a person gets admitted as a partner in
an existing partnership, he becomes an incoming partner. A new person can
be admitted as a partner with the consent of all the partners. The Incoming
partner is not liable for anything done by the firm before he became a partner.
A person may be admitted as a new partner -
i. With the consent of all the existing partners, or
ii. As per the contract already entered between the existing partners for the
admission of a new partner.
Liability of an incoming partner:
i. An incoming partner is not liable for any act of the firm done prior to his
admission as a partner [Sec. 31 (2)].
ii. However by mutual agreement, the new partner may agreee with the old
partners to be liable for the past liabilities of the. firm, but this does not give a
right to the creditors of the firm to proceed against the new partner for the
recovery of their past debts.
iii. A new partner is liable for the acts of the old firm only, if -
a. The new firm- assumes the liabilities of the old firm.
b. The creditors accept the new firm as their debtor and discharge the old firm
from its liability.
iv. The minor partner, on attaining majority, becomes liable for all the acts of the
firm from the date he was admitted to the benefits of the partnership.
6. Outgoing partner: A partner leaving the existing firm is known as outgoing or
retiring partner. An outgoing partner is liable for the debts and the obligations
 incurred before his retirement and also will be liable for future transactions if
he fails to give public notice, of his intention to retire from the partnership firm.
An outgoing partner can go out of the firm by the following methods:
a. Retirement
b. Expulsion
c. Insolvency
d. Death
e. Transfer of a partner's share
(Also Please Refer Chapter No. 7)

CHAPTER 5
IMPLIED AUTHORITY OF A PARTNER
(Relations op partners with third parties)
(Law of partnership - a branch of agency)
(See. 18 to 27)
IMPORTANT
MODEL QUESTIONS:
1. Explain the express and implied authority of a partner whereby his acts can bind the firm.
2. Explain the acts which are and which are not within the implied authority of a partner.
3. What is the effect of acts done by under the implied authority of a partner on third
parties?
4. What are ultra vires acts by a partner? State whether such acts are binding on the firm.
5. Every partner is the agent of the- firm for the purpose of the business of the firm -
Comment.
6. Write short note on: Implied authority of a partner.
SYNOPSIS:
A. Definition
B. Types of authority of a partner
C. Conditions for valid implied authority (Sec. 22)
D. Acts within implied authority
E. Acts outside implied authority (Sec. 19)
F. Partner's implied authority in an emergency (Sec. 21)
G. Implied authority with third party

A. DEFINITION:
Implied authority of a partner means the authority of a partner to bind the firm by his
acts done in the usual way of the business carried on by the firm.
In the words of James L J - 'as between the partners and the outside world, every
partner is the unlimited agent of every other partner in everything connected with the
partnership business'.
Sec. 18 of the Act also says every partner is the agent of the firm for the purposes of
the business of the firm and so he can act on behalf of the firm and bind the firm
provided -
a. He does the act for carrying on, in the usual way, the partnership business as
carried on by the firm, and
b. The act is done in the name of the firm.
Whether a given act was done by a partner in carrying on the business in the usual
way is a question to be determined by the nature of the business and by the
practices of persons engaged in it.
 B. TYPES OF AUTHORITY OF A PARTNER:
The authority of a partner means the capacity of a partner to bind the firm by his
acts. Such authority is divided into two types namely -
1. Express authority:
When the partnership agreement expressly (in writing) gives a partner the authority
to act in a partnership business, then it is called express authority.
2. Implied authority:
If there is no partnership agreement or if the partnership agreement is silent as to the
authority of a partner to act, then implied authority is inferred by the act of the partner
done to carry on the business in the usual way,

C. CONDITIONS FOR VALID IMPLIED AUTHORITY: (Sec. 22)

If the following conditions are satisfied, then the implied authority of a partner binds
the firm:
1. The act must have been within the scope of partnership and it must relate to
the normal business of the firm.
2. The act must be such as is done within the scope of the business of the firm in
the usual way.
3. The act must be done in the name of the firm or in any other manner
expressing or implying an intention to bind the firm.
i. M. Rajagopal Vs. K.S. Imam Ali, AIR 1981 Ker 36
The Court held that when a partner signed a pronote describing himself as proprietor
of the firm then there is no liability to the firm.
ii. B.N. Narasimhulu Chetty Vs. Rattakonda Krishna Murthy, AIR 1986 AP177:
The Court held that when a promissory note evidently required the endorsement of
all the partners then an endorsement by one partner alone is not within his implied
authority.

D. ACTS WITHIN IMPLIED AUTHORITY:

Decided case laws have repeatedly held that the following acts are within the scope
of implied authority and hence bind the firm.
1. Purchasing and selling goods in the usual course of business.
2. Receiving payments from customers and dealers and payment to the
suppliers in the usual course of business.
3. Drawing, accepting, endorsing bills and other negotiable instruments in the
name of the firm.
4. Engaging a lawyer to defend an action against the firm.
5. Buying or hiring on credit the kind of goods that are used in the firm's
business.

Tomlinson Vs Broadsmith, (1896) 1 QB 386:

The Court held that it is within the scope of a partner's authority to defend an action
brought against the firm and to engage a lawyer for the purpose.

Keighley, Maxsted & Co. Vs. Durant, 1901 AC 240:

The Court held that even though an act may have bee done without express
authority of the firm, it may subsequent be ratified by the firm and if so, the firm is
liable.
 E. ACTS OUTSIDE IMPLIED AUTHORITY: (Sec. 19)
In the absence of any usage or custom of trade to the contrary, the implied authority
of a partner does not empower him to do the following acts. These acts are
otherwise called ultra vires acts and they do not bind the firm.

1. Submit a dispute relating to the business of the firm to arbitration.

2. Open a bank account on behalf of the firm in his own name
3. Compromise or relinquish any claim.
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 partnership on behalf of the firm.

F. PARTNER'S IMPLIED AUTHORITY IN AN EMERGENCY: (Sec. 21)

In an emergency, a partner has authority to do certain acts provided.
a. They are done to protect the firm from loss
b. The partner acts as a prudent person would act under similar
circumstances in his own case.
Though- such acts bind the firm, they do not form part of the partner's implied
authority.
E.g.: A partner receives vegetables at Vizag to be re-transported to the buyer at
Chennai. The vegetables are in such a bad condition that they will not bear journey
to Chennai without getting spoilt. Now the partner can sell the goods at Vizag itself.

G. IMPLIED AUTHORITY WITH THIRD PARTY:

Any third party while dealing with a partner believes that he is dealing with the firm.
A partner may act beyond his authority, but if the third-party acts in good faith
thinking that the partner is acting within his ostensible or apparent authority, the firm
is liable for such partner's act.
The following acts bind the firm as against the claim
by third parties:
1. Extension and restriction of a partner's implied authority: (Sec. 20)
The partners in the firm may by contract between the partners, extend or restrict the
implied authority of any partner.
Notwithstanding 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.
2. An admission on 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. (Sec. 23)
3. 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 a fraud on the firm committed by or with the consent of
that partner. (Sec. 24)
4. Every partner is liable jointly with all the other partners and also severally for
all acts of the firm done while he is a partner. (Sec. 25)
5. Liability of the firm for wrongful acts of partner:
If by the wrongful act or omission of a partner who, is acting in the ordinary course of
the business of the firm or with the authority of his partners and by his acts if any
loss or injury is caused to any third party or any penalty is incurred, then the firm is
liable.
6. Liability of firm for misappropriation: (Sec. 27)
A firm is liable to make good the loss when -
a. A partner acting within the scope of his apparent authority receives money or
property from a third party and misapplies it.
b. The firm in the course of its business receives money or property from a third
party and the same is misapplied by any of the partners while it is in custody
of the firm.

CHAPTER 6
ADMISSION AND POSITION OF MINOR IN PARTNERSHIP
(Sec. 30)
IMPORTANT
MODEL QUESTIONS:
1. What is the legal significance of the passing of property in the goods?
2. What are the rule set out in the sale of Goods Act for ascertaining the
intention of the parties as to the time at which property is passed to the buyer
on sale? Can these be varied by the parties?
3. Write short notes on: Right and liabilities of a minor in the partnership firm.

SYNOPSIS:
A. Introduction
B. Position of minor
1. Position of a minor before attaining majority.
2. Position of a minor on attaining majority.

A. INTRODUCTION:
Sec.11 of the Indian Contract Act clearly provide that a minor is not competent to
enter into any contract.
Thus, a contract with a minor is wholly void and unenforceable. Since partnership is
also a contract minor cannot make a valid contract and hence become a partner in a
firm.
However, Sec 30 of the Partnership Act provides that though a minor cannot become
partner with the consent of all the partners, may be admitted to the benefits of
partnership. The rule is based on the principle that a minor cannot be a promisor, but
he can be a promisee or beneficiary. Further it is based on the principle that the
partnership is based on mutual agency and minor may be an agent.

The rules regarding the minor partnership are as follows -

1. A new partnership cannot be formed with a minor as partner. He can only be
admitted in an already existing partnership.
2. In Lovell Vs. Beauchamp, 1894 AC 60:
The Court held that the minor is liable only to extent of his share in the partnership
and is not personally liable for partnership debts.
 3. In Babu Vs. Official Assignee, 1934 (57) Mad. 931
The Court held that the minor's separate property cannot be proceeded against for
realisation of partnership debt.
4. The position of a minor partner is rather peculiar. He is entitled to all the
benefits as a part but he is not subject to all the liabilities of partner.

IT Commissioner Vs. Shah Mohandas, AIR 1966 SC15:

The Court held that a partnership deed that attempts to make a minor as a full-
fledged partner is valid to that extent.

B. POSITION OF MINOR:
The position of a minor partner may be of two types:
1. Before attaining majority.
2. On attaining majority

1. Position of a minor before attaining majority:

Rights:
a. He has a right to share the property and the profits of the property.
b. He can inspect and get copies the partnership accounts, but he cannot
inspect the secret information account of the business. [Sec. 30 (2)]
c. If he does not get his due share of profit, he can file a suit for his share of the
property. This he can do only if he wants to severe his connection with the
firm. [Sec. 30 (40]

Liabilities:
a. Minor partner is liable only to the extent of his share in the profits and the
property of the firm. [(Sec 30 (3)]
b. A minor cannot be declared insolvent. If the firm becomes insolvent, the
minor's share vests in the Official Receiver or Official Assignee.

2. Position of a minor on attaining majority:

i. On attaining majority, the minor partner must decide within 6 months
whether he should continue in the firm or leave the firm.
ii. The six months start running from the date of the minor attaining majority
or from the date when the minor first comes to know that he has already
been admitted to the benefits of partnership whichever date is later.
iii. Within this period of six months, the minor should give a public notice of
his choice -
a. to become or
b. not to become, a partner in the firm.
iv. If the fails to give a public notice, then he is deemed to have become a
partner in the firm on the expiry of the said six months period [Sec. 30 (5)].
v. In case there is delay in giving public notice eve after the expiry of six
months of his attaining majority, then the burden of proof is on the minor
that he had no knowledge of his admission as minor partner in the
partnership within the said six months period. [Sec. 30 (6)]

When he elects to become a partner:

 a. He is personally liable to third parties for all acts of the firm since he was
admitted to the benefits of partnership.
b. His share in the property and profits is the share to which he was entitled as a
minor partner. [Sec. 30 (7)]
When he elects not become a partner:
a. His rights and liabilities continue to be those of the minor till the date of the
public notice.
b. For any act of the firm, done after the date of the public notice, his share is not
liable.
c. He is entitled to sue the partners for his share of the property and profits in the
firm. [Sec. 30 (8)]

CHAPTER 7
INCOMING PARTNER AND OUTGOING PARTNER
(Sec 32 to 35 & Sec. 29)
IMPORTANT
MODEL QUESTIONS:
1. Discuss briefly the rights .and liabilities of an outgoing partner of a firm.
2. When can a partner retire? What are the liabilities of a retired partner?
SYNOPSIS:
A. Introduction
B. Incoming partner: (Sec. 31)
C. Outgoing partner
1. Retirement of a partner (Sec. 32)
2. Expulsion of a partner (Sec. 33)
3. Insolvency of a partner (Sec. 34)
4. Death of a Partner [Sec. 35 & Sec. 42 (c)]
5. Transfer of a partner's share (Sub partnership) (Sec. 29

A. INTRODUCTION:
Any change in the relations of the partner results in the reconstitution of a firm. A firm
is reconstituted by two ways.
1. By incoming partner/s
2. By outgoing partner/s.

B. INCOMING PARTNER: (Sec. 31)

A person may be admitted as a new partner -
i. With the consent of all the existing partners, or
ii. As per the contract already entered between the existing partners for the
admission of a new partner.

Liability of an incoming partner:

i. An incoming partner is not liable for any act of the firm done prior to
his admission as a partner [Sec. 31 (2)].
ii. However, by mutual agreement, the new partner may agree with
the old partners to be liable for the past liabilities of the. firm, but
 this does not give a right to the creditors of the firm to proceed
against the new partner for the recovery of their past debts.
iii. A new partner is liable for the acts of the old firm only, if -
a. The new firm- assumes the liabilities of the old firm.
b. The creditors accept the new firm as their debtor and
discharge the old firm from its liability.
iv. The minor partner, on attaining majority, becomes liable for all the
acts of the firm from the date he was admitted to the benefits of the
partnership.

C. OUTGOING PARTNER:
An outgoing partner can go out of the firm by the following methods:
1. Retirement
2. Expulsion
3. Insolvency
4. Death
5. Transfer of a partner's share

1. RETIREMENT OF A PARTNER: (Sec. 32)

A partner may retire:
a. With the consent of all other existing partners.
b. As per the express terms of the partnership deed.
c. In a partnership at will, the partner may retire by giving written notice to all
the partners of his intention to retire.

Duties and liabilities of a retiring partner:

Before retirement:
i. A retiring partner continues to be liable to the creditors for the acts of the firm
done before and up to the date of his retirement.
ii. The retiring partner is also liable to third parties for all transactions of the firm
begun but unfinished the time of his retirement.
iii. On retirement of a partner, the other partners, may agree in writing to release
him completely from such debts as were existing up to the date of his
retirement. But even then, the retiring partner continues to liable to the
creditors.
iv. Similarly on retirement of a partner, there may be implied agreement inferred
from the course of dealing between the other partners and also the third
parties that the retiring partner shall be released completely from all debts that
were existing up to the date of his retirement.

After retirement:
i. A retiring partner must give public notice of his retirement.
ii. In case he fails to give such public notice, then he continues to be liable for
the acts of the firm even after his retirement.
iii. The firm is also not liable for the acts of the retired partners done after
retirement from the firm.
iv. The public notice about the retirement of a partner may be given either by the
retiring partner himself or any of the partners of the reconstituted firm.
v. A retiring partner is not liable to any third party who deals with the firm without
the knowledge that he was a partner.
 vi. When a dormant or sleeping partner retires, he need not give any public
notice, as his name is not known to the outside world.
vii. A retired partner need not give a public notice of his retirement to persons
who are ignorant that he was a partner in the firm.

Harihar Davey Vs. Kamlesh Steel Enterprises, 2005 (3) CTC 497:
The retired partners pleaded ignorance of the borrowing by the firm after their
retirement. As per Rule 4 of the Tamil Nadu Partnership (Registration of firm) Rules,
Form V should be filed for giving notice of change in the constitution of the firm. The
Madras High Court held that the retiring partners who did not give such notice,
continued to be liable for debts which were incurred by the firm even after their
retirement.
Rights of a retiring partner:
i. A retiring partner may carry on business competing with that of the firm and
he may advertise business but he should not use the firm's name, nor
represent himself as carrying on the business of the firm, or solicit the custom
of persons who were dealing with the firm before he ceased to be a partner.
[Sec. 36 (1)]. But by an agreement, the retiring partner may be prohibited from
carrying on the competing business within a specified period or within
specified limits.

ii. When a partner ceases to be a partner and if there is no final settlement of

accounts, the legal representatives of the outgoing partner are entitled to
share the profit earned after the retirement of the partner, and also, they may
claim interest at the rate of 6% per annum on the amount of his share in the
property. (Sec. 37)

2. EXPULSION OF A PARTNER: (Sec. 33)

Under the following three conditions, a partner may be expelled from partnership:
a. The power of expulsion of a partner must be conferred by the contract
between the partners.
b. Powers of expulsion should be exercised by a majority of the partners.
c. Such power should be exercised in good faith as follows:
i. Expulsion must be in the interest of the partnership.
ii. The partner to be expelled should be served with notice.
iii. The partner to be expelled should be given an opportunity of being
heard.
d. When a partner is expelled, it does not mean dissolution of the firm.

Irregular expulsion:
If a partner is expelled without fulfilling the above conditions, it is an irregular
expulsion. Such expelled partner may either claim reinstatement as a partner or may
sue for the refund of his share capital and profits in the firm. The expelled partner in
such a case does not cease to be partner. An irregular expulsion is wholly ineffectual
and inoperative.

Regular expulsion:
If a partner is complying the conditions laid down above, then his expulsion is
deemed regular. The rights and liabilities of an expelled partner are the same as
those of a retired partner. [Sec. 33 (2)]

3. INSOLVENCY OF A PARTNER: (Sec. 34)

When a partner is adjudicated 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.
Under a contract between the partners, if the firm j is not dissolved by the
adjudication of a partner as an insolvent, then the estate of the insolvent partner is
not liable for any act of the firm.
Similarly, the firm is also not liable for any act of the insolvent done after the date he
became insolvent.

The following are the results of the insolvency of the partner -

i. The insolvent partner ceases to be a partner on the date of the insolvency
adjudication.
ii. The firm is usually dissolved on the date of adjudication of the insolvency.
iii. The estate of the insolvent partner is not liable for the acts of the firm, after the
order of adjudication.
iv. The firm is not liable for the acts of the insolvent partner after insolvency.

4. DEATH OF A PARTNER: [Sec. 35 & Sec. 42 (c)].

i. A firm is dissolved by the death of a partner subject to the contract between
them.
ii. By contract between the partners, if the firm is not dissolved by the death of a
partner, then the estate of the deceased partner is not liable for the act the
firm.
iii. Public notice of the death of a partner is not necessary.
iv. Whether the dissolution of the firm takes place or not, the estate of the
deceased partner is not liable for the acts of the firm done after his death.

5. TRANSFER OF A PARTNER'S SHARE (SUB PARTNERSHIP): (Sec. 29)

A partner may transfer his interest in the firm by sale, mortgage or charge. The
transfer may be absolute or partial. It does not, however, entitle the transferee,
during the continuance of the firm to do the following acts.
a. To interfere in the conduct of the business of the firm.
b. To check accounts of the firm
c. To inspect the books of the firm

On transfer of interest by a partner, the transferee only gets entitled to receive the
share of profit of the transferring partner.
If the firm is dissolved or if the transferring partner ceases to be a partner, then the
transferee is entitled to receive the transferring partner's share in the assets of the
firm.
 CHAPTER 8
PARTNERS' RIGHTS, DUTIES AND LIABILITIES
(Relationship of partners with other partners)
(Sec. 9 to 17 & 31 to 37)
MOST IMPORTANT
QUESTIONS:
1. Discuss briefly the rights and liabilities of incoming partners of a firm.
2. a. Discuss the mutual rights and liabilities of a partner. b. Explain the
scope of implied authority of a partner and discuss the limits on the
implied authority?
3. What are the duties and liabilities of partners in a firm?

SYNOPSIS:

A. Introduction
B. Rights of partners
C. Rights of outgoing partners
D. Duties of Partners
E. Firm's liability to third Parties (Sec. 26 & 27)

A. INTRODUCTION:
The relations of partners between themselves are governed by their own agreement,
whether express of implied. If there is no agreement, the relations of partners
regarding their rights and duties are governed by Secs 9 to 17 of the Partnership Act.
The relation of partners to each other is based on absolute good faith, and mutual
trust and confidence.
Sec. 18 also reads - a partner is the agent of the firm for the purpose of the business
of the firm.

B. RIGHTS OF PARTNERS:
1. Right to participate in the conduct of the business: [Sec 12 (a)]
Every partner can participate in the conduct of the business of the firm in the
absence of an agreement, to promote the interest of the firm.
Sec. 12 (a) of the Act reads - 'every partner has a right to take part in the conduct of
the business'. The general principle is that partnership business is the common
business of all the partners. This principle has got two exceptions -
i. If a partner neglects or refuses to perform his duties, then he can be
denied of his right to take part in the conduct of the business.
ii. Similarly, if there is unequal capital contribution or no capital contribution,
then it can be a bar to the right to take part in the conduct of the business.

2. Right to be consulted: [Sec. 12 (c)]

Every partner has a right to be consulted and heard in all the matters concerning the
business of the firm.
Changes in the fundamental nature of business may be made only with the consent
of all the partners. For other matters, if the partners have difference of opinion
regarding an ordinary matter, it may be settled by a majority of the partners.
The majority of the partners must act in good faith and every partner must have the
right of free expression. If the partners are equally divided, then the decision for
changes will be negated.

For the following matters, the consent of all the partners is necessary:
a. Change in the nature of the business
b. Admission of a new partner
c. Transfer of a partner's share
d. Admission of a minor to the benefits of partnership.
e. Change in the constitution of partnership

3. Right to share profits and losses: [Sec. 13(b)]

Sec. 13(b) reads - the partners are entitled to share equally in the profits earned and
shall contribute equally to the losses sustained by the firm.
4. Right to access to books: [Sec. 12 (d)]
Every partner has free access to books, record and accounts of the firm. He can also
inspect and copy them. However, he cannot carry them outside the company's
registered office.
A partner may exercise this right by himself or through agent. A partner can have the
accounts inspected through an agent and he need not do it personally

Bevan Vs. Webb, (1900-3) All ER Rep 206:

The Court held that when a sleeping partner wanted to sell his interest to other
partners and for this purpose when he authorised an expert valuer to inspect
accounts to ascertain the value of his interest, the other partners could not object to
it.

5. Sight to be indemnified: [Sec. 133 (e)]

Every partner has right to be indemnified by the firm for the payments made and
expenses/liabilities incurred by him for the business of the firm under the following
two circumstances.
i. In the ordinary and proper conduct of the business. Here the partner is
entitled to be indemnified for an expenditure or liability incurred by him.
ii. In doing an act in an emergency for the purpose of protecting the firm from
loss. Here the partner is entitled to be indemnified for any expenditure or
liability incurred by him, when he does an act in a emergency to save the firm
from loss. While acting in an emergency, the partner should have acted in the
same manner as a person of ordinary prudence would act in his own case,
under similar circumstances. (Sec. 21)
TB. Mody Vs. Sanghrajka, AIR 1987 Kant 268:
The Court held that proof of actual loss due to the conduct of a partner in emergency
to save the company from loss is necessary and it should not be merely notional.
6. Right to interest on capital: [Sec. 13 (c)]
Generally, interest on capital is s not payable to the partners. However, when such
payment of interest for capital is allowed by an express or an implied agreement by
among partners or by the custom of trade, then a partner can charge interest on his
capital amount invested.
The interest is payable only out of the profits of the business and also out of the
assets of the firm.
 7. Right to interest on advance: [Sec. 13 (a)]
A partner who makes an advance of money to the firm beyond the amount of his
capital for the purpose of business is entitled to get an interest at the rate of 6
percent per annum.
Here also the interest is payable out of the profits of the and also out of the assets of
the firm.

8. Partnership property and right to use them: (Sec. 14 & 15)

The property of the firm includes all property originally brought into the firm and
subsequently acquired by purchase or otherwise and it includes also the goodwill of
the business.
Every partner is a joint and equal owner of the partnership property. Such property of
the firm must be used by the partners exclusively for the business purposes of the
firm. No partner can treat/use it as his individual property. If a partner uses the
property of the firm for his private purposes, then he is accountable for the profits
made by using such property of the firm.

Arm Group Enterprises Ltd Vs. Waldorf Restaurant, AIR 2003 SC 4106 (c):
The Supreme Court observed that a particular property was found to exclusively
belong to a sole
proprietor and there was no agreement to show that the property involved was of
partnership's. Hence, the Court held that the property would not become the property
of partnership.

9. Right of partner as agent of the firm: (Sec. 18 & 19)

Every partner for the purposes of the business of the firm is the agent of the firm.
The acts of a partner which are done to carry on the firm's business in the usual way
binds the firm.

10. No new partner to be introduced: [Sec. 31 (1)]

In the absence of a special agreement to the contrary, no person can be introduced
as a partner into a firm without the consent of all the existing partners.

11. No liability before joining the firm: [Sec. 31(2)]

A partner does not have any liability for any act of the firm done before he became a
partner, unless there is a contract to the contrary.

12. Right to retire: [Sec. 32(2)]

Every partner has the right to retire -
a. with the consent of all the partners, or
b. according to an express agreement by the partners, or
c. where the partnership is at will, by giving a notice in writing to all other
partners of his intention to retire.
Syndicate Bank Vs. M/s. R.S.R. Engineering Works 2003 (4) Scale 648:
The agreement for overdraft facility with bank was jointly executed by the firm and its
partners. The Supreme Court held that if any partner would retire, then he would not
be made liable to repay the loan to the bank, unless there was a subsequent
contract between the bank and the newly constituted firm.
 13. Right not to be expelled: [Sec. 33 (1)]
A partner has a right not to be expelled from the firm by any majority of the partners.
The other partners can do so only if they are able to prove that the expulsion of the
partner was done in good faith of the powers conferred by contract to them and the
expulsion was made by a majority of partners.
14. Right to remuneration: [Sec. 13 (a)]
Sec. 13 (a) reads - a partner is not entitled to receive remuneration for taking part in
the conduct of business.
Garwood's Trusts, Re, (1903) 1 Ch 236:
The Court held that a partnership agreement can provide for the payment of
remuneration to working partners.

C. RIGHTS OF OUTGOING PARTNERS:

1. Right of outgoing partner to share in profits: (Sec. 37)
If a partner leaves the firm, then he is called an outgoing partner. If the accounts are
not settled for him and if the remaining partners continue the business with the
property of the firm, then the outgoing partner or his legal representative in the
absence of a contract to the contrary is entitled at his option to (i) a share in the
profits of the firm or (iij interest at the rate of 6 percent per annum on the amount of
his share in the firm.

Parmuru Vishnu Vinodh Reddy Vs. Chillakuru Chandrashekhar Reddy, AIR

2003 SC 1614:
A partner who retired from the firm sold his share to the firm. After that, the firm was
reconstituted with new partners. The Supreme Court held that the delay in paying the
share amount to the retired partner had to be compensated by awarding interest to
him.
2. Right of outgoing partner to carry on competing business: (Sec. 36)
As long as a partner remains in the firm he has no right to carry on a competing
business. But when he leaves the firm, he has a right to carry on a similar business
competing with the firm's business and he may also advertise such business.
However by an agreement among the partners an outgoing partner can be
prevented from doing the following acts.
a. Use the firm name
b. Represent himself as carrying on the 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.

D. DUTIES OF PARTNERS:
1. To observe utmost good faith: (Sec. 9)
Partnership is a contract of uberrimae fidei meaning that utmost good faith which is
the basis of a partnership. It also means that there must be mutual trust and
confidence among the partners.
Sec. 9 deals with the general duties of partners and in discharging such duties, the
partners are bound -
a. To carry on the business of the firm to the greatest common advantage.
b. To be just and faithful to each other and
c. To render true accounts and full information of all things affecting the firm to any
partner or his legal representative.
 2. To carry on business:
i. Every partner is bound to carry on the business of the firm to the greatest
common advantage.
ii. He is bound in all transactions affecting the partnership to do his best in
the common interest of the firm.
iii. He must share with other partners any benefit obtained from other people.

3. To indemnify for loss caused by fraud: (Sec. 10)

Every partner must indemnify the firm for any loss caused to it by his fraud in the
conduct of the business of the firm. This liability is absolute.

4. To attend diligently: [Sec. 12 (b)]

Every partner is under a duty to attend (carefully) to the partnership business with
diligence.

5. To share losses: [Sec. 13 (b)]

In the absence of any contract to the contrary, the partners have to bear the losses
equally.

6. To indemnify for wilful neglect: 13 (f)]

Every partner is under a duty to indemnify the firm for any loss caused to it by his
wilful neglect and due to acts not done in good faith in the conduct of the business of
the firm. The firm is, however, liable to third parties for such wilful neglect of a
partner.

7. To use property of the firm: (Sec. 15)

Every partner is liable to hold and use the property of the firm exclusively for the
purpose of the business and not for personal use.

8. To account for personal profits: [Sec. 16 (a)]

If a partner derives any profit for himself from -
a. any transaction of the firm
b. from the use of partnership property or
c. firm's name or
d. business connection of the firm.
Then he must account for that profit and pay it back to the firm.

9. To account for profits of competing business- [Sec. 16 (b)]

A partner must not carry on any business of the same nature, competing with that of
the firm. If he does, he is liable to pay all profits made by him to the firm. But he may
carry on any personal work outside the scope of the partnership business.

10. To act within authority: [Sec. 19 (1)]

Every partner is bound to act within the scope of his actual or implied authority. If a
partner exceeds the authority, then the partner is liable to make good the loss
suffered by the firm.

11. To be liable jointly and severally: (Sec. 25)

Every partner is liable, jointly with all the other partners and also severally
(individual) for all the acts of the firm done while he is a partner. A retired partner
continues to be liable for the debts of the firm incurred till he gives public notice of his
retirement.
Ashutosh Vs. State of Rajasthan 2005 (4) CTC 408:
The Madras High Court held that the will executed by a partner regarding his
partnership share would get defeated when an execution proceeding of a decree
were taken against a firm.

12. Not to assign his interest: (Sec. 29)

A partner cannot assign his rights and interest in the firm to an outsider so as to
make the latter the partner of the firm. He can, however, assign his share of the
profits and his share in the
assets of firm.
Even then the transferee of the share of the profits or assets of the firm is not entitled
to interfere in the conduct of the business or to check accounts or to inspect the
books of the firm.

E. FIRM'S LIABILITY TO THIRD PARTIES: (Sec. 26 & 27)

Sec. 26 reads - Liability of the firm for wrongful acts of a partner - by the
wrongful act or omission of a partner acting in die ordinary course of the business of
a firm, or with the authority of his partners, if any loss or injury is caused to any third
party or any penalty is incurred, then the firm is liable to the same extent as the
partner.
Sec. 27 reads - Liability of firm for misapplication by partners -
a. If a partner is acting within his apparent authority and receives money or
property from a third party and misapplies it, the firm is liable to make good
the loss to the third party.
b. Similarly if a firm in the course of its business receives money or property from
a third party and if the money or property is misapplied by any of the partners
while it is in the custody of the firm, then the firm is liable to make good the
loss.

CHAPTER 9
DISSOLUTION OF A FIRM OR TERMINATION (DETERMINATION)
OF
PARTNERSHIP (WITHOUT AND WITH COURT ORDER (Sec 39 to 54)

MOST IMPORTANT
MODEL QUESTIONS:
1. a. What are the different methods in which a partnership firm can be
dissolved? b. What are the rules to be observed in settling accounts of a firm
in dissolution?
2. What are the rights and obligations of partners after dissolution?
3. Write short notes on: (a) Dissolution of a firm by the Court (b) Dissolution of
partnership at will by issue of notice of dissolution by a partner (c) Dissolution
of a firm on the happening of certain contingencies.
SYNOPSIS:
A. Introduction
 B. Methods of dissolution of firm
1. Dissolution without the order of Court
2. Dissolution by Court
C. Rights and Liabilities of a partner on dissolution
D. Settlement of accounts

A. INTRODUCTION:
As per Sec. 39 of the Indian Partnership Act, dissolution of partnership between all
the partners of a firm is called dissolution of the firm. Dissolution of partnership only
involves a change in the relation of the partners, whereas dissolution of a firm means
complete breakdown of the relation of partnership among all the partners.
Dissolution of a firm may be voluntary or by the order of the Court.
Thus, there is a difference between dissolution of partnership and dissolution of firm.

Dissolution of partnership:
Any change in the relation of the partners is called 'dissolution of partnership'. Thus,
when a partnership is reconstituted, there is dissolution of the partnership.

E.g.: There is a partnership between A and B. Now a new partner C is admitted. The
partnership between A and B is dissolved and now a new partnership between A, B
and C is formed. So the partnership is dissolved, but the firm continues in a
reconstituted form.

Dissolution of firm:
As per Sec. 39, 'the dissolution of partnership between all the partners of a firm is
called the dissolution of the firm'. In dissolution of a firm, the business of the firm is
closed and all its affairs come to an end. The assets and liabilities are settled.
So, the dissolution of a partnership may not always result in the dissolution of a firm
but the dissolution of a firm will always result in the dissolution of the partnership.

E.g.: There are three partners X, Y and Z. Now X becomes insolvent. The firm
usually stands dissolved due to the insolvency of X. Automatically there is dissolution
of partnership. However Y and Z may continue in the firm in a reconstituted form.
Here there is only the dissolution of the partnership and no dissolution of firm.

B. METHODS OF DISSOLUTION OF FIRM:

There are two types of dissolution of firm:

1. Dissolution without the order of Court
2. Dissolution by Court order.

1. DISSOLUTION WITHOUT THE ORDER OF COURT:

It may take place by following four ways.
a. Dissolution by mutual agreement or consent: (Sec. 40)
As partnership is a creation by mutual consent in the same way it can be dissolved
by the mutual consent of all the partners. It can also be dissolved in accordance with
a contract between the partners.
b. Compulsory dissolution: (Sec. 41)
Compulsory dissolution of a firm takes place under the following three
circumstances:
 i. When all the partners become insolvent or when all the partners except one
become insolvent, the firm is dissolved, because a firm should consist, of at
least 2 partners.
ii. When any one of the partners becomes insolvent.
iii. If the business becomes unlawful by happening of some event.

c. Dissolution on the happening of certain contingencies: (Sec. 42)

If the following events happen, a firm gets dissolved.
i. Expiry of the term for which the firm was constituted.
ii. Completion of the particular adventure for which the firm is constituted.
iii. Death of a partner.
iv. Insolvency of a partner.

Abdul Jaffer Vs. Venugopal, 46 MLJ 503:

The Court held that if the partnership agreement indicates an intention that the
representatives of the deceased must be made as partners, then such agreement is
valid. The firm is deemed to consist the surviving partners and the legal
representatives of the deceased partner.
d. Dissolution by notice: (Sec 43)
In case of a partnership at will it may be dissolved by any partner by giving notice in
writing to all the partners of his intention to dissolve the firm.
An oral notice or notice to only some of the partners is not sufficient. Further such
notice must be clear in language and substance. When one such a notice is given,
then it cannot be withdrawn unless all the partners agree to such withdrawal.
A partnership which is not at will cannot be dissolved by notice.

Commissioner of Income Tax Vs. G.S. Mills AIR 1966 SC 24;

The Court held that if there are more than two partners, then if it is agreed that on
the death of one of them, the others can cany on the partnership, it is valid.
However, if there are only two partners, the partnership needs to be dissolved by the
death of one of the partners.

2. DISSOLUTION BY COURT ORDER: (Sec. 44)

Under the following seven grounds, the Court may order dissolving a firm:
i. Insanity:
When one of the partners becomes insane, then any partner may apply to the Court
for dissolution. There must be adequate proof to show that the partner has been
really suffering from unsound mind. If a sleeping partner becomes insane, the Court
may not order dissolution.
In Kirby Vs. Carr1838 (160) ER 666:
The Court observed 'temporary illness on infirmity is not sufficient. The hope of
recovery and resuming the partnership duties must be remote and of indefinite and
doubtful duration. Only for such prolonged illness, Court can order for dissolution.
ii. Permanent incapacity:
When any partner has become permanently incapable of performing his duties as a
partner, then the Court may order dissolving the firm. The incapacity may be due to
physical ailment or due to mental illness.
However, the incapacity must be permanent in nature.
iii. Misconduct:
When a partner is guilty of misconduct and if such misconduct is likely to affect
adversely the carrying on the firm's business, then the Court may order dissolving
the firm.
However, the firm cannot be dissolved on the petition given by the guilty partner. The
misconduct the partner need not be connected to the partnership business and it is
sufficient if the misconduct affects the business of the firm.
Examples of misconduct are - the conviction for travelling in a train/bus without
ticket, breach of trust, adultery by the partner with the wife of another partner.
It further includes gambling, fraudulent acts, etc.
iv. Continuous breach of contract:
When a partner wilfully and continuously commits breach of partnership agreement,
or conducts himself such a manner so that it becomes impossible for the other
partners to carry on the business in partnership with him, then the firm may be
dissolved.
E.g.: Wilful neglect by a partner to attend to the business of the firm, using
partnership money to pay off a partner's private debts, continuous quarrelling among
partners.
Anderson Vs. Anderson, 1857 (25) Beav. 190:
The Court held that for dissolution of a firm the violation of the partnership
agreement by a partner must not merely be wilful and persistent, but must also be
substantial.

v. Transfer of interest:
When a partner has transferred the whole of his interest in the firm to a third party,
then the Court may order dissolving the firm, if other partners sue for the same. Here
the transfer of shares must be of the whole interest of the partner in the firm and not
merely a part of it.
Similarly, when the share of a third party has been attached under a decree or sold
in the recovery of arrears of land revenue, the Court may dissolve the firm.
vi. Continuous losses:
When a business of the firm is running at a loss for a continuous period, then the firm
may be dissolved by the Court order. Generally, the object of partnership is to earn
profits, but when it becomes impossible to make profits, the firm can be dissolved by
the Court order.

vii. Just and equitable:

When on any other ground the Court thinks it just and equitable to dissolve the firm,
it may dissolve the firm.
i. Mackenzie Vs. Himalaya Assurance Co. Ltd AIR 1926 Cal 745:
The Court held that the fact that the partnership cannot be run profitably due to the
personal differences between the partners is a ground for dissolution by court order.
ii. V.H. Patel & Co. Vs Hirubhal Himabhai Patel & Co. 2000 (3) scale 369:
The Supreme Court held that the dissolution of partnership should be ordered if it
was shown that the conduct of a partner had resulted in destruction of mutual trust.
The conduct of a partner should be such that it would not be practicable for the other
partners to carry on the business in the partnership.

C. RIGHTS AND LIABILITIES OF A PARTNER ON DISSOLUTION:

1. Rights to have business wound up: (Sec. 46)

On the dissolution of the firm, every partner his representative has the right to have
the property of the firm applied for payment of debts and liabilities of the firm. The
surplus amount is distributed among the partners. The right of the partners is called
partner's lien.

2. Right to have firm's debts settled out of firm's property: (Sec. 49)
After the dissolution of the firm, each partner has a right to have the property of the
firm applied for payment of debts and liabilities of the firm. The surplus amount may
be distributed among the partners. This right of partner is called the partner's lien.

3. Right to personal profits earned after dissolution. (Sec. 50)

If any partner has bought the goodwill of the firm its dissolution, then he has the right
to use the firm's name and earn profits by its use.
Sarojini Vs. Kumari Bhagya 2005 (3) CTC 308:
A partner died while he carried on the firm's business. His legal heirs continued the
business as a sole proprietorship under the same name and style. The Plaintiff
claimed a share in the profit of firm earned. The Madras High Court held that the
legal heirs who carried on the business were legally bound to render accounts.

4. Right to return of premium on premature dissolution (Sec. 51)

When a partner has paid a premium on entering into the partnership for a fixed term
in the hope that the firm shall continue to exist and he shall enjoy the fruits of its
goodwill but if the firm is dissolved before the fixed term, then he is entitled to a
refund of reasonable premium. However, no refund can be made:
a. If the firm was not constituted for a fixed term or
b. if the firm is dissolved due to the death of a partner
c. If the dissolution is mainly due to the misconduct of the partner paying the
premium or
d. If the dissolution is in furtherance of an agreement between the partners
which contains no provision for the refund of the premium.

5. If the partnership is rescinded for fraud or misrepresentation, then the

partner has:
a. A lien on the surplus assets
b. right of subrogation for the payment made by him towards the debts of the
firm
c. Right to be treated as a creditor of the firm for any payment made by him
towards the debt of the firm
d. Right to be indemnified by the partner guilty of fraud.

6. Right to restrain from use of firm name or property: (Sec. 53)

When a firm is dissolved, a partner or his representatives can be refrained from
carrying on a similar business in the firm's name or from using the property of the
firm for his personal benefit.
However, this restriction can be waived if there is an agreement to the contrary or if
the partner has bought the goodwill of the firm.
Liabilities of a partner as dissolution:
1. If no public notice of dissolution is given, every partner is liable to third parties
for any act done any of them after the dissolution.
Exceptions:
The following persons are not liable, even if there is no notice of dissolution.
a. The estate of a deceased partner
b. The insolvent partner and
c. The sleeping or dormant partner.
2. Continuing authority of partners for winding up: (Sec. 47)
On dissolution of the firm, the authority of partners does not terminate immediately.
The authority of partners continues
a. For winding up the affairs of the firm
b. For completing the transactions already undertaken, but not finished at the
time of dissolution.
3. Liability to share personal profits:
During the process of winding up, if any partner makes profit using the firm's property
etc. then he must share the profit with the other partners.

D. SETTLEMENT OF ACCOUNTS:
The partnership agreement determines the modes of settlement of accounts among
partners after dissolution of a firm. If there is no specific agreement among them,
then the following are the provision.
1. After dissolution, the Goodwill must be included in the assets and must be
sold separately or along with other property.
2. If the assets of the firm are not sufficient for payment of the debts, the
partners must bear the deficiency. The losses must be first out of profits next
out of capital and lastly by the partners individually in the proportion in which
they share profits.
3. The assets of the firm must be applied to pay the following:
a. To pay the debts to third parties.
b. To pay to each partner the amount due to him from the firm for advances -
distinguished from capital.
c. To pay to each partner the amount due to him on account of capital.
d. The balance or residue is divided among the partners in the proportion in
which they share profits.
4. Debts of the firm must be paid first out of the property of the firm If there were
any surplus it would be distributed among the partners.

Private debts of the partners are paid first out of the private estate of the partners. If
there is a surplus asset after paying the debts of the firm, then the surplus is
proportionately shared and the private debts are paid to that extent.
5. If partner is unable to contribute towards the deficiency of his capital, then the
capital loss or deficiency of the insolvent partner is shared by all the solvent partners
in the ratio of their present capital amounts.

CHAPTER 10
REGISTRATION OF FIRMS (Sec. 56 to 70)
MODEL QUESTIONS:
 1. State the provisions of the Partnership Act relating to the registration of firms.
2. a. What are the effects of non-registration of a firm? b. Explain the implied
authority of a partner.
3. Write short notes on: (a) Effects of Non-registration of a firm (b) Firm and Firm
name.
SYNOPSIS:
A. Introduction
B. Time of Registration
C. Procedure for Registration (Sec. 58 & 59)
D. Change of particulars in registration (Sec. 60)
E. Penalty for false particulars (Sec. 70)
F. Inspection of Register of firms and documents and grant of copies (Sec. 66 &
67)
G. Rules of evidence (Sec. 68)
H. Effect of non-registration (Advantages of registration Disadvantages of non-
registration

A. INTRODUCTION:
A partnership business need not be compulsory registered. But a company must be
compulsory registered under the Indian Companies Act.
However, in partnership, registration is made compulsory indirectly Registration does
not create a partnership. It is only an evidence of partnership business.

B. TIME OF REGISTRATION:
As far as the time of the registration of a firm is concerned, the act is silent on both
these aspects.
Sec. 69 (2), however, lays down 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
the firm is registered and the persons suing are shown in the Register of firms as
partners in the firm.
Thus, Court will not allow any suit filed by a unregistered firm. So the firm must be a
registered one as on the date of the institution of the suit. This means that before any
suit is filed in a law Court, there must have been the registration of the firm.

C. PROCEDURE FOR REGISTRATION: (Sec. 58 & 59)

An application is filed by the partners to the Registrar of firms. An office of the
Registrar of firms exists in every state. The application should be on the prescribed
form accompanied by the prescribed fee.
The application must contain the following particulars: (Sec. 58).
1. The name of the firm:
The name of the firm, which shall not contain any of the following words namely
'Crown' 'Emperor', 'Empress',
'Imperial', 'King', 'Queen', 'Royal', or words expressing or implying the sanction,
approval or patronage of the Government unless prior approval in writing of the
Government has been taken.
2. The place or principal place of business of the firm.
3. The names of any other places where the firm carries on business.
4. The date when each partner joined the firm.
5. The name in full and permanent addresses of the partners.
6. The duration of the firm.
The application must be signed and verified by each partner or his authorised agent
in the prescribed manner. (Sec. 58)
When the Registrar is satisfied that the provisions of section 58 have been duly
complied with, then he makes an entry of the application in the Register of firms and
files the same. (Sec. 59)
Registration is effected by delivering to the Registrar a statement in the prescribed
form accompanied by the prescribed fee.
The Registrar then issues a 'Certificate of Registration' under his seal. The
registration is effective from the date when the Registrar files the statement and
makes entries in the register of firms and not from the date of presentation of the
statement to him.

D. CHANGE OF PARTICULARS IN REGISTRATION: (Sec. 60)

If there are changes in the following particulars, then the firm must intimate the
Registrar of firms far incorporating necessary changes in the Register of firms
1. Change in the name of the firm or in location of the , principal place of
business of the registered firm. (Sec. 60)
2. Closing and opening of the branches of the firm. (Sec. 61)
3. Change in names and addresses of partners. (Sec. 62)
4. Change in the constitution of the firm and its dissolution or election of a
minor partner on attaining majority to continue as partner or sever his
connection. (Sec. 63)
Any change of name or of the location of the principal place of business is almost
like a new registration and therefore, statement to that effect signed by all the
partners and accompanied by prescribed fee must be sent to the Registrar.
There is no time limit prescribed for filing the change in particulars. The Registrar
cannot reject them only on account of delay.
When the business of the firm is discontinued at one place or extended to a new
place, when a partner changes his name or permanent address, when the firm is
dissolved, a partner retires or joins, a minor having been admitted, elects to become
or not to become a partner, such all the above details should be informed to the
Registrar.

E. PENALTY FOR FALSE PARTICULARS: (Sec. 70)

The statements in the application form or amending forms and notices sent to the
Registrar must be true and complete, If any person knowingly or without belief in its
truth furnishes false or incomplete information, then he is liable to a penalty with
imprisonment which may extend to three months or with fine or with both

F. INSPECTION OF REGISTER OF FIRMS DOCUMENTS AND GRANT OF

COPIES: (Sec. 66 & 67)
The register of firms is open for inspection by any person on payment of prescribed
fee. [Sec. 66(1)]
Further, all statements, notices and intimations filed with the Registrar is open for
inspection subject to prescribed conditions and payment of prescribed fees. [Sec. 66
(2)]
On application and on payment of the prescribed fee, the Registrar must furnish to
any person a certified copy of any entry in the Register of firms. (Sec. 67)

G. RULES OF EVIDENCE: (Sec. 68)

Any statement, notice of intimation recorded with the Registrar by any person is a
conclusive proof against| him. However, the third parties have the right to challenge
the facts in a statement and prove that they are false and are based on
misrepresentation or fraud.

H. EFFECT OF NON-REGISTRATION:
(Advantages of Registration / Disadvantages of Non-Registration)

If a firm is not registered, it has got the following disadvantages/disabilities:

1. No suit by a partner against the firm/partners:
i. A partner of an unregistered firm cannot sue his present or past
partners for enforcing a right under the contract or under the
Partnership Act.
ii. So, for filing a suit, the firm must be registered and the name of the
partner suing must appear as a partner in the register of firms
maintained by the Registrar.
iii. The disability to sue is only with regard to the rights arising out of a
contract, but not for a tort committed by a partner.
a. Loonkaran Sethiya Vs. Ivan E. John, (1978) 1 SCC 379:
The Court held that only a partner of a registered firm whose name appears in
registration of a firm has the right to sue for enforcement of firm's rights

b. Union of India Vs. Durga Dutt, AIR 1961 Assam 2:

The Court held that when a suit is filed without registration by a firm, it cannot be
entertained by a Court. The suit is liable to be dismissed and cannot be rectified
even by subsequent registration.

c. U.P. State Sugar Corporation Ltd., Vs. Jain Construction Company, AIR
2004 SC 4335:
The Supreme Court held that in a partnership suit, the firm must be registered at the
time of institution of the suit and not later on.

d. Firm Ashok Traders Vs. Gurumukh Dad Saluja, AIR 2004 SC 1433:
The Supreme Court held that the bar enacted by Sec; 69 of the Partnership Act does
not affect the maintainability of an application under Sec. 9 of Arbitration and
Conciliation Act. The arbitration clause constitutes an agreement by itself and hence
not covered under Sec. 69 of the Partnership Act.

2. No suit by firm against third parties:

i. An unregistered cannot file a suit against any third party for enforcing the
rights under the contract Act.
E.g., when an unregistered firm sells certain goods to a buyer and if the buyer
refuses to pay the price, then the firm cannot sue him for recovery of the price, as
this right arises from a contract.
ii. The disability is only with regard to rights arising under a contract and not
otherwise.
iii. Thus an unregistered firm has got a right to sue a third party for trade
mark or a patent right violation.
iv. Though an unregistered firm cannot take any action against third parties,
the third parties can always take action against the unregistered firm.
 a. Parumal Vs. Central Bank of India Ltd., AIR 1953 Punj, 235:
For the question whether subsequent registration of a firm after filing a suit is
sufficient to enable a firm to sue third parties, the Court held that subsequent
registration is unavailable and the suit must be dismissed.
b. In D.G. Sahu Vs. Indian Mills Stores, Rajpur 1977 MPLJ 491:
The Court held that there is no need for fresh registration when a new partner of the
partnership is taken in.

3. No claim of set off:

An unregistered firm or any other partner cannot claim set off against a third party
who has instituted legal proceedings against the firm. Set off means - a third party
has filed a suit against an unregistered firm for the recovery of some money, then the
firm cannot take the defence that money owed by that party to the firm must be set
off (adjusted) against the claim by the firm.

E.g.: If the unregistered firm files a case to recover Rs. 5,000/- from a debtor X and if
the firm has to pay Rs. 10,000/- to the same debtor X, then the firm cannot adjust the
debt by paying only Rs. 5000/-.

Exceptions:
In the following cases, the non-registration of a firm does not affect the filing of suits,
etc. In other words, it has the same rights as a registered firm.
1. An unregistered firm can claim set off if the amount does not exceed Rs. 100/-
2. An unregistered firm having business abroad only can exercise all the rights
of a registered firm.
3. A partner in an unregistered firm can sue for its dissolution.
4. After dissolution, a partner can sue for accounts or a share in the partnership
property.
5. A third party can sue the firm and its partners.
6. In all transactions which are not contract, an unregistered firm can sue.

CHAPTER 11 SHORT NOTES

A. FORMATION OF PARTNERSHIP (PARTNERSHIP DEED)
B. FIRM AND FIRM NAME [Sec. 4, 58 (3)]
C. PARTNERSHIP PROPERTY OF PROPERTY OF THE FIRM. (Sec. 24)
D. GOOD WILL (Sec. 14)

A. FORMATION OF PARTNERSHIP (PARTNERSHIP DEED)

The partnership comes into existence by an agreement. The agreement may be
written or oral. When the partnership agreement is written and signed by all partners,
it is called a Partnership Deed or Articles of Partnership.
The partnership deed is not a public document like the Memorandum or Articles, of
Association of a company.
Contents of a partnership deed: The partnership deed contains the following
particulars:
1. The name of the firm.
2. The names and addresses of the partners.
 3. The nature of the business.
4. The duration of partnership
5. 5.The share of capital amount by each partner
6. 6.The authority of each partner including limit of drawing.
7. 7.The interest on capital and on drawings
8. Rights of partners.
9. Duties of partners.
10. Remuneration to partners.
11. The profit or loss ratios to be shared among the partners.
12. The basis for the calculation of goodwill.
13. The books of accounts and the balance sheet.
14. Settlement of accounts on dissolution of the firm.
15. Procedure in case of disputes among the partners.

B. FIRM AND FIRM NAME

FIRM:
Each person in partnership business is individually called partner. The partners are
collectively called a firm. A firm is not a legal person or legal entity. It is only the
collective name of all the partners. But in commercial usage it is deemed to have got
distinct existence. In some foreign countries, a firm is considered as a legal person
or legal entity.

A partnership is different from Firm. Partnership denotes the legal relationship

between the partners in a firm. But a firm is the collective name of all the partners.
Partnership is invisible but firm is a visible body.

FIRM NAME:
i. The name under which the firm is carried on is called the firm name. It is a
short way of expressing all the names of the partners.
ii. A firm name should not contain words like King, Queen, Prime Minister, Chief
Minister, President, etc.
iii. A firm name should not contain any words expressing or implying the
sanction, approval or patronage of the Government. The State Government
may, however, signify its consent to the use of such words by a firm as a part
of its name by order in writing (Sec. 58 (3))
iv. The name of one firm should not be used by other firms. If it is used it tends to
deceive the public.
v. The law safeguards the trade names and goodwill of other persons already in
existence. If the name is used with a fraudulent intention, the law will
intervene.

C. PARTNERSHIP PROPERTY OR PROPERTY OF THE FIRM

The partnership agreement may specify the property of the firm, the decision of
which is for several purposes (E.g., during dissolution payment of debts). If there is
no express agreement the following
are the property of the firm.
1. The property originally brought into the common stock of the firm.
2. Rights and interests in such property.
 3. Property acquired by the firm or for the firm and interests in the property
acquired.
4. Property acquired in the course of the business of the firm, and for the
purpose of the firm and rights and interests thereof.
5. Goods of the firm's business.
Thus, property that is thrown into the common stock at the commencement of the
business and that property which is acquired from time to time during the
continuance of the partnership business belong to the firm. Property and rights and
interests in property acquired with money belonging to the firm is deemed to be
acquired for the firm. If private property of a partner is used for business of the firm it
is firm's property only if the partners have such intention.
D. GOOD WILL
'Good will' is a commercial term and not a legal term. The value of the reputation and
connection established by the firm due to its integrity, efficiency in service, quality of
the products etc., is called the goods will of the firm. This good will is an intangible
asset of a firm, and depends upon the nature character of the business. It differs
from trade to trade.
Good will is the advantage other than the value of the capital stock, fund or property
employed therein due to encouragement received from its customers. It is gained by
the continuous years of honest work, and the prestige earned through it.
Khushal Khingar Vs. Mrs. Khorshedahanu, AIR (1970) SC. (147):
The Court held - 'Goodwill is an intangible asset of the firm, it is the whole advantage
of the reputation and connection formed with the customers together with the
circumstances which make the connections durable'

Sec. 55 speaks about sale of goodwill after dissolution:

1. In settling the accounts of a firm after dissolution, the goodwill is included in
the assets, and it may be sold either separately or along with other property of
the firm.

Rights of buyer and seller of goodwill:

2. When the goodwill of a firm is sold after dissolution, partner may cany on a
business competing with that of the buyer and he may advertise such
business, but he may not
a. Use the firm name
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 its
dissolution.
3. Agreements in restraint of trade:
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 such agreement is valid if the
restrictions imposed
are reasonable.

CHAPTER 12
THE LIMITED LIABILITY PARTNERSHIP ACT 2008
MODEL QUESTIONS:
 1. Explain the meaning of the Limited Liability Partnership. What are its
advantages?
2. Explain the salient features of the Limited Liability Partnership Act, 2008.
3. The Limited Liability Partnership is an alternate mode of carrying business.
Discuss.
4. Write short note on: (a) The Limited Liability Partnership Act, 2008 (b) Limited
Liability Partnership.
SYNOPSIS:
A. Need for the act
B. The Limited liability partnership Act, 2008
C. Meaning of limited liability partnership
D. Salient features of the limited liability partnership Act, 2008
E. Nature of limited liability partnership
F. Incorporation and name of the LLP
G. Extent and limitation of liability of LLP
H. Contribution by the partners
I. Financial disclosures
J. Assignment and transfer of partnership rights
K. Investigation of affairs of LLP
L. Conversion of existing firms into LLP
M. Provisions for incorporation of foreign LLP
N. Compromise, arrangement or reconstruction of LLP
O. Winding up and dissolution of LLP
P. Conclusion

A. NEED FOR THE ACT:

As per the Partnership Act, 1932, the maximum number of partners in a partnership
firm is twenty. Further, the partners are jointly and severally (individually) liable.

Most importantly, the liability of partners is unlimited which means that the personal
properties of partners can also be attached for discharge of debts and this is in
addition to the capital amounts contributed by the partners in the firm,
Thus, the present partnership laws act as a deterrent for the growth and expansion
of partnership firms. The above legal constraints in partnership have made it
impossible to meet the challenges posed today. For these reasons, partnership firms
have not grown in size and in number.
To overcome these constraints and disadvantages, the 'Limited Liability Partnership
Act, 2008' was enacted.

B. THE LIMITED LIABILITY PARTNERSHIP ACT, 2008:

The main advantage of the LLP Act, 2008 is that it provides limited liability to be
partners, which helps them to flexibly organize their internal structure as a
'partnership based on a mutually arrived agreement'.
Due to flexibility in its structure and operation the LLP is suitable for small
enterprises.

C. MEANING OF LIMITED LIABILITY PARTNERSHIP:

LLP is a body corporate and a legal entity separate from its partners. It has perpetual
succession. While the LLP a separate legal entity liable to the full extent of its assets,
the liability of partners is limited to their agreed contribution.

D. SALIENT FEATURES OF THE LIMITED LIABILITY PARTNERSHIP ACT,

2008:
The following are the salient features of the Limited Liability Partnership Act, 2008 -
1. The Limited Liability Partnership is a body corporate and a legal entity
separate from its partners.
2. The mutual rights and duties of the partners of the LLP inter se and of
the LLP and its partners governed by an agreement between the
partners inter se or between the LLP and the partners. The Act
provides flexibility to devise the agreement as per their choice. In the
absence of any such agreement, the mutual rights and duties is
governed by the provisions of the Act;
3. The LLP is a separate legal entity, liable to the full extent of its assets,
with the liability of the partners limited to their agreed contribution in the
LLP.
4. No partner is liable on account of the independent or unauthorised
actions of other partners or their misconduct.
5. The liabilities of LLP and its partners who have acted with intent to
defraud creditors or for any fraudulent purpose is unlimited for all or
any of the debts or other liabilities of the LLP.
6. Every LLP has at least two partners and also has at least two
individuals as Designated Partners, of whom at least one should be a
resident in India.
7. The LLP is under obligation to maintain annual accounts showing true
and fair picture of its state of affairs. A statement of accounts and
solvency should filed by every LLP with the Registrar every year. The
accounts of LLPs is also audited.
8. The Central Government has powers to investigate the affairs of a LLP
by appointment of competent inspector.
9. The compromise or arrangement including merger and amalgamation
of LLPs is as per the provisions of the Act;
10.A firm, private company or an unlisted public company is allowed to be
converted into a LLP as per the provisions of the Act.
11.The winding up of the LLP may be either voluntary or by the Tribunal to
be established under the Companies Act, 1956. Till the Tribunal is
established, the power in this regard has been given to the High Court.
12.The act confers powers on the Central Government to apply provisions
of the Companies Act, 1956 with necessary changes by notifications.
However, such notifications is laid in draft before each House of
Parliament for a total period of 30 days and is subject to any approved
modification by both Houses;
13.The Indian Partnership Act, 1932 is not applicable to LLPs.

E. NATURE OF LIMITED LIABILITY PARTNERSHIP:

1. The Limited Liability Partnership Act seeks to provide that LLP is to be
a body corporate having perpetual succession and legal entity separate
 from its partners and any change in the partners of such partnership
does not affect its liabilities.
2. Partners: Any individual or a body corporate may become a partner in
an LLP. However, the said person should be of sound mind, is not
insolvent., and has not applied for adjudication for insolvency.
3. An LLP shall consist of at least two partners and there no restriction on
the maximum number of partners.
4. The Act provides that in a situation when the number of partners is
reduced to one and if such LLP carries on business with such one
partner for more than six months and then such partner is liable
personally for the obligations of the LLP.
5. The LLP Act has made provisions that a LLP should have at least two
designated partners who are individuals and at least one of them is
resident in India.
6. An individual does not become a designated partner in any LLP unless
he has given his prior consent to act as such to the LLP in the
prescribed form and manner.
7. The particulars of every designated partner who agrees to act as
partner are filed with the Registrar.
8. Any partner may become or cease to be designated partner in
accordance with the LLP agreement.
9. The LLP Act seeks to empower the Central Government to make rules
for prescribing the conditions and requirements for an individual to a
designated partner.
10. The LLP Act also provides that every designated partner should be
obtain a Designated Partner Identification Number (DPIN) from the
Central Government.
11. The responsibilities and liabilities of the designated partner are as
follows -
a. He is responsible for the doing of all acts, matters and things
as are required to be done by the LLP in respect of compliance
of the LLP Act;
b. He is liable to all penalties imposed on the LLP for any
contravention of the provisions.
12. The LLP Act has provided for a 30 days period for filling up of a
vacancy of a designated partner. If no designated partner is appointed,
or if at any time there is only one designated partner, each partner of
the LLP is deemed to be a designated partner.
13. If the LLP fails to appoint designated partners then the LLP and its
every partner is punishable with fine.

F. INCORPORATION AND NAME OF THE LLP:

1. Two or more persons are required to file an incorporation document
for incorporating a LLP with the Registrar of Companies (ROC) in the
State in which the registered office of the LLP is situated.
2. There shall be filed, along with the incorporation document, a
statement in the prescribed form, that all the requirements of the Act
and the Rules have been complied with,
3. Once the incorporation documents of the LLP are registered and a
certificate of its incorporation is issued by the Registrar.
 4. The said certificate of registration is conclusive evidence that the LLP
is incorporated by the name specified therein.
5. Every LLP needs to have a registered, office to which all
communications is made and received.
6. The Act has imposed an obligation on every LLP to suffix "limited
liability partnership" or "LLP" with its name.
7. The clause also seeks to provide that no LLP is registered with an
undesirable name or a name which is identical or nearly resembles to
that of any other partnership firm or an LLP or a body corporate or a
registered trade mark or a trade mark, the application of which is
pending.
8. The Act has made provisions for the application for the reservation of
proposed name of the LLP or change of its existing name to the
Registrar who may reserve the name for a period of three months.
Further, the Central Government is empowered to give directions to the
LLP to rectify its name if the name registered is undesirable or so
nearly resembles the name of any other LLP or body corporate or other
name as to be likely to be mistaken for it.

G. EXTENT AND LIMITATION OF LIABILITY OF LLP:

1. The Act provides that every partner of the LLP is, for the purpose of
business of the LLP, an agent of the LLP but not of other partners.
2. The LLP is not bound by anything done by a partner in dealing with a
person if that partner has no authority to act for the LLP in doing a
particular act and the person with whom he is dealing also knows that
the partner has no authority for such act.
3. It provides that an obligation of the LLP, whether arising out of contract
or otherwise, is solely the obligation of the LLP.
4. It provides that liabilities of the LLP are to be met from the property of
the LLP and that a LLP liable for a wrongful act or omission by a
partner in the course of the business of the LLP or with its authority.
5. The partner is not personally liable directly or indirectly for an obligation
of the LLP solely by reason of his being a partner of the LLP.
6. It provides that the obligation of a LLP does not affect the personal
liability of a partner for his own wrongful act or omission but a partner,
is not personally liable for wrongful act or omission of any other
partner.
7. After a partner's death, if the business is continued in the same LLP,
the continued use of that name or of the deceased partner's name as a
part thereof does not itself make his legal representative or his estate
liable for any act of the LLP done after his death.
8. In case, the LLP or any of its partners carry out an act with intent to
defraud the creditors of the LLP or any other person or if they carry out
an act for any fraudulent purpose, then there exists unlimited liability for
the LLP and its partners.
9. In case, any such act is carried out by a partner, the LLP is liable to the
same extent as the partner.

H. CONTRIBUTION BY THE PARTNERS:

1. The contribution may consist of money, tangible or intangible property, or any
other benefits such as promissory notes, contracts for services performed or
to be performed.
2. The obligation of a partner to contribute money or property to a LLP shall be
as per the LLP agreement.

I. FINANCIAL DISCLOSURES:

1. Proper books of account are to be maintained by the LLP relating to its

affairs for each year and for filing of an Annual Statement of Accounts
and Solvency with the Registrar in prescribed form and manner.
2. The accounts of the LLPs are audited as provided by the rules which
are made by the Government.
3. Every LLP is required to file with the Registrar an annual return duly
authenticated every year.
4. Incorporation document, names of partners and changes, if any, made
therein, Statement of Accounts and Solvency and Annual Return filed
by each LLP with the Registrar are available for inspection in the; office
of the Registrar by the public.

J. ASSIGNMENT AND TRANSFER OF PARTNERSHIP RIGHTS:

1. The rights of a partner to a share of the profits and losses of the LLP
and to receive distribution, accordance with the LLP agreement are are
transferable either wholly or in part.
2. The transfer of any rights by any partner would not by itself cause the
dissociation of the partner or a dissolution and winding of LLP.
3. The transfer of rights does not entitle the transferee or assignee to
participate in the management or conduct of the activities of the LLP or
access information concerning the transactions of the LLP.

K. INVESTIGATION OF AFFAIRS OF LLP:

1. The Act provides for the circumstances under which investigation of the
affairs of a LLP may be ordered by the Central Government.
2. The Act also empowers the Central Government, in public interest, to
initiate proceedings against the LLP for recovery of property and
damages.

L. CONVERSION OF EXISTING FIRMS INTO LLP:

1. A partnership firm may convert itself into an LLP as per Section 55 and
second schedule of the act.
2. A private company may convert itself into an LLP per section 56 and
third schedule of the Act.
3. A unlisted Public company may be converted into an LLP as per
section 57 and the fourth schedule of the Act.
4. Upon such conversion, on and from the date of certificate of
registration issued by the Registrar in this regard, the effects of the
conversion is as specified in the Act.
 5. On and from the date of registration specified in the certificate of
registration, all tangible (movable or immovable) and intangible
property vested in the firm or the company, all assets, interests, rights,
privileges, liabilities, obligations relating to the firm or the company, and
the whole of the undertaking of the firm or the company, are transferred
to and vest in the LLP without further assurance, act or deed.
6. The firm or the company, is deemed to be dissolved and removed from
the records of the Registrar of Firms or Registrar of Companies. -

M. PROVISIONS FOR INCORPORATION OF FOREIGN LLP:

Foreign LLP can establish a place of business in India and its regulatory mechanism
is as per the rules prescribed by the Central Government.

N. COMPROMISE., ARRANGEMENT OR RECONSTRUCTION OF LLP:

The LLP Act provides compromise or arrangement including mergers and
amalgamations, winding up and dissolution of LLP. These should be agreed by
majority of members and creditors of LLP representing three-fourths in value and
confirmed by the National Company Tribunal (NCLT).

O. WINDING UP AND DISSOLUTION OF LLP:

1. The winding up of LLP may be either voluntary or by the NCLT under
certain circumstances.
2. The NCLT can order for the winding up of the LLP on the grounds of
inability of the LLP to pay its debts, or default in filing the statement of
account or solvency or annual return with the Registrar of Companies
(ROC) for five consecutive financial years or any other ground which is
just and equitable in the opinion of the NCLT.
3. The Central Government makes rules for provisions relating to winding
up and dissolution of LLP.
P. CONCLUSION:
The LLP acts as a mechanism of growth for economic development of the country
and leads to the growth of professional services in the country. With the liberalisation
and globalisation of Indian economy, the LLP, as an alternate mode of carrying
business encourages joint ventures and would make Indian Service sectors globally
competitive.
LLP structure enables Small and Medium Enterprises and Family partnerships to
expand as they can admit outsiders with 'capital' or 'skill' as partners. The flexible
structure of LLP facilitates entrepreneurs, service providers and professionals to
organize and operate in an innovative and efficient manner for effectively competing
in the global market.
 PROBLEMS
LAW OF PARTNERSHIP

PROBLEM NO. 1
Mala is a sole proprietor of a firm. She admits Kala as a partner on the
following terms.
a. She is not to bring any capital
b. She is not to be responsible for any loss
c. She is to receive Rs 5000 per annum in lieu of profits.
d. She is not to enter into contracts on behalf of the firm. Discuss
the legal position of Kala
ANSWER:
Sec. 4 of the Indian Partnership Act, 1932 defines partnership as follows:
Partnership is the relation between two or more persons who have agreed to share
the profits of a business carried on by all or any one of them acting for all.
In the instant case, Mala is the sole proprietor of a firm. She admits Kala as a partner
but has laid down stipulations.
The stipulations viz. Kala not to bring any capital, not to be responsible for any loss
and to receive Rs. 5000/- per annum in lieu of profits are all in the nature of a
'Nominal Partner'. A Nominal Partner is one who lends his name to the firm but does
not have any real interest on it. He does not invest, nor share in the profits or take
part in the conduct of the business. A Nominal partner is known to the world as a
partner though he does not participate in the affairs of the business.
It is also stipulated by Mala that Kala is not to enter into contracts on behalf of the
firm. The definition of partnership in Sec. 4 concludes stating that the business may
be carried on "by all or any of them acting for all".
This clearly establishes the principle of implied agency as a test to find out the
existence of partnership. The partner who is conducting the affairs of the business is
considered as the agent of the remaining partners. This means that in the above
case, Mala acting on behalf of Kala who has been admitted as a partner is not in any
deviation of the rules of Partnership and therefore Kala's legal standing is well
protected.
It is also pertinent to Cite the famous case of Mullow March & Co. Vs. Court of
Madras wherein it was decided that the real intention and conduct of the business
must be considered to decide whther they are partners or not irrespective of any
other tests of partnership.
In view of the foregoing, Kala is a partner in Mala's firm with a valid legal status.

PROBLEM NO. 2
"A", "B" and "C" enter into a partnership agreement under which C is not
liable for tosses. "F' filed a suit against A, B and C for the amount due from the
firm. Examine the position of 'C'
ANSWER:
Sec. 4 of the Indian Contract Act, 1872 defines Partnership as the relation between
persons who have agreed to share the profits of a business carried on by all or any
of them acting for all.
To constitute a partnership, there must be an agreement among persons. Without an
agreement, there cannot be a partnership. Thus, an agreement is the basis of
partnership.
In the above case, A, B and C are partners in a firm wherein it is decided and agreed
upon that C shall not be liable for losses. F who is a third party has no obligation to
know the nature of agreement among the partners and therefore files a suit for
recovery of the amount due from the firm in all the three names, only knowing them
as partners of the firm.
Sec. 13 (e) of the Partnership Act, 1932 states that every partner has the right to be
indemnified by the firm for the payments made and expenses / liabilities incurred by
him for the business of the firm in the ordinary and proper conduct of the business.
Here the partner is entitled to be indemnified for any expenditure or liability incurred
by him.
In keeping with the provision of Sec. 13 (e), C has the right to be indemnified by the
partnership firm in respect of the share of loss borne by him as a result of the law
suit filed by F.

PROBLEM NO. 3
'A' and 'B' agree to work together as carpenters. According to the agreement,
'A' shall receive all profits and shall pay Rs. 5,000 per month to 'B' as wages.
Discuss whether A and B are partners.
ANSWER:
Sec. 4 of the Indian Partnership Act , 1933 defines partnership as the relationship
between persons who have agreed to share the profits of a business carried on by
all or any of them acting for all. To constitute a partnership, there must be an
agreement between persons. Without an agreement) there cannot be partnership.
Thus an agreement is the basis of partnership.
Sec 5 of the Partnership Act states that the relation of partnership arises from
contract and not from status.
In 'Mullow, March & Co. Vs. Court of Madras', the following principle was laid down
to find out the existence of partnership. The real intention and conduct of the
business must be considered to decide whether they are partners or not. This is
known as the intention and conduct test.
Further, in 'Garwood's Trusts, Re, (1903) the Court held that a partnership
agreement can provide for the payment of remuneration to working partners.
From the foregoing, it is clear that A and B are partners.

PROBLEM NO, 4
A, B and C are carrying on business in partnership under an agreement which
provides that the profits will be shared by them equally, but the losses will be
borne equally by A and B alone. X a creditor of the firm sues C. Decide
whether C is liable.
ANSWER:
Sec. 4 of the Indian Partnership Act, 1932 defines partnership as the relation
between persons who have agreed to share the profits of a business carried on by
all or any of them acting for all.
To constitute a partnership, there must be an agreement between persons. Without
an agreement, there cannot be a partnership. Thus, an agreement is the basis of
partnership. Further, it has been clearly laid down in the classic case of Mullow,
March & Co. Vs. Court of Madras, that the real intention and conduct of the business
must be considered to decide partnership.
In the above case, A, B and C agreeing to share profits equally but losses to be
shared equally by A and B alone is as per their intention which forms part of their
contract. However, X, a creditor of the firm is not under obligation to know about the
nature of agreement entered into by the partners of the flrm and hence he sues one
of them.
As C turns out to be a partner who is not liable for sharing losses, he needs to satisfy
the liability of the creditor as the case warrants and later proceed against the rest of
the partners for recovery of the amount so paid by him.

PROBLEM NO. 5
'A' and 'B' agree to work together as Goldsmiths. According to the agreement.
'A' shall receive all profits and shall pay Rs.50,000 per month to 'B" as wages.
Discuss whether 'A' and 'B' are partners.
ANSWER:
Sec. 4 of the Indian Partnership Act, 1932 defines partnership as the relation
between persons who have agreed to share the profits of a business carried on by
all or any of them acting for all.
To constitute a partnership, there must be an agreement between persons. Without
an agreement, there cannot be a partnership. Thus, an agreement is the basis of
partnership.
Sec. 5 of the Partnership Act states that the relation of partnership arises from
contract and not from status.
Reference is made to the famous case law of Mullow, March & Co. Vs. Court of
Madras wherein it was held that the real intention and conduct of the business must
be considered to decide whether the concerned parties are partners or not.
This is known as the intention and conduct test. Sec. 6 of the Indian Partnership Act
lays down the rule that the real relationship, conduct and intention of the parties are
important to decide the existence of a partnership.
Thus, in the above case, although 'B' is a partner of 'A', as per their agreement of
partnership, he is to receive remuneration while 'A' would take the profits earned out
of the business.
Since the intention underlying in their agreement is one of partnership, whether they
share profits or not, A and B are partners of the business as decided in the case law
cited earlier.

PROBLEM NO. 6
Three Bus companies each having ten partners combine by agreement into
one firm. The firm enters into a number of contracts. Can these contracts by
the new firm be enforced by or against the firm?
ANSWER:
Sec. 4 of the Indian Partnership Act, 1932 defines partnership as 'the relation
between two or more persons who have agreed to share the profits of a business
carried on by all or any of them acting for all'.
The term 'person' here does not include firms and limited companies. From two or
more such firms, only the partners of the firms and not the firms as such, can form a
separate partnership outside of their respective firms, provided their total number
does not exceed the statutory limit. The statutory number of partners in any banking
business should not exceed 10 and in non banking business, should not exceed 20.
If the number exceeds such statutory limits, then any such partnership becomes an
illegal association.
Law does not confer legal personality to illegal association of two or more firms
constituting a new firm and hence such entities have no independent personality of
their own. They can neither sue nor be sued.
In the instant case, keeping in view of the above legal provision, the three bus
companies which are partnership firms cannot combine together and form ' a new
firm'. However, only the partners as individual persons may independently form a
new partnership firm but the number of partners in such case should not exceed the
stipulated statutory limit. Otherwise, it becomes an illegal association. Thus, the
question of forming a new firm by the existing three firms does not arise and
consequently, the contracts of the 'so-called' firm bear no significance.

PROBLEM NO. 7
X, a minor was admitted to the benefits of partnership, consisting of A, B and
C, three adult partners. Within six months after attaining majority, X gives
notice that he has become a regular partner. But A, B and C refuse to take X as
partner. Is the stand of A, B and C justified?

ANSWER:
Sec 11 of the Indian Contract Act clearly provides that a minor is not competent to
enter into
However, Sec. 30 of the Partnership Act provides that, though a minor cannot
become a partner, with the consent of all the partners he may be admitted to the
benefits of partnership.
Sec 30(5) states that at at any time within 6 months of minor attaining majority or of
his obtaining knowledge that he has been admitted to the benefits of partnership,
whichever date is later, such person may give public notice that he has elected to
become a partner (or not) and such notice shall determine his position as regards
the firm. In the above case, the minor X, on attaining majority, within a period of 6
months, gives notice as to his intention of becoming a regular partner in the firm, in
full conformity with the legal formality.

PROBLEM NO. 8
X, Y and Z are partners in a trade. X retires from partnership. Y and Z continue
the business in partnership and incur debts. Can the creditors make X liable
for the debts? Give reasons for your answer.
ANSWER:
Sec. 32 of The Indian Partnership Act, 1932 deals with 'Retirement of a Partner'.
This section brings out certain duties and liabilities of a retiring partner. It states that
a retiring partner continues to be liable to the creditors for the acts of the firm done
before and up to the date of his retirement.
Further, the retiring partner is also liable to third parties for all transactions of the firm
begun but unfinished at the time of his retirement.
A retiring partner must give public notice of his retirement. In case he fails to give
such public notice, then he continues to be liable for the acts of the firm even after
his retirement. The notice about the retirement may be given either by the retiring
partner himself or any of the partners of the reconstituted firm.
From the foregoing it is very clear that X who retires from the partnership firm must
give a public
notice about his retirement from partnership with Y and Z in his own interest else the
creditors of the firm can implead him as a respondent in their recovery proceedings.
PROBLEM NO. 9
A, B and C are partners of a partnership firm. C who is an active partner retires
without giving public notice. X supplies the goods to the firm after C's
retirement. Advice X as to the recovery of amount of the goods supplied.
ANSWER:
Sec. 32 of The Indian Partnership Act, 1932 deals with 'retirement of partners'.
It states that a retiring partner must give public notice of his retirement. If he fails to
give such a public notice, then he continues to be liable for the acts of the firm even
after his retirement.
The public notice about the retirement of a partner may be given either by the retiring
partner himself or any of the partners of the reconstituted firm.
In the instant case, C, who is an active partner retires without giving any public
notice as to his retirement which jeopardizes his position as far as the third parties
are concerned who recognise him as a partner of the firm of ABC.
Thus, owing to C's failure to make a public notice of his retirement, he continues to
be responsible for the firm even after his retirement. As far as X is concerned, he can
take recourse to law by filing a case against all the three partners in case of default
of payment for the goods.

PROBLEM NO. 10
A, B and C are partners in a partnership business. 'C' retires without giving a
public notice. 'D' an old customer deals with the firm without notice of change.
'D' wants to hold C also liable. Decide.
ANSWER:

Sec. 32 of The Indian Partnership Act, 1932 deals with 'retirement of partners'.
It states that a retiring partner must give public notice of his retirement. If he fails to
give such a public notice, then he continues to be liable for the acts of the firm even
after his retirement.
The public notice about the retirement of a partner may be given either by the retiring
partner himself or any of the partners of the reconstituted firm.
In the instant case, C, who is an active partner retires without giving any public
notice as to his retirement which jeopardizes his position as far as the third parties
are concerned who recognise him as a partner of the firm of ABC.
Thus, owing to C's failure to make a public notice of his retirement, he continues to
be responsible for the firm even after his retirement. As far as D is concerned, he
can take recourse to law by filing a case against all the three partners in case of
default of payment for the goods.

PROBLEM NO. 11
Mr. William an active partner of a ABC firm, resigned from ABC firm.
Afterwards he has decided to start a new Business competing with the ABC
firm. Can he do so? Decide.
ANSWER:
Sec. 36 of the Indian Partnership Act 1932 provides for the rights of a retiring
partner. It states that a retiring partner may carry on the business competing with
that of the firm and he may advertise business but he should not use the firm's name
or represent himself as carrying on the business of the firm, or solicit the custom of
persons who were dealing with the firm before he ceased to be a partner.
By an agreement, the retiring partner may be prohibited from carrying on the
competing business within a specified period or within specified limit.
According to the above provisions, Mr William who was an active partner of ABC firm
is well within his right to start a new business to compete with ABC firm. He is
however, not to use the name of ABC firm in the new venture nor solicit his old
clients for patronizing his new business, as we understand that ABC firm did not lay
down any prohibitory condition to Mr. William.

PROBLEM NO. 12
Ajay and Vijay two doctors formed a partnership firm. Ajay, one of the doctors
was punished for an offence of Rape. Vijay, the other doctor intends for the
dissolution of the firm. Can he do so? Decide.
ANSWER:
As per Sec. 39 of the Indian Partnership Act, 1932, the dissolution of partnership
between all the partners of a firm is called the dissolution of the firm.
In dissolution of the firm, the business of the firm is closed and all its affairs come to
an end.
There are two types of dissolution of firm viz. dissolution without the order of the
court and dissolution by court order.
Sec. 44 states the grounds under which a partnership is dissolved by Court Order,
one of which is 'misconduct'. When a partner is guilty of misconduct and if such
misconduct is likely to affect adversely the carrying on of the firm's business, then
the Court may order dissolving the firm.
In the above case, Ajay and Vijay who are doctors are on partnership. As Ajay was
accused of rape and punished under law, Vijay intends to dissolve the firm on the
ground of his misconduct.
As Ajay's misconduct may affect the partnership of Ajay and Vijay, Vijay may file for
dissolution of the partnership firm in the Court.

PROBLEM NO. 13
A and B are partners in a firm. The partnership deed inter-alia provides that
partnership can be terminated by mutual agreement only. B alone wants to
terminate the Partnership. Can he do so?
ANSWER:
No. B alone cannot terminate the partnership
Sec. 40 of the Indian Partnership Act, 1932 provides for dissolution of partnership by
mutual consent. It states that a partnership being a creation by mutual consent, in
the same way, it can be dissolved by the mutual consent of all the partners. It can
also be dissolved in accordance with a contract between the parties.
In the above case, A and B are partners who have contracted between themselves
that the termination of their partnership can be on mutual agreement only.
Further, Sec. 43 of the Act very clearly states that a partnership which is not at will
cannot be dissolved by notice.
In the light of the provisions of the above sections of the Act, B cannot terminate his
partnership unless A agrees to do so.

PROBLEM NO. 14
An unregistered partnership firm borrows Rs.1,00,000/- from Mr. X. The firm
failed to repay it within time. Now what can Mr. X do to recover the amount?
Advice.
ANSWER:
While Sec. 69 of the Indian Partnership Act states that an unregistered firm cannot
file a suit against any third party for enforcing the rights under the contract Act, it
does not stop the third parties from taking action against the unregistered firm. This
means that that though the firm is unregistered, any third party can always file a suit
against the unregistered firm.
In the above case, Mr. X who is the creditor of the unregistered firm can file a suit for
recovery of Rs. 1 lakh due from them This is well within the provisions of the law as
per Sec. 69 of the Act.

PROBLEM NO. 15
A, B and C and Co. is a newly constituted firm and commences business
without registration. 'D' having been indebted to the firm in a sum of Rs. 1 lakh
defaults to repay the debt. The firm files a suit against him for the recovery of
the said sum and immediately thereafter gets itself registered. Would the firm
succeed? Would your answer differ if 'D' being a creditor files a suit against
the unregistered firm for the recovery of a loan?
ANSWER:
Sec. 69(2) of the Indian Partnership Act, 1932 states 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 in the Register of firms as partners in the firm.
Thus, the Court will not allow any suit filed by a non-registered firm. The firm must be
a registered one as on the date of the institution of the suit. This means that before
any suit is filed in a Court of Law, there must have been registration of the firm.
From the foregoing, it is very clear that any suit by an unregistered firm against any
third party is not tenable. Even providing that the registration is in progress, any suit
filed on that strength shall also not hold.
In the case cited above A B C & Co. was an unregistered company as on the date of
filing a suit
1 lakh. Thus, their case would not qualify for admission
105
in the Court, at the outset. Even considering that they get the registration effected
soon after that, the case would not merit admission in the Court as the date of
registration is subsequent to the date of institution of the suit against D and not vice
versa.
The Act however provides that though an unregistered firm cannot take any action
against third parties, the third parties can always take action against an unregistered
firm. Therefore, in the above case if D were to be a creditor to the unregistered firm
viz. ABC & Co., he could very well proceed against them in respect of recovery of his
loan.

PROBLEM NO. 16
Geetha a minor, was admitted to the benefit of a firm consisting of Shalini,
Priya and Mathu, three adult partners. Within six months after attaining
majority, Geetha gives public notice that she has become a regular partner.
But Priya and Mathu refuse to take her. Is the refusal justified?
ANSWER:
As per Sec. 30 (5) of the Indian Partnership Act, 1932, the decision to become a
partner or not to
become a partner is with the minor, who has to take such decision within the expiry
of 6 months after become a major. If he fails to give such notice, he shall
automatically become a partner in the firm on the expiry of the said six months.
Sec. 30(5) reads - 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 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
shall determine his position as regards the firm:
PROVIDED that, if he fails to give such notice, he shall become a partner in the firm
on the expiry of the said six months.
In the above problem, since Geetha has given public notice within six months after
attaining majority, stating that she has become a regular partner, Priya and Mathu
cannot refuse to take her as their partner and hence their refusal is not justified.
 UNIT - V
THE SALE OF GOODS ACT 1930

SYLLABUS

Sale of Goods Act - The Contract of sale - Agreement to sell - Conditions and
Warranties - Passing of property - Transfer of title - Performance of the Contract -
Rights of Unpaid Seller - Remedies for Breach of Contract.

CHAPTER 1
CONTRACT OF SALE OF GOODS (Sec. 4 & 5)
MODEL QUESTIONS:
1. a. How is a "Contract of Sale of Goods" defined in the Sale of Goods Act?
What are the essentials elements| necessary to constitute a Sale of Goods?
b. What is the difference between a "Sale" and an "agreement to sell"?
2. a. How is a Contract for sale of goods made? What are the formalities of a
Contract of sale of goods?
b. Summarise the rules regarding the subject matter of the contract in the Sale of
Goods Act?
3. Distinguish between contract of sale and a hire purchase agreement.
4. Distinguish between sale and agreement to sell.

SYNOPSIS:
A. INTRODUCTION
B. ESSENTIALS OF A CONTRACT OF SALE
C. MODES OF MAKING A CONTRACT OF SALE
D. DIFFERENCE BETWEEN SALE AND AGREEMENT TO SELL.
E. DIFFERENCE BETWEEN SALE AND HIRE PURCHASE AGREEMENT
F. DIFFERENCE BETWEEN SALE AND BARTER OR EXCHANGE
G. DIFFERENCE BETWEEN SALE AND BAILMENT
H. DIFFERENCE BETWEEN SALE AND CONTRACT FOR WORK AND
MATERIALS (WORKS CONTRACT
I. KINDS OF SALE

A. INTRODUCTION:
Most of the commercial contracts involve sale of goods from one person called seller
to another person called buyer or purchaser. The law regulating sale of goods is
contained in Sale of Goods Act, 1930.
Section 4 the Sale of Goods Act, 1930 provides -
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. The term contract of sale
includes both a sale and an agreement to sell.

B. ESSENTIALS OF A CONTRACT OF SALE: '

The following are the essential elements to constitute a contract of sale of goods.
1. A Contract:
A contract of sale is a special type of contract. All the essentials of a valid contract
must be present in a contract of sale.. As per Sec. 10 of Indian Contract Act a
contract of sale must also have free consent, capacity of parties, lawful
consideration, lawful object, not declared as void by law, etc.
Thus, if there is no consideration a contract of sale, then it is treated as not a
contract of sale but as a gift.

2. Two parties (Bilateral Contract):

The seller and the buyer must be two different persons. This is based on the
principle that a person cannot be the buyer of his own goods.
There are however certain exceptions to the general rule that a person cannot be the
buyer of his own goods. A person may buy his own goods in the following
circumstances.
i. Auction, sale
ii. Execution of a decree
iii. Between part owners
State of Gujarat Vs. Ramanlal S. & Co.
On dissolution of a firm, the assets of the firm were divided among the partners. The
Court held that it was not a sale as the partners being the joint owners of those
assets cannot be both sellers and buyers.

3. Goods (The subject matter of the contract):

The subject matter of the contract of sale must always be 'goods' as defined in
Section 2(7) of the Act. The goods may either be existing or future goods and must
be movable.

4. Transfer of property in goods:

The transfer of property in goods is, in fact, the essence of a contract of sale. Thus, a
mere transfer of goods by owner from one place to another cannot amount to sale.
The transfer of 'passing of the property' is the test to determine whether there was a
sale or an agreement to sell between seller and buyer.

5. Price (in money as promised or consideration):

It is a general rule that an agreement without consideration is void. In a contract of
sale, the consideration is in terms of money. This consideration of money in a
contract of sale distinguishes it from bailment.

U.P. Co-operative Cane Unions Federations Vs. West Sugar Mills Association
AIR 2004 SC 3697:
The sugar factories in U.P. were compelled to enter into sale agreements for prices
fixed by the State government which were above the minimum prices fixed the
Central Government under Regulation of
Quota-U.P. Act, which were not acceptable to them. The Supreme Court held that
compulsory sale under a legislative Act does not lose the character of a sale.

C. MODES OF MAKING A CONTRACT OF SALE:

A contract of sale may be made in any of the following modes:
1. For a contract of sale, no particular form is necessary.
2. Like any other contract, a contract of sale is made by offer (to buy or sell
goods) by one party and its acceptance (to sell or buy goods respectively) by
the other party.
 3. The contract of sale may be made in writing or by word of mouth or partly in
writing and partly by word of mouth.
4. The contract of sale may also be implied from the conduct of the parties or the
dealings between the parties.
5. There may be immediate delivery of the goods.
6. There may be immediate payment of the price but it may be agreed that the
delivery is to be made at some future date.
7. There may be immediate delivery of the goods and also immediate payment
of the price.
8. It may be agreed that the delivery or payment or both are to be made in
particular instalments.
9. It may be agreed that the delivery or payment or both to be made on some
future agreed date.

D. DIFFERENCE BETWEEN SALE AND AGREEMENT TO SELL:

The main difference between a sale and agreement to. sell depends on the fact
whether the property in the goods has passed or is yet to pass from the seller to the
buyer.

S.No. Sale Agreement to sell

1 Executed contract.
2. Ownership of. property has
passed.
3. The buyer has become the owner
of the goods.
4. The risk has passed to the the
buyer.
5. The goods cannot be taken under
execution, if the seller has
become insolvent.
6. It creates a 'Right in Rem'
because of the ownership right.
7. For breach of contract by the
buyer, the seller can sue for the
price only.
8. The buyer has to pay the tax.
9. If the buyer becomes insolvent
before he pays the price of the
goods, the seller should return
them to the official Assignee.
10. In sale, a seller cannot resell the
goods, and if he does so,
subsequent buyer does not
acquire title to the goods.
11. Only in existing and specific
goods.
Executory contract.
Ownership of property has not
passed.
Seller is still the owner of the goods.
The risk with regard in the goods
remains with the seller.
The goods can be taken under
execution, if the seller has become
insolvent.
It creates a 'Right in personam'.
For breach of contract by the buyer,
the seller can claim only
compensation.
he seller has to pay the tax.
If the buyer becomes insolvent before
paying the price, the seller need not
part with the goods until he is paid.
Here, if the subsequent buyer takes
the goods for consideration and
without notice of the prior agreement,
then he acquires a good title.
Mostly in future and contingent goods
or unascertained existing goods.
E. DIFFERENCE BETWEEN SALE AND HIRE PURCHASE AGREEMENT.

A hire purchase agreement is a contract where the seller agrees to transfer the
goods to the hire purchaser when a certain fixed number of instalments of price are
paid by the buyer. The instalments paid by the hire-purchaser till that time are
regarded as the hire charges for the use of that goods. For default of payment or
instalment by the hire purchaser, the seller can recover the goods but the hire
charges cannot be recovered by the buyer. The ownership still rests with the seller.

Sale Hire purchase agreement

1. As soon as the contract is entered Only when a certain agreed number ol
into, the ownership is transferred from instalments is paid, the ownership is
the seller to the buyer transferred from the seller to the hire
purchaser.
2. The buyer's position is that of an The hire purchaser's position is that of
owner. the bailee.
3. The buyer cannot terminate the The hire purchaser can terminate the
contract and is bound to pay the price contract at any stage and cannot be
of the goods. forced to pay further instalments.
4. If the payment is made by the buyer in The instalments paid by the hire
instalments, th£ amount payable by purchaser are regarded as hire
the buyer to the seller is reduced as charges
the payment made by the buyer for
the seller towards the price of the
goods.
5. Because the buyer has become the The seller is still the owner of the
owner of the goods, he gets a right to goods and hence the hire purchaser
sell them. has no right to sell them. .

F. DIFFERENCE BETWEEN SALE AND BARTER OR EXCHANGE:

Sale:
1. Here property is transferred from the seller to the buyer fox a price.
2. The consideration for the transfer of property in goods may be partly of goods
and partly of money.
Barter or Exchange:
1. Goods are exchanged for goods.
2. Here money may be exchanged for money.

G. DIFFERENCE BETWEEN SALE AND BAILMENT:

Bailment is the delivery of goods by one person to another for some purpose. The
purpose is specified in the contract. After the purpose is accomplished, the goods
are returned to the person who delivered it or is disposed of according to the
directions of the person who delivered the goods.
Sale:
1. In a sale, the property is transferred from the seller to the buyer.
2. The buyer can use the goods according to his wish.
Bailment:
1. The property is transferred from the bailor to the bailee for safe custody, use,
carriage, etc.
2. The bailee can use the goods only according to the directions of the bailor.
H. DIFFERENCE BETWEEN SALE AND CONTRACT FOR WORK AND
MATERIALS (WORKS CONTRACT):
Contract for work and materials (Works contract):
Contract for work and materials means exercise of skill and labour by one party in
respect of materials supplied by another and the delivery of goods is only subsidiary
or incidental. The Sale of Goods Act does not apply to such contracts. But in a sale,
there is delivery of goods and hence the sale of Goods Act applies to it.
Example:
'A' arranges an artist 'B' to paint a portrait of 'A' for a fixed amount. 'B' the artist
himself, supplied the materials for its work. This is a contract for work and materials.
Sale:
1. In a sale, the property is transferred from the seller to the buyer.
2. The buyer can use the goods, according to his wish.
Contract for work and materials:
1. This involves exercise of skill and labour of one person or materials supplied
by another person.
2. The person receiving the goods cannot use the goods other than a purchase
for a contract for work.

I. KINDS OF SALE:
Section 4 of the Sale of Goods Act, 1930 provides -
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. The term contract of sale
includes both a sale and an agreement to sell.

Sale is divided into three types namely

(i) Agreement to sell
(ii) Ordinary sale
(iii) Auction sale
In both the sales, all the essentials like a contract, two parties; goods, transfer of
property in goods and price are present.
Auction is a public sale. Different bidders try to outbid each other and the goods are
sold to the highest
bidder. The auctioneer is deemed to be an agent of the seller.
An advertisement and catalogue of the goods, and terms of sale are circulated. The
intending buyers assemble at the appointing day and time and the auctioneer invites
bids from the intending buyer.
The highest bid constitutes the offer and some customary announcement like falling
of the hammers etc, constitutes acceptance of the offer. The contract of sale is
completed at this stage. Before acceptance of the bid, the bidder may withdraw his
bid.
The following transactions are not sales, though they resemble sale:
1. Hire purchase agreement.
2. Barter sale (exchange).
3. Contract for work (Works contract).
4. Bailment.
 CHAPTER 2
SUBJECT MATTER OF CONTRACT OF SALE OF GOODS
[Sec. 2 (6), 2(14), 6 to 8]

MODEL QUESTIONS:
1. Summarise the rules regarding the subject matter of the contract in the Sale
of Goods Act.
2. Define the term 'Goods? What are the different types of goods?
3. What ate goods? Explain the effects of destruction of goods.
4. Write short notes on: (a) Goods (b) Document of title to goods (c) Price
SYNOPSIS:
A. Introduction
B. Types of goods
1. Existing goods
a. Specific Goods [Sec. 2 (14)]
b. Ascertained. Goods
c. Un-ascertained Goods
2. Future Goods (Sec. 2 (6)]
3. Contingent Goods [Sec. 6(2)]
C. Effect of destruction of goods (Sec. 7 & 8)
1. Goods perishing before making of Contract (Sec. 7)
2. Goods perishing after the agreement to sell but before sale is effected
(Sec. 8)
D. Document of title to goods {Sec. 2 (4)]
E. Price in a contract of sale (Sec. 9 & 10)

A. INTRODUCTION:
Goods form the subject matter of a contract of sale.
According to Sec. 2 (7) 'Goods' means every kind of movable property other than
actionable claims and money.
It includes stocks and shares, growing crops, grass and things attached to or forming
part of land which are agreed to be severed before sale or under the contract of sale.
Trees which are agreed to be severed before sale or under the contract of sale are
held as goods.
Money and actionable claims have been expressly excluded from the definition of
goods.
Money here means current money or the money in circulation. So, the old and rare
coins and currency are only goods and hence can be purchased and sold.
An actionable claim means a claim to any debt or any beneficial interest in movable
property not in possession. It can only be enforced by action in a Court of law. For
e.g., a debt due from one person to another is an actionable claim and cannot be
bought or sold as goods. It can only be assigned.

B. B TYPES OF GOODS:

Goods are classified as follows:

1. Existing goods:
Existing goods are the goods which physicalIy exist and which are owned and/or
possessed by the seller at the time of making the contract of sale. Sometimes, the
seller may not be the owner, (for e.g., an agent) but he may be in possession of
goods.
In case the goods are not in existence, then there cannot be any contract of sale.
E.g.: A sells his horse to B, believing it to be alive but in fact the horse was dead at
the time of making the contract, there was no contract of sale.
Existing goods may be
a. Specific goods
b. Ascertained goods
c. Unascertained goods

a. Specific Goods: [Sec. 2 (14)]

As per Sec. 2 (14), specific goods mean goods identified and agreed upon at the
time - a contract of sale is made. To be specific goods, the goods must be actually
identified and it is not sufficient that the goods are only identifiable.
E.g.: A owns a number of cars. He promises to sell one of them to B. Here the goods
are not specific, because it cannot be identified. However, if A promises to sell his
only black coloured Maruti Car, then, the offer is valid.

b. Ascertained Goods:
These are goods which become ascertained after the formation of the contract of
sale.
In the above example, when the car to be sold is identified as black coloured Maruti
car, then it becomes ascertained goods.
c. Unascertained Goods:
They are goods which are not identified or ascertained at the time of making the
contract of sale. They are defined only by description or by sample.
Illustration - for ascertained, unascertained and specific goods.
'A' wants to buy a cow. He goes to a cow dealer 'B'. B has 100 cows. A agrees to
buy a particular cow,
That identified cow is a 'Specific' cow. If 'A' gives a certain description of the cow
which he wants to purchase aand if a cow suited to his description is separated from
the lot, then that cow becomes ascertained. Till the answering the description is
ascertained all the cows are only unascertained.

2. Future Goods: [Sec. 2(6)].

They are the goods which a seller does not possess at the time of contract, but
which will be manufactured, produced or acquired by him after making the contract.
Unlike existing goods, the future goods are not in existence at the time of contract of
sale. A contract for sale of future goods creates only an agreement to sell and not a
sale.
E.g., A agrees to sell B all the rice to be grown in his field in the current season. It is
a sale of future goods and it is only an agreement to sell.
3. Contingent Goods: [Sec. 6 (2)]
These are future goods - the acquisition of which by the seller depends upon the
contingency which may or may not happen.
In this case also, there can be only an agreement to sell. The contract for sale of
contingent goods can be enforced only on the happening or non-happening of a
Specified uncertain event or otherwise the contract becomes void.
E.g.: A agrees to sell to B certain goods which are on their way from Bombay to
Chennai subject to goods arriving safely. If the lorry meets with an accident and the
goods are destroyed, then the contract becomes void and unenforceable.

C. EFFECT OF DESTRUCTION OF GOODS: (Sec. 7 & 8)

There are two cases:
1. Goods Perishing before making of contract (Sec. 7)
2. Goods perishing after the agreement to sell but before sale is effected (Sec.
8)

1. Goods perishing before making of contract: (Sec. 7)

a. In the case of sale of specific goods if at the time when the contract was
made, the goods have perished or so damaged as to lose its identity
without the knowledge of the seller, then the contract for sale becomes
void.
Perishing of goods does not only mean physical destruction but it also includes loss
by theft and commercial destruction.
.
Couturier Vs. Hustie:
'A' agreed to sell a specific charge to 'B', which was on its way from England to
Bombay. The ship was cast away and the goods were lost, without the knowledge of
the parties. It was held that the agreement was void.
This rule is based on the ground of mutual mistake by both the parties or
impossibility of performance.

b. In the case of an indivisible part of specific goods, if a part of the goods

have perished at the time when the contract is made, the contract is also
void.
E.g.: 'A' sold to 'B' 1000 bags of rice kept in a warehouse. At the time when the
contract was. made, unknown to. 'A', 300 bags were stolen. Held the sale was void
and 'B' could not be compelled to take the remaining rice bags.

c. If the goods have been stolen or lawfully requisitioned by the Government,

the contract of sale is void.

2. Goods perishing after the agreement before sale is effected: (Sec. 8)

a. In the case of specific or ascertained goods, if after the agreement the goods
perish or get so damaged as to lose its description of identity without the fault
of the seller or buyer, the agreement becomes void.

If the goods are in existence at the time of making the contract but perish without the
fault of either party before the risk passes to the buyer, then the contract becomes
void.
The parties to the contract are excused for the non-performance of the contract
based on the principle of 'supervening impossibility of performance'.
b. If the destruction of goods is caused due the fault of either party, then the
party in default is liable for non-delivery of the goods.
c. The above rules are applicable to specific or ascertained goods. So, in the
case of unascertained goods, even if the whole quantity of such goods in the
 seller's possession is perished, the agreement is not void and the seller has to
deliver the goods.
E.g.: A agrees to sell to B 100 bags of rice from the stock of 1000 bags lying in A's
warehouse. Due to fire, the entire stock of rice is lost. Now the contract does not
become void and A has to supply 100 bags of rice to B from other sources.

D. DOCUMENT OF TITLE TO GOODS: [Sec. 2 (4)]

Document of title to goods is a document which proves the possession or control of
the goods as owner of the goods. It also authorises the holder of the document either
by endorsement or delivery to transfer or receive goods represented by it.
The following Conditions must be fulfilled by a document of the title to the goods:
1. It should be used in the ordinary Course of business.
2. There must be unconditional undertaking to deliver the goods to the
possessor of the document.
3. The possessor of the document should be entitled to receive the goods
unconditionally.

Bill of lading, dock warrants, railway receipt etc. can easily be cited as a few
examples of the documents of title.
Documents of title need not be negotiable instruments.

E. PRICE IN A CONTRACT OF SALE: (Sec. 9 & 10):

Payment of price is an essential part of the contract and must be in terms of money.
It is the money consideration for sale of goods [Sec. 2 (10)]. Though it need not be
fixed at the time of sale, it should be payable.

Money means legal tender money in circulation. Old and rare coins are not included
in the definition
the term money.
The following are the rules regarding ascertainment of price:
1. Price may be fixed in the contract itself or
2. It may be left to be fixed in an agreed manner, or
3. It may be determined during the course of dealing between the parties.
4. If the price is not fixed in any of the above way, the buyer pays a reasonable
price to the seller.
5. If there is an agreement to sell goods on the terms that the price is to be fixed
after valuation by a third party and if such third party does not make any
valuation, then the agreement can be avoided. [Sec. 10(1)].
However, if the goods or any part thereof have been delivered to and appropriated
by the buyer, then the buyer must pay a reasonable price for it.
6. If such third party is prevented from making the valuation due to the fault of the
seller or buyer then the party not in fault can maintain a suit for damages against
the party in fault [Sec. 10 (2)].

7. The buyer may advance certain money as a token of good faith as a guarantee or
security for the due performance of the contract. This is known as earnest
money.
If the contract is duly performed, then the earnest money is adjusted against the
purchased price.
However, if the contract is not performed through the default of the buyer then, the
buyer forfeits the earnest money. unless otherwise agreed between the parties.
An earnest money is not part payment of price money.

CHAPTER 3
IMPLIED CONDITIONS AND WARRANTIES (Sec. 12 to 17)
IMPORTANT
MODEL QUESTIONS:
1. a. What are the implied undertakings as to title in a Contract of Sale of
Goods? Illustrate.
b. Explain with illustration sale by sample arid sale by description.
2. a. Distinguish between a condition and a warranty with reference to sale of
goods. When is a breach of condition treated as a breach of warranty?
b. What conditions and warranties are implied in a Contract of sale?
3. State and discuss the implied conditions and warranties in a Contract of
Sale of Goods.
SYNOPSIS:
A. Introduction
B. Stipulation as to time
C. Condition and warranty
D. Difference between condition and warranty
E. Condition treated as a warranty'
F. Implied conditions (Sec. 14 to 17)
1. Implied condition as to title {Sec. 14)
2. Implied condition as to sale by description (Sec. 15)
3. Implied condition as to sale by sample (Sec. 1 7)
4. Sale by sample as well as by description (Sec. 15)
5. Implied condition as to quality or fitness [Sec. 16(1)]
6. Implied condition as to merchantability [Sec. 16 (2)]
7. Implied conditions by trade-usage or custom [Sec. 16 (3)]
8. Implied condition as to wholesomeness
G. Implied warranties
1. Implied warranty of quiet possession [Sec. 14 (b)]
2. Implied warranty of freedom from encumbrances [Sec. 14 (c)]
3. Implied warranty as to quality or fitness by usage of trade or custom [Sec.
16 (4)]
4. Implied warranty to disclose dangerous nature of goods
H. Conditions reduced to warranties (Sec. 13)
I. Exclusion of implied conditions and warranties

A. INTRODUCTION:
In every contract of sale, representations are made both by the buyer and the seller
as part of negotiations between them before they finalise the contract of sale, Such
representations in law are called stipulations.
The stipulation in a contract of sale may be either a condition or a warranty. If there
are no stipulations in a contract, then the principle 'Caveat Emptor' i.e., 'Let the buyer
beware' applies.
B. STIPULATION AS TO TIME:
As per Sec 11 of Sale of Goods Act stipulations as to time of payment are not
generally the essence of a contract of sale, Other than the stipulations as to time of
payment, the other stipulations has to time whether essence of the contract are not
dependent on the terms of contract.
For example, the time of delivery of goods is always essence of the contract, unless
and otherwise agree between parties.

C. CONDITION AND WARRANTY:

Stipulation or representation in a contract of sale may be either a condition or a
warranty depending on the character and importance of the stipulations.

They are of two types

1. Condition: [Sec. 12 (2)]
These are the most essential terms. They form the root of the contract. The breach
of such terms entitles the other party to reject the contract.
Sec. 12 (2) of the Act reads 'a condition is a stipulation essential to the main purpose
of the contract gives rise to a right to treat the 'contract as repudiated'.
E.g., 'A' orders for a Fiat car; 'B' supplies an Ambassador car. This is a breach of
condition, so the contract can be rejected.
2. Warranty: [Sec. 12 (3)]
These are merely essential terms, collateral to the contract of sale and not of such
vital importance as conditions.
The breach of such terms entitles the other party to claim compensation only. The
affected party cannot reject the contract.
Sec. 12 (3) of the Act reads a warranty is a stipulation collateral to the main purpose
of the contract the breach of which gives rise to claim for damages but not a right to
reject goods and treat the contract as repudiated.
E.g., 'A' orders for a red coloured Fiat Car. 'B supplies a blue coloured Fiat Car. This
is a breach o warranty. The buyer can only claim compensation.

D. DIFFERENCE BETWEEN CONDITION AND WARRANTY

1. From the above, it is clear that conditions form the basis of the contract and they
are of primary importance. On the other hand, warranties are only of secondary
importance.
However, whether a stipulation in a contract o sale amounts to a 'condition' or a
'warranty' depend entirely on the construction of the terms of the contract. A
stipulation may be a "condition" though called |"warranty" in a contract. In other
words, it depends entirely on the intention of the parties as evidenced by the terms of
the contract.
Sec. 12 (4) of the Act reads 'whether a stipulation in a contract of sale is a condition
or a warranty depends in each case of the construction of the contract. Stipulation
may be a condition, though called a warranty in the contract'.
The essential differences between condition and warranty are as follows:
Condition:
1. It is the stipulation which is essential to the main purpose of the contract.
2. It goes direct to the root or substance of the contract.
 3. Its breach gives the buyer right to repudiate the contract.
4. In case of breach, the buyer has an option to treat a ' condition as
warranty.
5. The buyer has an option to the claim damages, instead of repudiating the
contract.
Warranty:
1. It is a stipulation which is not essential to the main purpose of the contract.
2. It does not go direct to the root of the contract.
3. Its breach does not give right to the buyer to repudiate the contract.
4. In the case of breach, the buyer has no option to treat it as condition.
5. The buyer cannot repudiate the contract if there is a breach of warranty. He
can only claim damages.

E. CONDITION TREATED AS A WARRANTY:

1. When a contract has a condition to be fulfilled by the seller, the buyer may
either waive the condition or treat the breach of the conditions as a breach of
warranty. If the buyer once waive the condition, he cannot ask for fulfilment of
the condition afterwards (estoppel).
2. If the contract is divisible and the buyer has accepted the goods or part of
them any breach of condition must be treated as a breach of warranty.

F. IMPLIED CONDITIONS: (Sec 14 to 17)

The parties are at liberty to include in their contract any number of express
conditions and warranties. But in addition to the above express conditions and
warranties the law implies into every sale of goods a number of conditions and
warranties. They are read: as part and parcel of every contract of sale unless they
are expressly excluded by the contracting parties.
These conditions and warranties are known as implied conditions and warranties.

The following are the various implied conditions:

1. Implied condition as to title: (Sec. 14)
The buyer can generally presume or assume that he seller who is in possession of
the property has valid title.
In the case of an agreement to sell it is presumed that the seller will have a right to
sell the goods at the tim when the property passes from the seer to the buyer.
If the seller's title turns out to be defective, then the buyer may reject the goods.
Sec. 14 reads - in a contract of sale, there in an implied condition on the part of the
seller that
i. in the case of a sale, he has a right to sell the goods.
ii. in the case of an agreement to sell/he will have a right to sell the goods at
the time when the property is to pass.
Rowland. Vs. Divall, 1923 2 KB 500 CA:
A man bought a car under the impression that the dealer is the owner of it. Later,
after 3 to 4 months, it turned out that the ar was a stolen one and hence, seized by
the police. The Court held that the buyer was entitled to recover the full price of the
car from the seller.
The term 'right to sell' has wide meaning - if a person sells goods by infringing the
intellectual property rights like trade mark, patent or copyright, then the buyer is
entitled to repudiate the contract o the ground that the seller has no right to sell
them.
Niblett Vs. Confectioners' Materials Co., 1921 3 KB 387:
Out of 3000 tins of condensed milk sold to a buyer, 1000 tins were labelled as 'Nissly
Branc'. Another manufacturer of condensed milk 'Nestle brand' proved that there was
infringement of its trade mark by Nissly Branc The Court held that the seller was
liable to pay damages to the buyer of Nissly Branc for the loss sustained by him.
2. Implied condition as to sale by description: (Sec. 15)
In a contract for a sale of goods by description, it is implied that the goods shall
correspond with the description. The buyer contracts relying on the description of the
goods.

Sec. 15 reads - 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 and if the
sale is by sample as well as b description, it is not sufficient that the bulk of the good
corresponds with the sample if the goods do not also correspond with the
description.
The term 'sale by description' has nowhere been defined in the Act.
in the following circumstances, sale of goods by description takes place. -
a. The buyer has not seen the goods but relies on the description given by the
seller.
Varley Vs. Whipp (1900) QB 513:
The buyer had not seen a reaping machine, but the seller had stated that it was new
and efficient. On delivery it was found to be very old. So, the buyer returned it. The
Court held that the seller could not Claim the price, as it was a breach of a condition.
b. Though the buyer has seen the goods he does not rely on what he has seen,
but on what was stated to him and the deviation of the goods from the
description is not apparent.
Nicholson and. Venn Vs. Smith Marriott, (1947) 177LT 189:
The buyer bought a set of lien napkins and table cloths described as dating from the
seventeenth century.
After buying, the buyer found that was only of the eighteenth century. He rejected the
sale. It was held that as there was a difference between the description and the
quality, the buyer was entitled to reject the sale.

c. Packing of goods may be essential part of the description.

Moore & Co., V. Landauer & Co., (1921) 2 KB 519, CA:
This was a contract for the purchase of 3000 tins of canned fruit from Australia, to be
packed in cases each containing 30 tins. The sellers tendered a substantial portion
in cases containing 24 tins. The method of packing was held to be a part of the
description and therefore the purchasers were entitled to reject the whole
consignment.

3. Implied condition as to sale by sample: (Sec. 17)

In a contract of sale by sample, the following conditions must be satisfied:
a. The bulk quantity must correspond with the sample.
b. The buyer must be given an opportunity to compare the bulk with the sample.
c. Goods shall be free from any defect which are ot apparent on examination.
Drummers and Sons Vs. Van Ingen Company:
Worst coating supplied correlated with the; sample, but not suitable for stitching due
to the latent defects, The Court held that the buyer could reject the goods.

4. Sale by sample as well as by description: (Sec. 15)

If the goods are sold by sample as well as by description, then the implied condition
is that the bulk of the goods supplied must correspond both with the sample and the
description. In case the goods correspond only with the sample but do not
correspond with the description, then the buyer is entitled to repudiate the contract.
Azemar Vs. Casella, (1867) 2 CP 431:
Long staple Salem cotton was sold as equal to sample and description, but the
supplied cotton turned out to be western Madras cotton. The Court held that the
buyer was entitled to reject the contract of sale.
5. Implied condition as to quality or fitness: [Sec. 16(1)]
When the goods sold are below the prescribed quality, then the contract can be
rejected. But the buyer must satisfy the following two conditions.
i. He must tell the purpose for which he required the goods.
ii. He must have relied on the skill of the manufacturer to produce the goods of
the quality required by the buyer.
iii. The goods must be of a type which are normally dealt with by the seller. .
a. Priest Vs. Last (1903) 2 KB 148:
The seller told the buyer that the flask was suitable for hot water, but not for boiling
water. When the buyer's wife used it with hot water it burst and she suffered injuries.
The Court held that the seller must pay compensation for breach of contract.

b. Frost Vs. Ashbury Dairy Company (1905) 1KB 608:

A milk dealer supplied milk to Frost and his family drinking the milk. Frost and his
family were affected by typhoid fever. The Court held that there was breach of
condition as to quality and hence compensation should be awarded to Frost and his
family.
c. Grant Vs. Australian Knitting Mills (1936) AC 85, 105:
The buyer purchased some 'under wears'. Alter wearing them, he was infected by a
skin disease due to the presence of Silicon particles in the underwear, The Court
held that there was breach as to |merchantable quality and hence the buyer can get
compensation.

d. Evan Vs. Benjamin:

A refrigerator sold to the buyer performed all functions which a refrigerator normally
does but failed to make ice. The Court held that this was a breach of the Implied
condition as to fitness and the buyer could repudiate the contract.

6. Implied condition as to merchantability: [S6c. 16 (2)]

By merchantable quality, it means the goods are fit for sale in the market. If the
buyer has incurred some
loss by relying on the merchantable quality, then he can get compensation.

Merchantability means:
a. If the goods are purchased for re-sale, they must capable of passing in the
market under the name description by which they arc sold. The goods must
marketable at their full value.
 b. If the goods are purchased for self-use, they must fit for the purpose for which
they are generally used.
c. Packing of goods is also considered for judging merchantability.
In simple terms, it means that the goods should be commercially saleable under the
description they are known in the market at their full value and also, they must be fit
for the purpose for which goods of that kind are commonly bought.
i. Morelli Vs. Fitce and Gibbons (1928) 2 KB 636:
When a buyer who bought a bottle of store's ginger wine, tried to open the cork, it
broke off and injured his hand. The seller was liable for damages.
ii. Jackson Vs. Matson and sons (1909), 2 KB 193:
A grocer sold tinned Salmon. The buyer’s wife died after eating it. As the Salmon
was not of merchantable quality. The buyer could recover damages. If the goods are
defective and not merchantable, the buyer can avoid the contract.
iii. R.S. Thakur Vs. H.G.E Corporation, AIR 1971, Bom 97:
A radio sold to a layman was found defective and it did not work even after repairs.
The Court held that the buyer could return the radio and claim back the money.
iv. Malli & Co., Vs. V.A.A.R. Firm, AIR 1923 Mad 252:
The Court held that merchantability means immediately saleable under the
description of the goods. So when 9/10 of the goods were damaged or seconds then
they were not merchantable and hence could be rejected.

7. Implied conditions by trade usage or custom: [Sec. 16 (3)]

An implied condition as to quality or fitness for a particular purpose may be annexed
by usage or custom of trade.
i. Jones Vs. Bowden (1813) 4 Taunt 847:
The trade usage was to sell the sea damaged drugs by auction sale. The samples of
the quality of the drugs were exhibited, but the information that they were sea
damaged was not disclosed. The buyer could reject the contract as the drugs were
sold as if they were not sea damaged.

ii. Rusttonsi Rowji Vs. The Bombay United Weaving & Spinning Co., ILR
(1916) 41 Bom 518:
The custom should not be inconsistent with the express terms of the contract.

8. Implied condition as to wholesomeness:

In case of eatables and other provisions, they must correspond and also are
merchantable.
In simple terms, it should be wholesome, pure unadulterated and suitable for
consumption of the buyer at the time of sale.
Chaproniere Vs. Mason, (1905) 21 TLR 633;
A buyer purchased a bun which contained a stone and it broke the buyer's teeth The
Court held that the buyer could claim compensation from the seller.

A. IMPLIED WARRANTIES:
There are four types of implied warranties:
1. Implied warranty of quiet possession: [Sec. 14 (b)]
In every contract, there is an implied condition that the buyer shall have and enjoy
quiet possession of the goods. If the buyer is affected by the seller defective title
then he can claim damages from the seller.
 i. Monforte Vs. Marsden, 1895 (12) RFC 266:
The Court observed - 'it is a warranty that the vendor shall not, or anybody claiming
under a superior title or under his authority, interfere with the quiet enjoyment of the
vendee'.
ii. Manson Vs. Bruningham:
The buyer who purchased a second hand typewriter and used it for a few months,
also spent some money on repairs. But after some months it turned out to be a
stolen property and the true owner claimed it. The buyer could claim damages for the
price paid and the cost of repair. - *

2. Implied warranty of freedom from encumbrances: [Sec. 14 (c)]

The goods bought by the buyer should not be subject to any charge or encumbrance
in favour of a third party. If the buyer's possession is affected by any charge or
encumbrance, then the buyer can claim damages for breach of this warranty. .
However, the buyer can have no right of action if the seller had disclosed the charge
or encumbrance in goods at the time of contract.

3. Implied warranty as to quality or fitness by usage of trade or custom:

[Sec. 16 (4)]
An implied warranty as to quality or fitness for a particular purpose may be as per the
usage of trade or custom.

4. Implied warranty to disclose dangerous nature of goods:

If a seller sells certain goods, knowing that such goods are inherently dangerous and
if the buyer is ignorant of such dangers, then the seller must warn the buyer of such
dangers or otherwise the seller is able for all consequences arising out of the use of
such goods sold.

H. CONDITIONS REDUCED TO WARRANTIES: (Sec. 13)

i. Waiver by buyer:
The buyer can waive his right of repudiation of contract and rejection of the goods
sold to him for breach
of any of the implied conditions stated above and may treat them as warranties and
claim damages.
ii. Acceptance of goods by buyer-
Similarly the buyer by accepting the goods sold can treat the breach of conditions as
breach of warranties and restrict his right only to claim damages from the seller and
not repudiation of the contract of sale as a whole.

G. EXCLUSION OF IMPLIED CONDITIONS AND WARRANTIES:

By express agreement between the seller and buyer or by the course of dealings
between them or by custom or usage of trade, the above implied conditions and
warranties may be waived or varied and in such a situation, the contract is binding
on the buyer and the buyer can netither repudiate the contract nor claim damages
from the seller.
 CHAPTER 4
CAVEAT EMPTOR OR "LET THE BUYER BEWARE" (Sec. 15 to 17)

MOST IMPORTANT
MODEL QUESTIONS:
1. Examine the rule involved in the maxim 'Caveat Emptor'. State the
exceptions to the rule, if any?
2. The doctrine of "Caveat Emptor" has too many exceptions as to
rename the doctrine as the doctrine of "Caveat Venditor"
3. Comment Write short note on: "Caveat Emptor"
SYNOPSIS:
A. Introduction
B. Exceptions to 'caveat emptor'
1. Fitness for buyer's purpose [Sec. 16 (1)]
2. Goods - to correspond with the description (Sec 15)
3. Merchantable quality [Sec. 16 (2)]
4. Sale by sample (Sec. 1 7)
5. Sale by sample and description (Sec. 15)
6. Quality or fitness by usage of trade [Sec. 16 (2)]
7. Sale by misrepresentation, fraud or concealment
8. Express terms in the contract [Sec. 16 (4)]

A. INTRODUCTION

Generally, when goods are sold, the buyer must exercise reasonable care and
caution regarding the defects, quantity, quality etc. if the defects are potent (external)
and are easy to to discover, the seller cannot be sued for fraud. It is only the
negligence of the buyer for which there is no remedy. But if the defects are latent
(internal) and are not easy to discover, the seller is liable. This liability of the seller to
exercise care and caution is 'Caveat Emptor' (Let the buyer beware).

In earlier days, the buyer and seller faced each other and the buyer examined the
goods and then bargain. But now trade has assumed global dimensions and so it
has become difficult for buyer to examine the goods before sale. Most transactions
are by correspondence and hence the sellers have to assure the quality and quantity
of goods.

The rule of caveat emptor has limited applications and many exceptions have come
to to stay. Sec 16 of the Sale of Goods Act confirms this by stating the rule of caveat
emptor and also providing the exceptions to the rule in the following words.
"Subject to the provisions of this Act and of and of any other law for the time being in
force, there is no implied warranty or condition as to the quality or fitness; for any
particular purpose of goods supplied under a contract of sale, except as follows .... ".
Thus, Sec. 16 provides the following exceptions to the rule of caveat emptor:

B. EXCEPTIONS TO 'CAVEAT EMPTOR:

The doctrine of 'caveat emptor' does not apply in the following cases and so in these
cases, the buyer need not be aware or need not examine the quality of the saleable
goods.
 1. Fitness for buyer's purpose: [Sec. 16 (1)]
When the buyer intimates to the seller the purpose for which he requires the goods,
then the seller must supply goods which shall be fit for the buyer's purpose.
To apply this condition, the following points have to be proved:
i. The buyer should make known to the seller the particular purpose for which
the goods are required.
ii. The buyer should rely on the seller's skill or judgment.
iii. The goods must be of a description which the seller in the course of his
business to supply.

a. Priest Vs. Last (1903) 2 KB 148:

The seller told the buyer that the flask was suitable for hot water, but not for boiling
water. When the buyer's wife used it with hot water, it burst and she suffered injuries.
The court held that the seller must pay compensation for breach of contract due to
defective quality.

b. Frost Vs. Ashbury Dairy Company (1905) 1 KB 608:

A milk dealer supplied milk to Frost and his family. By drinking the milk, Frost and his
family were affected by typhoid fever. The Court held that there was breach of
condition as to quality and hence compensation should be awarded to Frost and his
family.
c. Grant Vs. Australian Knitting Mills (1936) AC 85, 105:
The buyer purchased some 'under wears' After wearing them, he was infected by a
skin disease due to the presence of Silicon particles in the underwear. The Court
held that there was breach as to merchantable quality and hence the buyer can
claim compensation.
d. Raghava Menon Vs. Kuitapan Nair, AIR 1962 Ker 318:
The Court held that a buyer was allowed to reject a defective watch supplied by a
dealer.

However, when there is a contract for sale of specified article under its patent name
or trade name then there is no implied condition that the goods shall be reasonably
fit for any particular purpose.
In such cases, it is the manufacturer who has to assure the quality, but not the seller.
Further, it is unjust to burden the seller with responsibility for fitness of the article.
However, if the seller recommends a particular brand with trade name, then in such
a case, the buyer relies more on the seller's skill and judgment than the patent name
or trade name of the article and hence the seller becomes liable, if the article is not fit
for the particular purpose for which it was purchased.
Here a buyer relies more on the trade name of commodity than on the skill and
judgment of the seller.
e. Baldry Vs. Marshall, (1925) 1 KB 260:
A car had to be selected for touring purposes and the seller recommended 'Bugatti'
car, a trade name. This did not exclude the implied condition of fitness, as the buyer
relied on the seller's skill and judgment and not on the trade name of the car.

2. Goods - to correspond with the description (Sec. 15)

When the goods are sold by description, then there is an implied condition that the
goods shall correspond with the description, because the buyer, whether has seen
the goods or not, relies more on the description given by the seller about the goods.
 a. Varley Vs. Whipp, (1900) QB 513:
The buyer had not seen a reaping machine, but the seller had stated that it was new
and efficient. On delivery, it was found to be very old. So, the buyer returned it. The
Court held that the seller could not claim the price, as it was a breach of a condition.

b. Nicholson and Venn Vs. Smith Marriott, (1947) 177 LT 189:

The buyer bought a set of linen napkins and tablecloths described as dating from the
seventeenth century. After buying, the buyer found that was only of the eighteenth
century. He rejected the sale. It was held that as there was a difference between the
description and the quality, the buyer was entitled to reject the sale.

3. Merchantable quality: [Sec. 16 (2)]

Where goods are bought by description from a seller who deals in goods of that
description (whether he is the manufacturer or producer or not), then there is an
implied condition that the goods shall be of
merchantable quality.
However, if the buyer has examined the goods at the time of purchase, then there is
no implied condition
as to the defects in the goods, since the examination of goods ought to have
revealed such defects in the goods.
a. Godley Vs. Perry (1960) 1 All ER 36:
A child of six years bought a plastic toy displayed in a shop window of a toy dealer.
While he was using it, it broke off and blinded his left eye. In a suit by the guardian of
the child, the seller contended that there was no condition of merchantable quality as
the toy was not from him by description. The court however held that an order placed
on the strength of a catalogue amounted to 'sale by description' and hence the
dealer was liable.

b. Morelli Vs. Fitce and Gibbons (1928) 2 KB 636:

When a buyer who bought a bottle of store's ginger wine, tried to open the cork, it
broke off and injured his hand. The seller was liable.
c. Jackson Vs. Matson and sons (1909) 2 KB 193:
A grocer sold tinned Salmon. The buyer's wife died after eating it. As the Salmon
was not of merchantable quality. The buyer could recover damages. If the goods are
defective and not merchantable, the buyer can avoid the contract.
d. R.S. Thakur Vs. H.G.E Corporation AIR (1971) Bom. 97:
A radio sold to a layman was found defective and it did not work even after repairs.
The Court held that the buyer could return the radio and claim back the money.
4. Sale by sample: (Sec. 17)
When the goods are bought by sample, then the rule of caveat emptor does not
apply if the bulk of the goods does not correspond with the sample.

Drummers and Sons Vs. Van Ingen Company (1887) 12 AC 284:

'Worst coating supplied correlated with the sample, but not suitable stitching due to
the latent defects. The court held that the buyer could reject the goods.

5. Sale by sample and description (Sec 15)

When the goods are bought by sample as well as description, the rule of caveat
emptor is not applicable, in case the goods do not correspond with both the sample
and description.
 a. Azemar Vs. Casella, (1867) 2 CP 431:
Long staple Salem cotton was sold as equal to sample and description, but the
supplied cotton turned out to be western Madras cotton. The Court held that the
buyer was entitled to reject the contract of sale.

b. Peer Mohammed Vs. Daloo Ram, (1918) MWN 658:

A contract for the sale of one hundred casks of spirits was made with the guarantee
of quality to be equal to the sample produced by the seller. The Court held that the
sample being 'brandy' and the bulk supplied consisted of 'rum' the buyer could reject
the contract on the basis that the sale by sample and description did not tally.
6. Quality or fitness by usage of trade: [Sec. 16(2)]
An implied warranty or condition as to the 'quality or fitness for a particular purpose',
if annexed by the usage of trade and if the seller deviates from that, then the rule of
caveat emptor does not apply.

Jones Vs. Bowden (1813) 4 Taunt 847:

The trade usage was to sell the sea damaged drugs by auction sale. The samples of
the quality of the drugs were exhibited, but the information that they were sea
damaged was not disclosed. The buyer could reject the contract, as the drugs were
sold as if they were not sea damaged.

7. Sale by misrepresentation, fraud or concealment:

|If the seller sells the goods through| misrepresentation, or fraud or concealment of
defects (not easily detectable) in the goods and if the buyer relies on it, then the rule
of caveat emptor does not apply. So the buyer can reject the contract.

8. Express terms in the contract: [Sec. 16 (4)]

Only if an express warranty or condition is not inconsistent with the implied
conditions, then it is valid. It means that an express warranty or condition in a
contract cannot negate an implied warranty or condition lawfully recognised by the
Sale of Goods Act.
If an express condition or warranty violates the implied condition or warranty, then
the rule of caveat emptor does not apply and the buyer can claim remedy.
Bombay - Burma Trading Corporation Vs. Aga Mohammed, (1911) 38 IC 169:
Though the sleepers supplied to a railway company were approved by its experts,
the Court held, that such approval does not exclude the implied condition of
^merchantability i.e., fit for sleeping.

CHAPTER 5
PASSING OF PROPERTY IN THE GOODS OR PASSING OF OWNERSHIP
(Risk prima facie passes with property) (Sec. 18 to 26)
MODEL QUESTIONS:
1. What is the legal significance of the passing of pro pa in the goods?
2. What are the rules set out in the Sale of Goods Act ascertaining the
intention of the parties?
3. State the rules that govern the transfer of property goods as between
the sellers and buyers.
SYNOPSIS:

A. Introduction
B. Rules regarding transfer of property in goods
C. Types of goods
D. Passing of property in ascertained goods
E. Intention of parties in ascertained goods
F. Unascertained or future goods
G. Passing of risk.with property

A. INTRODUCTION:
The main essential of a contract of sale is transfer of property in goods from the
seller to the buyer.
The term 'property in goods' is different from 'possession of goods’
Property in goods means the ownership of goods.
Whereas 'possession of goods' means the custody or control of goods.
For example, A is the owner of an article, but the article may not be in his
possession. B may be in possession of that article, but he may not be owner.
An agent, a servant or a carrier who is in possession of goods is not the owner of the
goods.
After a seller has sold the goods to the buyer, if he is still in possession of the goods
as an unpaid seller, he cannot be called the owner of goods though the goods are in
his possession.
It is, therefore, important to know the precise moment of time at which the Property
in goods passes from the seller to the buyer.
The actual time of passing of ownership from the seller to the buyer is
important for six reasons:
1. To decide who is the actual owner
2. To decide as to who has to bear the loss of the goods.
3. To decide the passing of risk.
4. To decide who has got right to sue third parties in case of damage of goods.
5. What is the position in case of insolvency of seller or buyer?
6. Who can sue for the price of the goods?

B. RULES REGARDING TRANSFER OF PROPERY IN GOODS:

Both the seller and buyer are at liberty to fix any time regarding the passing of
ownership from seller to the buyer.
In case a time is fixed by them, then that time is when the passing of ownership from
seller to buyer takes place.
However, if the time is not fixed by the parties, then it is necessary to decide the
exact time at which the property in goods passes from the seller to the buyer.
C. TYPES OF GOODS:
Goods are divided into two types namely —
1. Ascertained goods (Specific goods)
2. Unascertained goods
1. Ascertained goods: (Specific goods)
Goods are 'ascertained' goods when they are identified and agreed upon between
the parties to the sale. When this is done at the time the contract is made, then the
contract is in respect of specified or ascertained goods.
2. Unascertained goods:
Goods are 'unascertained goods, when they are unidentified and are not agreed
upon between the parties to the sale.

D. PASSING OF PROPERTY IN ASCERTAINED GOODS,

In ascertained goods, it is necessary to know the exact time when the property
passes from the seller to the buyer:
The following are the rules for determining when the property in ascertained goods
passes from the seller to the buyer.
1. Goods must be ascertained: (Sec. 18)
Section 18 provides -
When there is a contact for the sale of unascertained goods, then no property in the
goods is transferred to the buyer unless and until the goods are ascertained. .
Thus, for transferring the ownership from seller to buyer, it is essential that goods
must be ascertained.
No property in goods passes if the unascertained.

State of Madras Vs. Ramalingam & Co., AIR 1956 Mad. 695:
When there is no express or implied contract governing the transfer of ownership,
then the provisions of Sections 18 to 24 are helpful in ascertaining the intention of
the parties regarding the time when the ownership of the goods is transferred from
the seller to the buyer.

2. Passing of property in ascertained goods (specified goods): (Sec.

19)
In a contract for the sale of specific or ascertained goods, the property passes to the
buyer at the time when the parties intend it to pass.
In this regard, Sec.19 reads -
1. When there is contract for the sale of specific or ascertained goods, the
property in them is transferred the buyer at such time as the properties to the
contract intend it to be transferred.
2. For the purpose of ascertaining the intention of the parties, the terms of the
contract, the conduct of the parties and the circumstances of the case are
regarded.
Vasantha Vishwanathan Vs. V.K. Elayalwar, 2001 All SCW 3304:
The Supreme Court held that in the case of a transfer of motor vehicle, the property
in the vehicle does not pass on to the transferee on the day when the order of
transfer of registration is passed by Registration Authorities.
The passing of property would be done as per the transfer of vehicles governed by
the provisions of Sec. 19, which depends on the intention of the parties as evidenced
from the terms of the contract.

Moulana Traders Vs. The Official Liquidator of High Court 2005 (2) CTC 520:
The Madras High Court held that the terms of sale would disclose as to when the
property in the goods passes from the seller to the buyer. Importance for the
intention of parties would be given only when the terms of sale are not clear. In the
absence of clear terms in the sale contract, to ascertain the intention of the parties, it
would be necessary to look to the provisions of Sale of Goods Act.
3. Unless a different intention appears, the rules contained in sections 20 to 24
are rules for ascertaining the intention of the parties as to the time at which
the property in the goods is to pass to the buyer. _
The property in the goods which passes to the purchaser is a question entirely
dependent upon the intention of the parties.
The law allows the parties to settle the issue of transfer of property in the goods by
themselves by an expression of their intention in the contract itself.
Thus, the intention of the parties reigns supreme in deciding when the property in the
goods has transferred from seller to buyer. .
Sacks Vs. Tilley, (1915) 32 TLR 148:
Certain diamonds were sent to the buyers by post by a foreign seller. Along with the
diamonds, a bill for the price was also sent. A condition was stipulated in the contract
itself that the property (ownership) in the diamonds would pass to the buyer only
when the bill was accepted by him. The invoice also was marked 'settle by
acceptance'. Since the bill was never accepted, there was no transfer of property in
the diamonds to the buyer

4. When special conditions are expressly attached in the contract, then the
general rule that 'the property in goods passes when the documents are
forwarded' does not apply.

E. INTENTION OF PARTIES IN ASCERTAINED GOODS:

Section 20 to 22 of Sale of Goods Act provides for the following rules for ascertaining
the intention of
the parties regarding the time when the transfer of property in ascertained goods
passes from the seller
to buyer.
1. Specific goods in a deliverable state: (Sec. 20)
Here the passing of property in the goods takes place at the time when the contract
is made.
Sec. 20 reads-
When there is an unconditional contract for the sale of specific goods in a deliverable
state, then the property in the goods passes to the buyer when the contract was
made.
It is immaterial whether the time of payment of the price or the time of delivery of the
goods, or both are postponed.
Essentials:
a) There must be an unconditional contract.
b) The sale must be of specific goods.
c) The goods must be in a deliverable state
'Deliverable state' means that the goods are ready for delivery and there is nothing to
done in the goods. Further, it is a state where the buyer is bound to take delivery of
the goods.
Further the goods are complete in themselves fully to treat them as to be in
deliverable state.
Example:
S offers P for his camera for a sum of Rs, 5,000/-. It is agreed between S and P that
the camera shall be delivered by S after two days and the price shall be paid by P
after five days. Now P accepts the offer of S. The camera now becomes P's property
as soon as P accepts the offer of S.
i. Acramen Vs. Morrice, (1849) 8 CB 449:
The Court held that when the goods have to fulfil certain express or implied
conditions as to their character or quality, then the contract is on conditional. If the
goods delivered does not satisfy the conditions, then the property does not pass
from seller to buyer.
ii. United India Insurance Vs. Kanchan Bai, AIR 1981 MP 225:
The Court held that when a truck was sold but the requirements of the Motor
Vehicles Act relating to delivery and payment of full consideration had not been
satisfied, the vehicle was only seller's property and if any accident occurred, then the
seller was liable.

iii. Underwood Vs. B.C. Cement Syndicate, (1922) 1 K.B.343:

S entered into a contract with B for sale of a machine embedded in a concrete floor.
A portion of the machine was damaged while it was removed from the concrete floor.
The Court held that the buyer B could refuse to buy the machine as it was not in a
deliverable state.
iv. Clarke Vs. Army and Navy Co-operative Society Ltd, (1903) 1 K.B.
155:
S sold his haystack lying in his land to P on 4th January. As per the terms of the
agreement, the price for the hay shall be paid after a month to S and till then the
haystack would remain on S land and that no hay was to be cut till the price was
paid. The haystack was burnt by fire before the payment of the price was made. Now
the Court held that the purchaser P was liable for the loss since the property in the
haystack had already passed to him i.e., on the day P had entered into the contract
of sale with S.
v. Appleby Vs. Myers (1867) L.R.C.P. 651:
S agreed to sell his machinery to P for a fixed price. P also agreed to buy the
machinery, but under the condition that S must make the machine in running
condition. For this S informed P that P can get the machinery repaired and the repair
charges can be deducted in the agreed price. The machine was fully damaged
during the repairs without any fault of the mechanic. The Court held that the seller S
must bear the entire loss since the sale was conditional and the ownership of the
machine had not passed to P until repairs are done and the machine became in
running condition.

2. specific goods to be put into a deliverable state:(Sec 21)

Here the property in the goods does not pass from the seller to buyer until the goods
become deliverable State' and the buyer has notice of the sale.
Sec. 21 reads - .
When there is a contract for the sale of specific goods and if the seller is bound to do
something to the goods for ' the purpose of putting them into a deliverable state, then
the property does not pass to the buyer until such thing is done in the goods and the
buyer has notice thereof.
Essentials:
1. There must be a contract for the sale of specific goods.
2. The seller has to do something to the goods to make them into a deliverable
state.
3. The buyer must have notice of something done in the goods.
Only if the above three conditions are fulfilled, then the. property passes to the
buyer.
The term something includes packing of goods, testing the quality of the goods,
polishing the goods, painting the goods, etc.,
Rugg Vs. Minett, 10 RR 475 (11 East 210):
The Court held that when the seller undertakes to put the goods on rail, then the
property remains in him
till they are loaded and if they are damaged on the way, the seller has to bear the
loss.

3. Ascertaining price of goods by doing something: (Sec. 22)

Here, the seller has to do something in the 'specific goods in a deliverable state' to
ascertain their price.
Sec. 22 reads -
When there is a contract for the sale of specific goods in a deliverable state, but if
the seller is bound
to weigh, measure, test or do some other act or thing in the goods for the purpose of
ascertaining the price, then the property in such goods does not pass to the buyer
until such act or thing is done and the buyer has notice thereof.
Essentials:
a) There must be a contract for the sale of specific goods! in a deliverable state.
b) The price of such goods must not be ascertained.
c) The seller has to weigh, measure, test or do some other act or thing in the
goods for the purpose of ascertaining the price.
d) Property in such goods does not pass to the buyer until such act or thing is
done.
e) The buyer must have notice of such act or thing done in the goods to
ascertain its price.

i. National Coal Board Vs. Gamble, (1959) 1 QB 11

The Court held that in a contract for the sale of goods lying in a warehouse, if the
seller has to do something in the goods for the purpose of ascertaining their identity
or quantity, then the handing over of delivery order to the buyer and the transfer of
the goods to him in the ware houseman's books does not vest property in the goods
with buyer.
ii. Harmond Vs. Anderson, 8 RR 763:
The Court held that if the identity of the goods and the quantity arc known, then the
weighing can only be for the satisfaction of the buyer and therefore, in such cases,
the transfer in the books of the wharfinger is sufficient to transfer the property in the
goods to the buyer.

A. UNASCERTAINED OR FUTURE GOODS:

'Ascertainment' is the process by which the identity of the goods to be delivered
under the contract is established. Thus, if the identity of the goods to be 'delivered
under a contract' is not established, then such goods are called unascertained
goods.
The general rule is that when there is a contract for the sale of unascertained goods,
no property in the goods is transferred to the buyer unless and until the goods are
ascertained. (Sec. 18)

Sec. 23 provides for sale of unascertained goods and appropriation by the

buyer. It reads -
When there is a contract for the sale of unascertained or future goods by description
and if such 'goods of that description in a deliverable state' are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by
the buyer with the assent of the seller, the property in the goods thereupon passes to
the buyer. Such assent may be express or implied and may be given either before or
after the appropriation is made.
The term 'unconditionally appropriated the goods to the contract’ includes
delivery of goods to the buyer or to a carrier or other bailee for the purpose of
transmission to the buyer and the seller does not reserve the right of disposal.
1. The goods must be ascertained and then there should be appropriation
of goods. The word 'appropriation means doing something with the
intention of identifying or determining the goods in respect of which the
ownership is to pass.
2. The appropriation may be done either by the seller or by the buyer,
with the assent of the other party.
3. Generally, the goods are appropriated by the seller by putting the
goods; in bags, boxes, containers and in case of fluids in bottles, casks
or other suitable containers.
E.g.: A agrees to sell 100 bags of rice, out of his stock of 500 bags. when the 100
bags are identified and separated, then the goods are appropriated.
4. The method of appropriation as recognised by law is the delivery to the
carrier or other bailee.
5. When the seller delivers the goods to the carrier for the purpose of
carrying them to the buyer and if the seller does not reserve his right
over the goods, then the property in the goods passes to the buyer.
For example, if a railway receipt or bill of lading or courier is made out in the name of
the buyer and is sent to him, then the presumption is that the seller has not reserved
his right over the goods and so the property in the goods has passed to the buyer.
On the other hand, if the railway receipt, etc are taken in the seller's name, then the
property in the goods does not pass to the buyer.
6. An appropriation without the buyer's assent is ineffective.
7. The buyer's assent to the appropriation may be either express or
implied form the buyer's conduct.

Case Laws:
i. Rhod Vs. Thwaites:
In a contract for the sale of unascertained goods, the goods pass only when they are
ascertained. Until the goods are ascertained, there is only an agreement to sell,
further, there should be unconditional appropriation of the goods. The appropriation
may be done either by the seller with assent of the buyer or by the buyer with the
assent of the seller and it may be express or implied.
E.g., A large quantity of sugar was taken away by the buyer. The remaining bags of
sugar would be taken away by the buyer in future. In the meantime, the sugar bags
were destroyed by fire. The Court held that the ownership had passed to the buyer at
the time of loss and hence to buyer would be liable for the loss.

ii. Emperor Vs. Kuverji Kavasji, AIR 1941 Bom 106:

The Court held that when there was a contract for the sale of a part of quantity of
liquor in a Cask containing much larger quantity and if the quantity to be sold was not
separated or bottled, then the property in the goods did not pass to the buyer.
iii. Aldridge Vs. Johnson, (1857) 26 LJ QB 296:
The buyer bought some quantity of barley from the seller’s bulk stock. One of the
conditions in the sale agreement was that the buyer should send sacks, the seller
should fill them up. The buyer sent 200 sacks out of which the seller had filled 155
sacks. In the meantime, the seller became insolvent.
The Court held that for 155 filled up sacks, the property in the goods passed on to
the buyer and so he was entitled to it.
iv. Pignataro Vs. Gilvry & Son, (1919) 1 KB 459:
The seller informed the buyer that the goods were at the seller's warehouse and he
was asked to take them, he made no reply for two months and before he ultimately
sent his man the goods were stolen without the seller's fault, it was held that^ the
seller had appropriated the goods, that the buyer's assent was implied from his
failure to reply and that the goods were the buyer's property at the time of the theft
and the seller was not liable for non delivery.

2. Goods sent on approval or 'on sale or return': (Sec. 24)

When goods are delivered to the buyer on approval or 'on sale or return' or other
similar terms, the property therein passes to the buyer -
a. When he signifies his approval or acceptance to the seller or does any other
act adopting the transaction.
So, when a seller delivers the goods to the buyer 'on sale or return' basis on the
terms that the goods would remain as seller's property until paid for the goods, then
the property in the goods does not pass to the buyer.
i. Elphick Vs. Barnes, (1880) 5 C.P.D. 321:
The seller delivered a horse to a buyer on sale or : return. basis within 8 days. While
in the custody of the buyer, the horse died. The Court held that the seller was only
liable as the property in the horse had not passed to the buyer.
ii. Kirkham Vs. Attenborough:
A jeweller had delivered some jewellery to a buyer on 'Sale or return" basis. He
pledged the jewellery with a pawn broker, and also failed to pay the price to the
jeweller. The jeweller sued the pawn broker for recovery of the jewellery. It was held
that as the buyer had adopted the transaction by pledging it, and that the pawn
broker had a good title, the jeweller could sue only the buyer and not the pawn
broker. There was a fire in the seller's warehouse and the goods were destroyed.
Now the buyer must pi the price of goods to the seller as the ownership bypassed
from seller to buyer.

iii. Demby Hamilton & Co. Ltd., Vs. Barden (1949) All E.R. 435:
A buyer contracted to buy 30 tons of apple juice from a seller. The seller crushed the
apples, put the juice and kept it ready for delivery. There was delay on the part of
buyer to take the delivery and the juice got putrefied. The Court held that the buyer
was liable to pay the price.
If the damage or loss of the goods is due to Vis Major, then the liability lies with the
buyer even if the sold goods are in the possession of the seller.

CHAPTER 6
TRANSFER OF TITLE OR "NEMO DAT QUOD NON HABET"
OR
SALE BY NON-OWNERS
(NO ONE CAN PASS A BETTER TITLE THAN WHAT HE HIMSELF POSSESSES)
(Sec. 27 to 30)

MODEL QUESTIONS

1. 'No one can transfer a better title than he himself possesses'. Explain the rule
and indicate the exceptions to it.
2. Explain the rule contained in the maxim 'Nemo Dat Quod non habet' and - state
exceptions to the Rule in the sale of goods Act.

SYNOPSIS:
A. Introduction
B. Exceptions to the Rule
1. Consent of the owner
2. Estoppel (Sec. 27)
3. Sale by mercantile agent
4. Sale by a co-owner (Joint owners) (Sec 28)
5. Seller by a person in possession under a voidable contract (Sec. 29)
6. Seller in possession after sale [Sec. 30 (1)]
7. Sale by buyer in possession after sale [Sec.-30 (2)]
8. Sale by unpaid seller [Sec. 54 (3)]
9. Sale by a finder of lost goods
10. Sale by pawnee or pledgee
11. Sale by Official Receiver/Official Assignee/Liquidator of a company
12. Sale in market overt.

A. INTRODUCTION:
Generally, the seller sells only goods absolutely owned by him. However, at certain
times, the goods are sold by non-owners. Now the question arises whether such
transfer by non-owners is legal and valid and what is the position of the buyer who
buy such goods for value.
As per law, 'a seller cannot transfer to the buyer of goods a better title than what he
himself has'. It means the seller is not the owner of goods, then the buyer also will
not become the owner of such goods.
This law is known by the Latin maxim 'Nemo dat quot non habet' which means that
‘no one can give a better title than what he has got’ i.e., if a seller has a defective title
in the goods, then he can pass only a defective title to the buyer.
In the regard section 27 of the Sale of Good Act provides - When goods are sold by
a person who is not the owner and who does not sell them under the authority or
with the consent of the owner, then the buyer does not acquire a better title to the
goods than the seller had....".
This rule is made to protect the interests of the true owner. Otherwise, anyone can
make a sale of goods belonging to others which will lead to a lot of litigations.
However, if this rule is strictly followed, then even innocent buyers who purchase
goods in good faith and for value will also be put to loss.
So a number of exceptions have been formulated to protect the interests of innocent
buyers and in all these cases, the buyer gets a better title to the goods than what
the seller has possessed in the goods.

B. EXCEPTIONS TO THE RULE:

The maxim has got the following exceptions. In the following exceptions, the
defective title holder can pass a Valid title. .
1. Consent of the owner:
If the owner gives his consent to other persons to "sell his goods, then such other
persons, even though not owners, can give a valid title to the purchasers.

2. 2.Estoppel: (Sec. 27)

It means prevention of a person from denying what he has said or done. If a person
by conduct has allowed another person to have authority to sell and the buyer
purchases the goods from the other person, then the owner cannot deny the
authority given to the other person by conduct.

Example:
A has been selling B's goods in B's presence to C. B does not object to the sales. C
gets a better title because the true owner B is estopped from denying A's authority.
Eastern Distributors Ltd., Vs. Goldring:
A, the owner of a car signed the documents and delivered them to B. B pretends that
he has the necessary authority to sell the car belonging to A. Now the buyer C gets a
better title. The Court held that A was estopped from disputing B's authority to sell
the car to C.
3. Sale by mercantile agent:
Section 2 (9) of the Sale of Goods Act provides - mercantile agent is a person who,
in the customary course of his business, has, as 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.
Section 27 (2) provides - when a mercantile agent who is in possession of goods
with the consent of the owner, sells goods in the ordinary course of business to a
buyer who buys them in good faith, the buyer gets a better title, even though the
seller had no authority to sell.

The following conditions must be satisfied by the mercantile agent for passing a valid
title to buyer:
1. The person selling the goods must be a mercantile agent.
2. The mercantile agent should be in possession of goods or of
documents of title to the goods, in his capacity as mercantile agent. If
the goods are held by him in some other capacity, then he can pass a
better title.
3. The mercantile agent should be in possession of goods with the
consent of the owner. If the goods are in the possession of the agent
without the consent of the owner, then the buyer does not get a valid
title.
 4. The mercantile agent must sell the goods while acting in the ordinary
course of business.
5. The buyer must act in good faith and should not have notice that the
seller has no authority to sell.
Folkes. Vs. King:
The owner entrusted his car to a mercantile agent for sale at a specified price and
not for any lesser price. The agent sold the car to the buyer below the specified price
and also misappropriated the sale money, the buyer subsequently sold the car to the
second buyer. The Court held that now the owner cannot recover the car from the
second buyer as the mercantile agent had conveyed better title to the buyer .

4. Sale by a co-owner (Joint owners): (Sec. 28)

If one of the several joint owners, who is in sole possession of the goods with
consent of the other co-owners can sell the goods to a buyer in good faith and such
buyer gets a good title to the goods.
5. Sale by a person in possession under a voidable contract (Sec. 29)
If a person has obtained possession of goods under a voidable contract, then he can
make a valid transfer to other buyers but before the first contract is rescinded. Now
the other buyers obtain a valid title. But the buyer must have acted in good faith and
without notice of the defective title of the seller.

i. Philips Vs. Brooks:

A person entered a jeweler's shop and selected valuable jewels, He gave a cheque
in the name of rich man in the city, by name Sir George Bullough]. The jeweller
accepted the cheque in good faith thinking that the person was Sir Bullough. The
person later pledged the jewels with a pawnbroker. The Court held that the contract
was not void, but only voidable because the mistake was only to the attribute of the
buyer and hence any pledge to an innocent pledgee for value was valid and so the
jeweller could not recover the jewels from the pledgee/pawnbroker.

ii. Cundy Vs. Lindsay:

A person called Blenkarn signed his name in such a way as to appear as Blenkiron &
Co. He bought the goods, from the Plaintiff and sold them to an innocent purchaser
by name Cundy. The court held that the original agreement Blenkarn was void
because of unilateral mistake as to the identity of the person. So, the plaintiff was to
recover goods from the innocent purchaser Cundy.

Mistake as to attributes of the contracting party is not a mistake as to identity of the

party- So a contract entered under the mistake as to an attribute of the other party is
fully valid.
For e.g.: A intends to contract with B under the attribute that B is a rich man which is
not actually so. The contract is valid.
6. Seller in possession after sale: [See. 30 (1)]
Section 30 (1) provides that if a person, having sold the goods to the first buyer,
Continues to be in possession of the goods or of the documents of title and sells
them over again to a second buyer, then the second buyer gets a better title
provided he has acted in good faith and without notice of the previous sale to the first
buyer.
:
The following conditions must be satisfied:
 a. The seller must be in possession of goods.
b. The seller must have delivered the documents of title to the first buyer.
c. 'The first buyer must not have, paid the price.
d. Now, the seller, though not the real owner, can make a valid second sale.
The second buyer must act in good faith and without notice of the first sale.

7. Sale by buyer in possession after sale: [Sec. 30(2)]

Section 30 (2) provides that if a buyer has bought or agreed to buy the goods, with
the consent of the owner and obtains possession of the goods or documents ot title
to the goods, but if the seller still has some lien or right over the goods, and if the
buyer sells the goods to a second buyer, who buys them in good faith, then the
second buyer gets a better title.
The following are the essentials:
1. The buyer must have bought the goods or agreed to buy the goods.
2. There must be the consent of the owner.
3. The buyer must have obtained the possession of the goods or the documents
of the title to the goods.
4. The seller must have got some lien or right over the goods.
5. The buyer must have sold the goods to a second buyer
6. The second buyer must have bought the goods in. good faith.
Only if the above essentials are fulfilled, the second buyer gets a valid title.
However, a person who has obtained goods under a hire purchase agreement
cannot pass a valid title to a buyer.

8. Sale by unpaid seller: [Sec. 54 (3)]

If an unpaid seller has exercised his right of lien or stoppage in transit re-sells the
goods, then the buyer gets a good title to the goods as against the original buyer.
9. Sale by a finder of lost goods:
The finder is not entitled to sell the goods, but he can sell them under the following
conditions.
a. If the goods found are a common object of sale. For example, Vegetables,
Rice etc.
b. If the owner is not to be found anywhere for a reasonable period, but here, the
finder should have taken reasonable steps to find the owner.
c. If the found owner refuses to pay the lawful expenses of the finder, then, the
latter can sell the goods after | reasonable notice.
d. If the found goods are perishable in nature, then the finder can sell the goods.
For e.g., fruits, vegetables.
e. If the lawful expenses incurred in respect of the goods amount to 2/3 of the
real value of the goods, then the finder can sell the goods.
f. If the goods are in the danger of perishing or of losing the greater part of their
value.
In the above circumstances, the sale made by a finder of lost goods passes a valid
title to the buyer as against the original owner.
10. Sale by Pawnee or pledgee:
The Pawnee may sell the goods after giving the pawner a reasonable notice of the
sale. The notice need not state the date, time or place of the sale. Without notice if
he sells the goods, the pawnor may sue him for conversion. The Pawnee himself
may buy the goods during the sale. The Pawnee can also pass a valid title to a buyer
from him.
 11. Sale by Official Receiver/Official Assignee/ liquidator of a company;
In case of the insolvency of a person, all the properties of such insolvent person vest
with the official Receiver or Assignee. The official assignee or official receiver can
pass a valid title to the buyers buying the properties of the insolvent person. Here
even though the official receiver or official assignee is not the owner of the
insolvent's property they can pass a better title to the buyer.
12. Sale in market overt:
In England, if a person buys goods in market overt (open, public and legally
constituted market) then he obtains a good title to the goods. Thus, for the goods
sold in market overt, the buyers get a valid title to the good even if the seller's title is
defective. However the goods must have been sold as per the usage of market, and
the buyer must have bought the goods in good faith and without notice of any defect
in title of the seller.

CHAPTER 7
PERFORMANCE OF A CONTRACT OF SALE (DELIVERY OF GOODS)
(Sec. 32 to 44)

IMPORTANT
MODEL QUESTIONS:
1. What are the modes of delivery of goods by the seller?
2. Enumerate the rules as to delivery of goods.
3. When is the delivery of goods deemed to be accepted? What is the liability of
a buyer for wrongful refusal or neglect to take delivery?
4. What are the rights and duties of a buyer? -

SYNOPSIS:
A. Introduction
B. Modes of delivery of goods
C. Rules regarding to delivery of goods
D. Acceptance of delivery (Sec. 42)

A. INTRODUCTION:
Performance of a contract means delivery of goods by the seller to the buyer and
acceptance of the goods and payment for them by the buyer. It involves reciprocal
promises to be performed simultaneously by the seller and the buyer. (Sec. 31)
Thus, the performance of the contract involves three acts -
1. Delivery of goods to the buyer
2. Acceptance of delivery of goods by the buyer
3. Payment for such delivery of goods by the buyer
So, in every contract, there are rules regarding delivery of goods and acceptance of
goods

B. MODES OF DELIVERY OF GOODS:

Delivery means Voluntary transfer of possession of goods from one person to
another. [Sec. 2 (2)]
Delivery of goods also includes doing, anything which the contracting parties agree
to treat them as delivery. Similarly, delivery includes anything which has the effect of
putting the goods in the possession of the buyer or his agent. (Sec. 33)
Delivery may be actual, symbolic or constructive.
1. Actual Delivery:
If the seller hands over the goods to the buyer or his authorised agent, it is known as
actual delivery.
Anything done which has the effect of putting the goods in the possession of the
buyer or his agent is also considered as actual delivery. (Sec. 33}
2. Symbolic Delivery:
If the goods are not in a position to be handed over actually. E.g., if the goods are
bulky, then the seller may either hand over the key of the godown or warehouse to
the buyer. This is called symbolic delivery.
3. Constructive Delivery: (Delivery by attornment}
If a third party (bailee) holding the possession of goods of the seller acknowledges to
the buyer that he holds the possession of the goods on behalf of the buyer, then it is
called constructive delivery.
The following are the instances of constructive delivery:
1. The seller in possession of the goods may agree to hold them on
behalf of the buyer.
2. The buyer may be in possession of the goods already and the seller
may agree that the buyer may hold the goods as owner.
3. A third person in possession of the goods may acknowledge to the
buyer that he holds them on his behalf.

C. RULES REGARDING TO DELIVERY OF GOODS:

1. Place of delivery: [Sec. 36 (1)]
If the contract specifies the place at which the goods should be delivered, the goods
must be delivered at that place. If it is not specified, they may be delivered at the
place which they are at the time of sale. Regarding agreement to sell, as per the
agreement or at the place of manufacture.
2. Mode of delivery: (Sec. 33)
Seller should put the goods in possession of the buyer or his duly authorised-agent.
Delivery may be actual, constructive or symbolic.
3. Time for delivery: [Sec. 36 (4)]
If time for delivery is not fixed in the contract, it should be done within a reasonable
time. Failure of delivery within the reasonable time gives rise to breach of contract.
4. Delivery and payment: (Sec. 32)
The delivery of goods should be concurrent with the payment of price of the goods.
5. Part-delivery: (Sec. 34)
If part of the goods are delivered, in progress of the delivery of the whole of goods, it
has the same effect as delivery of the whole. If it is meant to severe it from whole, it
is not considered as delivery of the remainder.
6. Application for delivery by buyer: (Sec. 35)
The buyer should apply for delivery of goods. If he does not apply for delivery, he
has no right of action against the seller.
7. Cost of delivery: [Sec. 36 (5)]
All expenses of making delivery and its incidental expenses should be borne by the
seller and all the expenses and incidental expenses regarding obtaining delivery
should be borne by the buyer.

8. Third party in possession of goods: [Sec. 36 (3)]

If at the time of sale, the goods are with the third party, there is no delivery unless
the third party acknowledges to the buyer that he holds them on his behalf. Third
party's consent is not necessary if the sale is by transfer of documents of title to
goods, through railway receipt or a bill of lading etc.

9. Delivery of wrongful Quantity/Defective delivery: (Sec. 37)

The quantity of goods delivered must be strictly according to the terms of the
contract. If it is not according to the contract, the buyer may reject the goods.

There are three different types of defective delivery.

a. Delivery of goods less than the quantity contracted for: [Sec. 37 (1)]
Here, the buyer may either reject the goods or accept and pay for them at the
contract rate. If the buyer rejects them, the seller may send the goods according to
the contract within a reasonable time.
b. Delivery of goods in excess of the quantity contracted for: [Sec. 37 (2)]
Here, the buyer may either accept the whole quantity, reject the whole or accept the
quantity he ordered and reject the rest.
c. Delivery of goods contracted for, mixed with other goods: [Sec. 37 (3)]
The buyer may either accept the goods which are in accordance with the contract
and reject the rest, or may reject the whole.
10. Instalment deliveries: (Sec. 38)
Delivery of goods by instalments is not allowed unless agreed upon by the parties.
The buyer ma, choose to reject the goods, if he has not accepted fo. such delivery.
11. Delivery to a carrier or Wharfinger: (Sec. 39)
If goods are delivered to a carrier for transmission to the buyer or to a wharfinger for
safe custody, it is deemed to be delivery to the buyer. Here the seller must enter into
a contract with the carrier or wharfinger on behalf of the buyer for the sale,
transmission or custody of the goods. If the seller fails to do so and if the good are
destroyed, the buyer may decline to treat the deliver to the carrier as a delivery to
himself. The seller i: responsible for the damages or loss.

D. ACCEPTANCE OF DELIVERY: (Sec. 42)

Merely receiving the goods by the buyer doesn't constitute acceptance of goods.
Final assent by the buyer that he has received the goods under and in the
performance of the contract of sale is acceptance. If he refuses to accept the goods
wrongfully, he is liable for damages.

The buyer accepts the goods if he does any of the following:

i. If he intimates that he accepted the goods (to the seller)
ii. After the goods are delivered to buyer, if he resells them, or uses them or
makes any alteration in them.
iii. If the buyer retains the goods without intimating the seller that he rejected
them after a reasonable
When goods are delivered to the buyer but he rejects them, he need not return them,
but he should intimate that he has rejected the goods. If the seller' fails to take away
the goods, the buyer becomes the bailee of the goods and may claim charge for
keeping them.
But if the seller is ready and willing to deliver the goods to the buyer but if the buyer
fails to take the goods within a reasonable time, he is liable to the seller for any loss
due to his neglect or refusal and a reasonable charge for care and custody of the
goods.
The refusal to take delivery by the buyer amounts to repudiation of the contract and
the seller gets a right to sue him for the price and also for damages.

CHAPTER 8
RIGHTS AND DUTIES OF BUYER AND SELLER
(Sec. 31, 32, 35 to 39, 41, 44 & 55 to 61)

MODEL QUESTIONS:
1. Explain the rights and duties of buyer and seller
2. What are the rights of buyer?
3. The rights oi buyer are really the duties of the seller - Explain.
4. Write short notes on:
(a) Duties of buyer
(b) Duties of seller
(c) Rights of buyer
(d) Rights of seller

SYNOPSIS:
A. Rights of buyer
B. Duties of buyer
C. Rights of seller -
D. Duties of seller

A. RIGHTS OF BUYER:
1. The buyer can take delivery of the goods as per the terms of contract. (Sec.-
31 & 32)
2. If the goods sent are less than that are ordered, he may either reject the
whole or accept the quantity he ordered. (Sec. 37)
3. He can refuse to accept the delivery of goods by instalments. [Sec. 38 (1)]
4. If the goods are sent by the seller by sea route then the seller should inform
the buyer so that he may insure the goods. [Sec. 39 (3)]
5. Before accepting the goods, the buyer can examine them. (Sec. 41)
6. For breach of contract, the buyer is entitled to the following rights:
a. For wrongful neglect or refusal to deliver the goods by the following
rights.
b. If price is paid by buyer and if the goods are not delivered, then the
amount may be recovered from the seller.
c. The buyer can also sue for specific performance of the contract to sell.
(Sec. 58)
Vasantha Vishwanathan Vs. V.K. Elayalwar, 2001 AIR SCW 3304:
The defendant namely the transferee took forceful possession of buses and
transferred them to others. The subsequent transferees from the defendant were
found to be not bonafide purchasers without notice. The Supreme Court held that the
specific performance decree "would bin the defendant and subsequent purchasers
as well.
 d. The buyer may sue the seller if there is breach of warranty by the
seller. (Sec. 59)
e. If the seller repudiates the contract before th date of delivery, then the
buyer may wait till date of delivery and treat it as subsisting till then.
He may also treat the contract as rescinded and sue for damages for its breach.
(Sec. 60)
f. If there is a breach of contract by the seller and hire turns the price to
the buyer, then he can claim interest on the amount of the price from
the date on which the payment was made, [Sec. 61 (2) (h)].
7. The buyer may insist for delivery of goods within a stipulated date.
8. The buyer has the right to claim delivery of goods on payment of price.
9. The buyer need not take the risk of deterioration of goods, if the seller delivers
the goods from a different place at his own risk.
10. The seller or the buyer can recover interest or. special damages in cases
where interest or special damages recoverable.
11. A buyer may demand reduction of price when tax or duty on the goods is
reduced/removed.
B. DUTIES OF BUYER:
1. As per the terms of the contract, the buyer should accept the goods and pay
for them. (Sec. 31 & 32)
2. He should apply/demand for delivery of goods. (Sec. 35)
3. He must demand delivery at reasonable hours of a day. [Sec. 36 (4)]
4. If the delivery is by instalment, he has the duty to accept delivery and pay for
it. [Sec 38 (2)].
5. If the buyer refuses to accept the goods then he should info mi the same to
the seller- (Sec 43).
6. After the offer of delivery, the buyer must take delivery of the goods within a
reasonable period. (Sec. 44)
7. The buyer must pay the price as per the terms of the contract after the
property in the goods have passed to the buyer, (Sec. 55)
8. For wrongful neglect or refusal to accept by the buyer, he must compensate
the seller for damages claimed by him. (Sec. 56)
C. RIGHTS OF SELLER:
1. The seller has the right to check that the buyer properly handles the goods" as
per the conditions and warranties.
2. The seller can demand the. price for the goods sold to the buyer. -
3. In case, the seller makes "excess delivery and if the buyer accepts it, then the
seller can demand price for such excess delivery of goods as per agreed
price.
4. In case of wrongful neglect or refusal of acceptance of goods by the buyer,
the seller can make the buyer liable for such neglect or refusal.
5. If the contract is for instalment delivery, then the seller can get it accepted by
the buyer.
6. An unpaid seller has right to remedies like right of lien, right of stoppage in
transit and right of re-sale.
7. The seller can ask price in advance even before the delivery of goods.
8. The seller can instruct the carrier/bailee as his agent and thus can reserve his
right of disposal over the goods while in the custody of the carrier/bailee.
9. The seller has the right to get application/requisition (for supply of goods) from
the buyer.
 D. DUTIES OF SELLER:
1. The seller cannot make instalment delivery unless agreed in the
contract of sale.
2. The seller has to follow all the rules as to delivery as per law.
3. In an auction sale, the seller cannot bid by himself or through his agent.
4. The seller must accept unconditional appropriation of goods when the
buyer has consented for the same.
5. The seller must deliver the goods immediately on payment of price by
the buyer.
6. The seller has the duty to deliver the goods to the buyer as per the
stipulated time.
7. The seller has the duty to make supply of goods as per condition that
a. The bulk of the goods correspond with the sample or
b. The goods correspond the description or
c. both
The seller must also give the buyer reasonable opportunity to cross check the goods
with the sample.
8. The seller must make the goods deliverable and to inform it to the
buyer. He must also bear the expenses for the delivery.
9. After sale, if the seller has the possession of goods, then he must act
as a bailee of the goods till the delivery of the goods to the buyer.
10. If the seller delivers the goods to a carrier or wharfinger, then he must
give notice of insurance of the goods both fire. and marine transit.
11. If the seller delivers the goods from a different place and at his own
risk, the he must bear risk of deterioration of goods.
12. The seller has the duty to permit the buyer to examine the goods
before sale.
13. The seller cannot claim compensation from the buyer for the goods
rightfully rejected by the buyer.

CHAPTER 9
RIGHTS OF AN UNPAID SELLER (VENDOR)
(Lien, Stoppage in Transit, Re-sale) (Sec. 45 to 61)

MOST IMPORTANT
MODEL QUESTIONS:
1. Define an unpaid seller. Examine his rights
2. State the circumstances under which an unpaid seller is entitled to a
lien on the goods sold. When does the lien terminate? State the
circumstances under which the right of lien is defeated.
3. What is 'right of stoppage in transit'? How is it effected?
SYNOPSIS:
A. Introduction
B. Right of an unpaid seller
I. Against tfie goods
1. When the property has passed
a. Right of lien (Sec. 47)
b. Right of stoppage in transit (Sec. 50 to 52)
 c. Right of Resale
2. When the property has not passed
i. Right of withholding delivery
ii. Stoppage in transit
II. Against the buyer personally
1. Suit for price
2. Suit for damages
3. Repudiation of contract
4. Suit for interest

A. INTRODUCTION:
Sec. 45 of Sale of Goods Act reads A seller is an 'unpaid' seller:
1. If he has not received the whole of the price for the sold goods.
2. If the seller has received the whole of the price of the sold goods.
a. He must be unpaid and the price must be due.
b. He must have an immediate right of action for the price.
c. A bill of exchange or cheque must have been received but dishonoured.

Hiralal Chiman Lal Vs. Pehlad Rai & Co., 31 Bom, LR 508
An agent bought certain goods in his personal name on behalf of his principal. The
principal refused to pay the price of the goods. Here the agent's liability is that of
personal liability. So, he is treated as an unpaid seller in the relationship between
him and the principal.

B. RIGHTS OF AN UNPAID SELLER:

The right of unpaid seller are of two types:
1. Right against the goods.
2. Rights against the buyer personally
Sec. 46 reads -
Notwithstanding that the property in the goods may have passed to the buyer, the
unpaid seller of goods has by implication of law - the following rights -
a. A lien on the goods for the price while he is in possession of them
b. In case of the insolvency of the buyer, a right of stopping the goods in transit
after he has parted with the possession of them.
c. A right of resale as limited by this Act

1. RIGHTS AGAINST THE GOODS:

1. When the property has passed:
When the property has passed to the buyer, an unpaid seller has the following rights:
a. Right of lien (Seller's/Vendor's Lien): (Sec. 47)
Lien is a right to retain possession of goods until payment of the price. It is a security
for recovery of debt or payment of a sum. To exercise this right, the following
conditions must be satisfied:
i. The goods must have been sold not on credit.
ii. If the goods have been sold on credit then the period of credit should have
expired.
iii. The buyer must be insolvent.
iv. The seller must be in possession of the sold goods.
v. The ownership of the goods should alone have passed.
 vi. An unpaid seller can have the right of lien only for the price and not for any
other charges warehouse or dock charges.
vii. If the unpaid seller has made part delivery of the goods he can exercise
his right of lien on the remainder.
Somes Vs. British Empire Shipping Co., (I860) 8 HLC 338:
The Court held that when the price was offered, the seller could not retain the goods
for the expenses incurred by him for storage etc., during the period of his right of
lien.

Termination of lien:
Lien is terminated in the following cases:
i. When the seller delivers the goods to a carrier or bailee for
transmission to the buyer, without reserving the right of disposal of
the goods.
ii. When the buyer, or his agent lawfully obtains possession of the
goods as buyer.
iii. When the seller waives his right of lien on the goods. Waiver may
be express or. implied.
iv. When the buyer offers price for the goods, then the seller ceases to
be an unpaid seller. Here even if the seller refuses to receive the
money, he loses his right of lien on the goods.
Valpy Vs. Gibson, (1847) 4 CB 837:
The sold goods delivered to the buyer's shipping agents were put on board a ship.
Since packing was not in order, the goods were returned to seller repacking. While
the goods were in seller's custody, the buyer became insolvent. Since the sellers
were unpaid, they claimed the right of lien. The Court held that by delivery to the
shipping agents, the sellers have lost their right of lien and hence they must deliver
the goods to the buyer.
b. Right of stoppage in transit: (Sec. 50 to 52)
It is a right of stopping the goods while they are in transit. There is retention of
possession of the goods in transit by the seller until payment of the price.
Section 50 reads -
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. It means that
he can resume possession of the goods as long as they are in th course of transit
and can retain them until payment of the price is made to him.
In D Aquila Vs. Lambert, 1761 Amb 399:
Lord Northington observed that the right of stoppage in transit is based on justice
and equity that, one man's goods should not be applied to the payment of another
man's debts.
This right of stoppage in transit is available under the following conditions:
i. The buyer must be insolvent.
ii. The seller must be an unpaid seller
iii. The seller must have parted with the possession of the goods.
iv. The goods must be in the course of transit to the buyer.
v. If the goods have been sold on credit, then the period of credit should
have expired.
vi. The property in the goods must have passed to the buyer.
 vii. It is not necessary that at the very moment of the stoppage of transit in
goods the buyer must have become insolvent. Even in anticipation, of the
insolvency of the buyer, the seller can exercise his right.
viii.If the seller has not assented to any sale or pledge of the goods by the
buyer, then the unpaid seller's right of lien or stoppage in transit is not
affected. However, if the seller has transferred the title of goods to the
buyer and buyer in turn has made a sale to a third person, who acts in
good faith, and for consideration, then the seller loses his right of lien or
stoppage in transit.
Effecting stoppage in transit: (Sec. 52)
i. Taking possession of the goods or
ii. Giving notice of his claim to the carrier or other bailee who possesses the
goods.

Notice of stopping the goods in transit:

i. Notice may be given either to the person in actual possession of the goods
or to his principal.
ii. When a notice is given to the principal, then there should be sufficient time
for the principal to communicate with his agent to prevent delivery to the
buyer.
iii. When a notice of stoppage in transit is given by the seller to the carrier in
possession of goods or to his principal, then the carrier must not deliver
the goods to the buyer or his agent but must redeliver them to the seller or
deliver according to his directions.
iv. If the carrier delivers the goods to the buyer even after receiving such a
notice from the seller, then he shall be liable to the seller for conversion.
v. The expenses of redelivery of the goods must be borne by the seller.

Ex parte Cote (1873) (9) Ch. Ap.27:

The Court held that when the carrier delivers the goods to the buyer even after
notice by the seller under bonafide mistake, the buyer is still liable for conversion if
he refuses to return the goods to the seller.

US Steel Products Co. Vs. GWR (1916) 1 AC 189:

The Court held that the seller must bear all expenses of redelivery including freight
as per the original contract of carriage of goods.

Duration of transit: (Sec. 51)

i. The transit of goods begins from the moment the goods are
delivered to the carrier and ends with the delivery of the goods to
the buyer or his agent.
ii. If the buyer or his agent takes delivery before the arrival of the
goods at the appointed destination, then the period of transit ends.
iii. If the carrier wrongfully refuses to deliver the goods to the buyer or
his agent then the transit comes to an end.
iv. The carrier must be a middle man or the agent or servant of the
seller and not of the buyer.
v. If the goods are rejected by the buyer and if the carrier or other
bailee continues to be in possession of the goods, then the transit
does not end, even if the seller refuses to receive the goods back.
 vi. If goods are delivered to a ship chartered by the buyer, then
whether they are in the possession of the master as a carrier or as
agent of the buyer depend on the circumstances of the particular
case.
vii. If part delivery of the goods has been made to the buyer or to his
agent, the remainder of the goods may be stopped in transit.
G.I.P. Railway Vs. Hammandas (1890 (14) L.R. Bom
The goods were sent by Railways. The buyers had paid the freight for the transport
of the goods and got the receipt. The Court held that as the goods had been
delivered to the buyer, the right of lien ends and the right of stoppage in transit
begins.
Bethel Vs. Clark (1887) 19QBD 553:
Since the goods had to be carried by more than one carrier as part of the original
contract, the Court held that the transit continues till the goods arrive at their ultimate
destination.
Termination of transit:
The transit comes to an end in the following cases:
i. If the buyer or his agent obtains delivery of the goods before the arrival at
the destination.
ii. If after arrival of the goods at the destination, the carrier or bailee
acknowledges to the buyer that he holds the goods on his behalf.
iii. When the carrier or bailee wrongfully refuses to deliver the goods, to the
buyer or his agent.
iv. If part delivery of the goods has been made to the buyer, remaining goods
may be stopped in transit.
v. If the goods are rejected by the buyer, but the carrier or bailee is in
possession of the goods, the transit is not deemed to be ended.
c. Right of Resale:
The third right of an unpaid seller is to effect a resale.
Sec.54 has laid down that a contract of sale is not rescinded by the mere exercise by
an unpaid seller, of
his right of lien or stoppage in transit. The following conditions must be satisfied:
i. The goods should have come to the possession of the seller by the right of
lien or by the right of stoppage in transit.
ii. The goods must be of a perishable nature or ordinary goods. The seller
must have possessed the goods for a reasonable period; In Maclean Vs.
Dunn, 1328 (130) ER 947, the Court held that the word perishable means
not merely physically perishable, but commercially perishable, as by
deteriorating in market value by delay or by deteriorating in quality so as to
become unmerchantable.
iii. Before exercising the right of resale, the seller must give notice, giving
reasonable time to the buyer for payment of the price.
iv. After the expiry of the period or on receiving a reply from the buyer
consenting for the resale, the seller can make a resale.
v. If the resale has brought about loss, the first buyer must compensate the
seller. But if the resale has brought about gain or profit to the seller, the
seller need not give such profit to the first buyer.
vi. In the case of perishable goods, resale can be effected even without giving
notice to the first buyer in circumstances command.
 vii. When the seller has expressly reserved the right of resale in case of the
buyer's default. In such a case no notice need be given to the buyer.

P.S.N.S. Chettiar Vs. Express Newspapers, AIR 1968 SC 741:

After exercising the right ot lien or stoppage in transit in all cases of resale, whether
with or without notice to the first buyer, the subsequent buyer gets good title even if
such buyer had notice of the previous sale to the first buyer.
Difference between right of lien and. stoppage in transit
i. The right of lien is exercised only when the goods are in the- actual
possession of the seller.
The right of stoppage in transit is exercised only if the goods have not reached the
possession of the buyer though the seller has parted with such possession of the
goods.
ii. The right of stopping the goods in transit arises only when the buyer has
become insolvent and is unable to pay the price.
The right of lien is exercised even when the buy is solvent i.e., he is able to pay but
does not pay.
iii. While the right of lien comes to an end as soon as the goods get out of the
possession of the seller, the right of stoppage in transit commences only
when the goods have left the possession of the seller and the goods are in
transit and has not reached the hands of the buyer of his agent.
iv. In lien, the seller retains the possession over the goods, while in right of
stoppage in transit, the seller regains or resumes possession of the goods.

2. Rights of an unpaid seller when the property in the goods has not
passed:
a. Right of withholding delivery:
If the property has not passed to the buyer, an unpaid seller may withhold delivery of
the goods.
b. Stoppage in transit:
Already dealt

II. RIGHTS OF AN UNPAID SELLER AGAINST THE BUYER

PERSONALLY: (Sec. 55 to 61)
An unpaid seller has got the following rights against the buyer personally, in addition
to the rights against the goods.

1. Suit for price:

i. When the property has passed to the buyer, and the buyer refuses to
pay the price, then the seller may sue for the price of the goods.
ii. Under the contract of sale, where the price is payable on a certain day
irrespective of delivery and the buyer neglects or refuses to pay the
price the seller may sue him for the price, even though property has
not passed.

2. Suit for damages:

According to the 'measure of damages' the Indian Contract Act, if there is no default
by the seller and he is willing to deliver the goods, but the buyer wrongfully refuses to
take delivery of the goods within a reasonable time. the seller may recover.
i. Loss due to the buyer's refusal or neglect to take delivery.
 ii. Any reasonable charge for the care and custody of the goods.
3. Repudiation of contract:
When the buyer repudiates the contract before the due date, the seller may treat the
contract as rescinded and sue for damages for the breach. This rule is known as the
"Rule of anticipatory breach of contract'.
4. Suit for interest:
If there is an agreement between the seller and the buyer as. to interest on the price
and the goods from the date on which payment is due, the seller may get the interest
from the buyer.

CHAPTER 10
AUCTION SALE (Sec. 64)
MODEL QUESTIONS:
1. State the rules regarding sale by auction.
2. Explain the procedure and rules of auction sale.
3. Write short notes on: (a) Auction sale (b) Knock out (c) Damping
SYNOPSIS:
A. Introduction
B. Procedure of auction sale
C. Rules of auction sale (Sec. 64)
D. Tax in sales (including auction sales) [Sec. 64-A]

A. INTRODUCTION:
Auction is a public sale. Different bidders try to outbid each other and the goods are
sold to the highest bidder. The auctioneer is deemed to be an agent of the seller.
B. PROCEDURE OF AUCTION SALE:
An advertisement and catalogue of the goods, and terms of sale is circulated. The
intending buyers assemble at the appointing day and time and the auctioneer invites
bids from the intending buyer. The highest bid constitutes the offer and some
customary announcement like falling of the hammers, etc, constitutes acceptance of
the offer. The contract of sale is completed at this stage. Before acceptance of the
bid, the bidder may withdraw his bid.
C. RULES OF AUCTION SALE: (Sec. 64)
Section 64 of the Sale of Goods Act lays down the principle of auction sale. It gives
the following principles:
1. In auction sale, where goods are put for sale in lots each lot is prima facie
deemed to be the subject of separate contract of sale.
2. The auction sale is complete when auctioneer announces its completion
by the fall hammer or in any other customary manner, and until such
announcement is made any bidder may restrict his bid.
Sweeting Vs. Turner, 1871 KB 310:
The Court held that any bidder may retract his bid before the fall of the hammer and
such retraction is valid.
Lachia Setty & Sons Ltd., Vs. Coffee Board, AIR 1981 SC 162:
The Court held that the seller has the right to withdraw his goods from the auction at
any time before the fall of the hammer.
3. A contract of sale is generally a bilateral contract where the buyer and seller
are two different persons. However, auction sale is an exception to this
general rule. In a sale by auction, a right to bid may be reserved expressly or
on behalf of the seller. So, the seller or any one person on his behalf may bid
 at the auction. Moreover, the seller can employ such any one person to bid on
his behalf only when he notifies that the sale is subject to a right to bid on
behalf of the seller. He may treat any sale contravening this rule as fraudulent.
4. The auction sale may also be notified to be subject to a reserve or upset
price. That is, auction sale may be subject to a condition that if the highest bid
is less than the reserved price, the sale will not be concluded.
But where the sale is without reserve, the goods will be sold to the highest bidder
whether the sum bid may be equal to the real value or nor.
5. If the seller makes use of pretended bidding to raise the price, the sale will be
voidable at the option of the buyer.
6. Knock out agreements
Jyoti Vs. Jhowmull, 36 Cal. 134:
A group of persons combine together with the object of preventing competition
among themselves at an auction sale. As per the agreement only one person will
bid. The Court held that such a combination is called a 'knock out' agreement and it
is not illegal. However, if the intention of such combination of parties to 'knock out' is
to defraud third parties, then such knock out agreement is illegal.
7. If the auction buyers are persuaded as not to bid and/or not to raise the price
by showing the defects in the goods or by creating fear among the bidders by
scaring them or by doing any other act to dissuade the intending bidders, then
these acts are 'damping'. Damping is illegal and in such a such a situation, the
auctioneer has the right to refuse the sale of goods by auction.
8. In every auction sale, there is an implied warranty that the auctioneer has
authority to sell and that he does not know any defect in the title of his
principal then he undertakes to ensure quiet and undisturbed possession of
the buyer.
9. The auctioneer can demand payment of sale money by cash only and he
cannot be compelled to accept the payment of the price by way of bill of
exchange, cheque, etc.

D. TAX IN SALES (INCLUDING AUCTION SALES): [Sec. 64-A]

1. If after the contract is made, there is a tax revision before the performance of
the contract, the parties may readjust the price of the goods. E.g.: Duty or
customs or excise on the goods, any tax payable on sale or purchase of
goods.
2. If tax increases, the buyer should pay the increase price. If tax is curtailed, he
is entitled to the reduction. But by agreement, the effect of any revision of tax
may be excluded.

CHAPTER 10-A.

REMEDIES FOR BREACH

AND
ANTICIPATORY BREACH OF CONTRACT OF SALE
MODEL QUESTIONS:
1. What are the remedies open to an aggrieved party in case of a breach and
anticipatory breach of contract?
2. What is meant by breach of contract^ What remedies are available to an
aggrieved party on the breach of the contract?
 3. Where there is a right, there is a remedy'. Amplify this statement and briefly
explain the various remedies available for breach and anticipatory breach of
contract?
SYNOPSIS:
A. Anticipatory breach of contract
B. Ordinary breach of contract
C. Remedies

Answer:
A contract can be breached by two methods, namely

A. ANTICIPATORY BREACH OF CONTRACT:

When a party to the contract declares his intention of not performing the contract
when it is due, it is called anticipatory breach of contract.
Anticipatory breach of contract may be -
1. By Renunciation (Express repudiation)
2. By Implied Repudiation

B. ORDINARY BREACH OF CONTRACT:

After the performance of the contract has commenced and at any time before the
performance of the contract is completed, a contract may be breached. This is called
ordinary breach of contract

C. REMEDIES:
The affected party has the following remedies, in case of anticipatory breach and
ordinary breach of contract.
1. Rescission of the contract
2. Suit for price and damages
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for injunction

1. Rescission of the contract:

When a contract is breached by one party, the other party may sue to treat the
contract as rescinded and refuse further performance. He is free from all his
obligations under the contract.
E.g.: A promises to supply 10 bags of ragi on a certain day. B agrees to pay the price
after he gets the goods. A does not supply the goods. B is free from liability to pay
the price for the goods.
281-C
If a party treats the goods as rescinded, he is liable to restore any benefit received
under the contract to the other party. But if a person rightfully rescinds the contract,
he is entitled to compensation for any damage he has suffered through non-
performance by the other party.
2. Suit for price and damages:
When a contract is breached by the buyer after sale, then the seller is entitled for
price of the sold goods. However, if the contract is breached by the seller, then the
buyer is entitled for damages.
'Damages' means money compensation allowed to the affected party by the Court.
The object of awarding damages for a breach of a contract is to put the affected
party in the same position as if he had not been affected.
The Court is often subject to difficultly to determine the exact amount to be given as
compensation to the affected party. The Court is guided by some norms and
principles. Sec. 73 deals with such measures of damages.
a. Such damages as would arise naturally in the course of things. This
relates to ordinary damages.
b. Such damages which the parties know at the time of making the
contract to be likely to result from such breach of contract.
c. Compensation is not given for any remote or indirect loss or damage
due to breach of contract.
d. Compensation for damages arising from breach of quasi contract.

3. Suit upon quantum meruit:

Quantum Meruit arises - When an agreement is discovered to be void, and the
contract has thus become void, any person who has received any advantage, has to
return it or to make compensation for it to the person from whom he received it.
4. Suit for specific performance of the contract:
Specific Relief means a decree issued by the Court that the defendant should
actually perform his promise. There is no money compensation for the breach of the
contract but actual performance of the contract. This is based on equity and justice.
5. Suit for injunction:
Injunction' means the specific order of the Court prohibiting the threatened or
prohibiting the continuance of the wrongful act already commenced. In other words,
it is an order to prevent the breach of contract. It is based on justice and equity.
For example: A is about to sell B's land to C. Now B can get a specific order form the
Court to prevent the wrongful act of sale by A.
Injunctions are divided into four types, namely:
1. Temporary Injunction
2. Permanent or Perpetual Injunction
3. Positive Injunction (Mandatory Injunction)
4. Negative Injunction (Prohibitory Injunction)
PROBLEMS
LAW OF SALE OF GOODS
(The Sale of Good Act, 1930)

PROBLEM NO. 1
A agrees to purchase 10 tons of apple juice from B on a specified date. 'B'
crushes the apples, puts the juice ready for delivery on that specified date. A
delays to take the delivery and the juice goes putrid and has to be thrown
away. Is A liable to pay for the juice?

ANSWER:
Yes. Sec. 8 of The Sale of Goods Act, 1930 outlines the provisions of law relating to
'Goods perishing after the agreement to sell but before the sale is effected'. Under
this section, it is clearly brought out that if the destruction of goods is caused due to
the fault of either party, then the party in default is liable for non-delivery of the
goods.
In the above case, A who agrees to purchase 10 tons of apple juice from B on a
specified date, fails to adhere to his commitment.
The putrefaction of the juice was the result of the delay caused by A and taking
guidance from the provision under this section, A is liable to pay for the juice though
he could not take delivery of the same.

PROBLEM NO. 2
X sold a harvest machine to 'Y'. He described and assured that the machine is
a new one without any defect. But afterwards Y found that the machine was
very old and damaged one. So, Y filed a suit to set aside the sale. Will he
succeed?

ANSWER:
Yes. Y can file a suit to set aside the sale.
As per Sec. 15 of The Sale of Goods Act, 1930, 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.
Generally, when goods are sold, the buyer must exercise reasonable care and
caution, regarding the defects, quantity, quality etc. If the defects are patent and are
easy to discover, the seller cannot be held liable. However, if the defects are latent
and not easy to discover, the seller is held liable. Sec. 16 of the Sale of Goods Act
confirms this by providing exceptions to the rule:
Sec. 16 (2) states that the goods should be of merchantable quality. Where goods
are bought by description from a seller who deals in goods of that description
(whether he is the manufacturer or
producer or not), then there is an implied condition that the goods shall be of
merchantable quality.
In the problem given, Y has bought the harvest machine from X when the latter
described it as new and also assured him that the same is free from any defect.
The harvest machine sold by X was a very old one having latent defects which were
not perceivable and therefore Y bought the same, entirely relying upon the
assurance given by X.
This is a case of breach of the implied condition that the goods sold shall be of
merchantable quality and therefore Y is entitled to a legal remedy.
Y's suit to set aside the contract of sale merits success keeping in view the
foregoing.

PROBLEM NO. 3
"A" purchased a golden chain from B by exercising undue influence and
pledged it with "C" before the contract was rescinded by "B". Is the pledge
valid?

ANSWER:
Yes. Sec. 16 of the Indian Contract Act, 1872 defines "undue influence' as "a
contract is said to be induced by 'undue influence' where the relations subsisting
between the parties is such that one of the parties is in a position to dominate the will
of the other and uses that position to obtain an unfair advantage over the other". A
contract that has been entered into using undue influence is voidable, which means
the party who has been unduly influenced may choose to continue with the contract
or annul it.
However, Sec.29 of The Sale of Goods Act, 1930 provides that if a person has
obtained possession of goods under a voidable contract, then he can make a valid
transfer to other buyers but before the first contract is rescinded.

Going by the above provisions of law, in the instant case, A's contract with B for
purchase of the golden chain is a voidable one. Before B rescinded the contract on
this ground, A had already pledged the same with C. However, C must be an
innocent pledger for value.

Therefore, the pledge is valid and B cannot recover the golden chain from C which
was pawned by B. The same decision was held in 'Phillips Vs. Brooks'.

PROBLEM NO. 4
"A" purchases a gold ring from "B" by exercising coercion and pawns it with
"C" before the contract is rescinded by "B". Is the pledge valid?
ANSWER:
Yes. Section 15 oi the Indian Contract Act defines coercion as "the committing or
threatening to commit, any act, forbidden by the Indian Penal Code, or the unlawful
detaining, or threatening to detain, any property, to the prejudice of any person
whatsoever, with the intention of causing any person to enter into an agreement. A
contract that has been entered into using coercion is voidable, which means the
party who has been coerced may choose to continue with the contract or annul it.

However, Sec.29 of The Sale of Goods Act, 1930 provides that if a person has
obtained possession of goods under a voidable contract, then he can make a valid
transfer to other buyers but before the first contract is rescinded.

Going by the above provisions of law, in the instant case, A's contract with B for
purchase of the golden chain is a voidable one. Before B rescinded the contract on
this ground, A had already pledged the same with C. However, C must be an
innocent pledger for value.

Therefore, the pledge is valid and B cannot recover the golden chain from C which
was pawned by B. The same decision was held in 'Phillips Vs. Brooks'.

PROBLEM NO. 5
"A" asks "B" a chemist, to give him hot water bottle. Subsequently, the bottle
bursts and injures "A's" wife. Is "B" required to refund the money paid by "A"?

ANSWER:
According to Sec. 16 (1) of the Sale of Goods Act, 1930 when the goods sold are
below the prescribed quality, the contract can be rejected. But the buyer must satisfy
the following two conditions.
i. He must tell the purpose for which he required the goods.
ii. He must have relied on the skill of the manufacturer to produce the goods
of the quality required by the buyer.
iii. The goods must be of a type which are normally dealt with by the seller.
If the above conditions are satisfied by the buyer, then 'A' can claim refund of the
money by him to the seller 'B' and in addition, 'A' can claim compensation for the
injuries sustained by 'A's' wife.
The facts of the case are similar to Priest Vs Last (1903) 2 KB 148: wherein the
Court held that the seller must pay compensation for breach of contract.

PROBLEM NO. 6
Prashanth purchased dead Pig from Pinto a dealer in port. Prashanth's family
consumed the pork and suffered illness as the dead Pig unfit for human
consumption. Prashanth filed a suit against Pinto to recover damages. Decide.

ANSWER:
Sec. 16 (2) of the Sale of Goods Act 1930 speaks about Quality or fitness of goods
by usage of trade.

It reads - 'An implied warranty or condition as to the for a Particular purpose', if

annexed by the usage of trade and if the seller deviates from that, then the rule of
caveat emptor does not apply and hence the purchaser can sue the seller for breach
of implied warranty or condition as to the quality or fitness for a particular purpose.

In the above problem, since, the dead Pig had suffered illness and thus the pork
rendered unfit for human consumption, it is a breach of implied warranty or condition
as to the 'quality or fitness for a particular purpose. So, Prashanth can file a suit
against Pinto to recover damages.

PROBLEM NO. 7
'Anand' a milk dealer supplied Santhosh with milk which was consumed by
Santhosh's wife. The milk contained germs of typhoid fever. Santosh's wife
was infected and died. Santhosh intends to file a suit against Anand, to
recover damages. Decide.

ANSWER:
Sec. 16 (2) of the Sale of Goods Act 1930 speaks about Quality or fitness of goods
by usage of trade.

It reads - 'An implied warranty or condition as to the for a Particular purpose', if

annexed by the usage of trade and if the seller deviates from that, then the rule of
caveat emptor does not apply and hence the purchaser can sue the seller for breach
of implied warranty or condition as to the quality or fitness for a particular purpose.

In the above problem, since, the milk contained germs of typhoid fever and thus the
milk was rendered unfit for human consumption, it is a breach of implied warranty or
condition as to the 'quality or fitness for a particular purpose. So, Prashanth can file a
suit against Pinto to recover damages.

PROBLEM NO. 8
'A' gave a golden ring to 'B' on "Sale or return» basis and asked B to return the
ring within ten days in the case of non approval. 'B' pledged the ring with C
without informing A of his approval to purchase the ring. When price was not
paid by 'B', "A" filed a suit against C to
recover the ring. Decide.

ANSWER:
Secs. 18 to 26 of The Sale of Goods Act, 1930 deal with the passing of property in
the goods or passing of ownership. In this regard, Sec. 24 talks about Goods sent on
approval or 'on sale or return' basis.

It states that when goods are delivered to the buyer on approval or on sale or return
or other similar terms, the property therein passes to the buyer-
When he signifies his approval or acceptance to the seller or does any other act
adopting the transaction.

In the pertinent case, A gave a golden ring to B on sale or return' basis and had also
given a period of 10 days to return the same in case of non-approval. B neither gave
his approval to buy the ring nor did he return it within the stipulated time. Besides, B
went a step further to pledge the ring with C without informing A about it.

The above acts on the part of B clearly imply that he has accepted purchase of the
ring. B has adopted the transaction by pledging the ring and the pawn broker
acquired a good title to the ring. Since the price of the ring remained unpaid, A had
to take recourse to law to recover the amount from B. As the pawn broker had a
good title, only B is liable as a buyer.

The judgment in 'Kirkham Vs. Attenborough' is on similar lines and confirms the
above finding.

PROBLEM NO. 9
'B' offers to purchase and A accepts to sell a stack of firewood standing on
'A's premises for Rs. 10,000/-. According to the terms of contract, buyer has to
take the firewood on a certain date after payment. Before payment and while
the firewood is on 'A's premises it is accidentally destroyed by fire. Now 'A'
wants to recover the price from 'B'. Discuss.

ANSWER:
Sec. 19 of The Sale of Goods Act, 1930 states that in a contract for sale of specific
or ascertained goods, the property passes to the buyer at the time when the party
intends it to pass.
In this regard, the above section provides that:
1. When there is a contract for the sale of specific or ascertained goods, the
property in them is transferred to the buyer at such time as the parties to the
contract intend it to be transferred.
2. For the purpose of ascertaining the intention of the parties, the terms of the
contract, the conduct of the parties and the circumstances of the case are
regarded.
Further, Sec. 20 of the Act states that when there is an unconditional contract for the
sale of specific goods in a deliverable state, then the property in the goods passes to
the buyer when the contract was made. It is immaterial whether the time of payment
of the price or the time of delivery of the goods, or both are postponed.
In the instant case, the goods which were the subject matter of sale, viz. a stack of
firewood were ascertained goods. They were also in a deliverable state and the
contract was unconditional in nature. Since 'A' and 'B' finalised the sale price of Rs.
10,000 payable on a certain day and delivery to be taken then, the contract of sale of
firewood is deemed to be complete and the property in the goods had already
passed from A to B. It is immaterial that B had not taken delivery of the firewood by
effecting any payment. Keeping in view of the provisions u/s 19 and 20 of the Act,
the buyer 'B' , is liable to compensate to the seller, 'A' towards the loss of the
firewood due to accidental fire.

PROBLEM NO. 10
'A' a jeweller, delivered some jewellery to B 'on sale or return basis'. B pledged
the jewellery with a pawn-broker, although he had not paid the price there of to
A. There upon A sues B for sale price. Can he succeed?

ANSWER:
Sec. 24 of the Sale of Goods Act, 1930, speaks about goods sent on approval or 'on
sale or return' basis:
When goods are delivered to the buyer on approval or 'on sale or return' or other
similar terms, the property therein passes to the buyer, when he signifies his
approval or acceptance to the seller or does any other act adopting the transaction.

In the above problem, B's act of pledging the jewellery with a pawn-broker, although
paid the price thereof to A. transaction. Therefore, A can sue B for sale price.

In Kirkham Vs. Attenborough, a jeweller had delivered some jewellery to a buyer on

'Sale or return" basis. He pledged the jewellery with a pawn broker, and also failed to
pay the price to the jeweller. The jeweller sued the pawn broker for recovery of the
jewellery. It was held that as the buyer had adopted the transaction by pledging it,
and that the pawn broker had a good title, the jeweller could sue only the buyer and
not the pawn broker.

PROBLEM NO. 11
'A' a jeweller, delivered some jewellery to B on Sale or return basis. B pledged
the jewellery with a pawn broker, although he had not paid the price there of to
A. There upon A sues B for sale price. Can he succeed?

ANSWER:
Sec. 24 of the Sale of Goods Act, 1930, speaks about goods sent on approval or 'on
sale or return' basis:
When goods are delivered to the buyer on approval or 'on sale or return' or other
similar terms, the property therein passes to the buyer, when he signifies his
approval or acceptance to the seller or does any other act adopting the transaction.

In the above problem, B's act of pledging the jewellery with a pawn-broker, although
paid the price thereof to A. transaction. Therefore, A can sue B for sale price.
In Kirkham Vs. Attenborough, a jeweller had delivered some jewellery to a buyer on
'Sale or return" basis. He pledged the jewellery with a pawn broker, and also failed to
pay the price to the jeweller. The jeweller sued the pawn broker for recovery of the
jewellery. It was held that as the buyer had adopted the transaction by pledging it,
and that the pawn broker had a good title, the jeweller could sue only the buyer and
not the pawn broker.

PROBLEM NO. 12
The Plaintiff purchased a motor car from the defendants and used the same
for several months. The defendant had no title to the car and therefore, the
plaintiff was compelled to give it to true owner. The plaintiff sued the
defendant to recover back the price which he had already paid. Can he
recover?

ANSWER:
Sec. 27 of the Sale of Goods Act provides that, "when goods are sold by a person
who is not the owner and who does not sell them under the authority or with the
consent of the owner, then the buyer does not acquire a better title to the goods than
the seller...".
As per law, a seller cannot transfer to the buyer of goods better title than what he
himself has. It means that if the seller is not the owner of the goods, then the buyer
also will not become the owner of such goods.

This law is known by the Latin maxim "Nemo dat quot non habet' which means that
no one can give a better title than what he has got i.e., if a seller has a defective title
to the goods, then he can pass only a defective title to the buyer.

Keeping in view of the provisions of the above section, it is clear that the plaintiffs
who purchased the motor car from the defendants have acquired a defective title to it
as the defendant was not in possession of a good title (not being the owner of the
motor car.

PROBLEM NO. 13
A, B and C are joint owners of a horse. The horse is in possession of 'C' with
the permission of A and B. They have not authorized 'C' to sell the horse. 'C'
sells the horse to 'D' a bonafide purchaser. A and B contend that the sale is
void. Decide.

ANSWER:
Sec. 28 of the Sale of Goods Act, 1930 states that if one of the several joint owners,
who is in sole possession of the goods with consent of the other co-owners can sell
the goods to a buyer in good faith and such buyer gets a good title to the goods.
However, in the instant case, C who is a joint owner of a horse sold the horse
without the consent and authorisation of the other joint owners viz., A and B. This
renders the contract tract of sale by C voidable.

Sec. 29 of the Act states that if a person has obtained goods under a voidable
contract, then he can make a valid transfer to other buyers but before the first
contract is rescinded.
In the above case, the contract of C with D being voidable, it is well within the right of
A and B to render the contract void. It is however possible subject to D not having
sold the horse to any other bonafide buyer for consideration (value)in the meantime.

PROBLEM NO. 14
'A' buys a diamond necklace from B, pays for it, but leaves it in the possession
of 'B'. 'B' then sells the same necklace to 'C' for a higher price. Does 'C'
acquire a better title to the necklace? Can 'A' file a suit against 'C' for recovery
of the necklace?

ANSWER:
Sec. 30(1) of the Sale of goods Act, 1930 provides that if a person, having sold the
goods to the first buyer, continues to be in possession of the goods or of the
documents of title and sells them over again to a second buyer, then the second
buyer gets a better title provided, he has acted in good faith and without notice of the
previous sale to the first buyer and for consideration.

In the instant case, A buys the diamond necklace from B and leaves it in his (seller's)
possession after paying for the same. As A has already paid for the necklace, B has
no authority to sell the necklace to anybody as the ownership has already been
transferred from B to A. However, C buys the same necklace from B for a higher
price.

As per the maxim, 'nemo dat quod non habet' which means that nobody can pass on
a better title than he himself has, B can only pass on a defective title to the necklace
to C. Whereas, in case C has bought the necklace in good faith, innocent of the
previous sale, then he acquires a better title to the necklace.

Under the circumstances, A can take recourse to law by filing a suit for
compensation from B who is liable in this case.

PROBLEM NO. 15
'A' agrees to supply 100 Barrels of groundnut oil to 'B'. A dispatches 120
barrels. 'B' refuses to receive on the ground that he has supplied excess.
Advise 'A'.

ANSWER:
Sec. 31 & 32 of ‘The sale of Goods Act, 1930’ list out the rights and duties of the
buyer in a contract of sale. One of the duties is that the buyer should accept the
goods as per the terms of the contract entered into and pay for them.

If the goods sent are less than that are ordered, the buyer may either reject the
whole or accept the quantity he ordered (Sec. 37). Sec. 37 (2) states that if the
goods are delivered in excess of the quantity contracted for, the buyer may accept
the whole quantity, reject the whole or accept the quantity he ordered and reject the
rest.

In the above case, the contract between A and B was for supply of 100 barrels of
groundnut oil to B by A. A dispatches 20 barrels in excess of the quantity ordered for.
B has the option of limiting his acceptance to only 100 barrels and returning the 20
sent in excess and paying for the ordered quantity, whereas he chooses to reject the
whole quantity supplied.

Since it is a case of supply of excess quantity which is possible to be segregated as

units, B could take delivery of the ordered quantity instead of rejection in total.
However, as per law, B is entitled to reject the entire quantity.

PROBLEM NO. 16
"A" agrees to supply 100 tons of sugar to B. "A" dispatches 120 tons. B
refuses to receive sugar that he has supplied excess. Advise A.

ANSWER:
As per Sec. 37(1) ‘The sale of Goods Act, 1930’, the quantity of goods delivered
must be strictly according to the terms of the terms of contract. If it is not according
to the contract, the buyer may reject the goods.

Further, as per Sec. 37 (2), the buyer may either accept the whole quantity, reject
the whole or accept the quantity he ordered and reject the rest.

In the above problem, since 'A' has dispatched 120 tons as against 100 tons
ordered, 'B' can refuse to receive the sugar that he has supplied in excess. A cannot
sue for compensation against B, as A has breached Sec. 37 (1) and Sec. 37 (2).

PROBLEM NO. 17
Bala sells goods to Mani. Mani pays to Bala through a cheque. Before Mani
could obtain delivery of goods his cheque has been dishonoured by the bank.
Bala refuses to deliver the goods until payment is made. Is Bala's action
Justified?

ANSWER:
Yes. U/S 45 of the Sale of Goods Act, 1930 a seller remains an 'unpaid seller' even if
the seller has received the whole of the price of the sold goods, when:
He is unpaid and the price is due.
He has an immediate right of action for the price.
A Bill of Exchange or cheque has been received but dishonoured Thus, as per Sec.
46 of the Act, the unpaid seller has a right of lien on the goods for the price while he
is in possession of them.

In the above case, the goods are yet to be taken possession of by Mani but in the
meantime, the cheque issued by him for the purchase has been dishonoured.
The goods now in the custody of Bala are under his lien and his right of lien would
continue until the consideration is paid by Mani.
Bala's action is as per the rules governing the rights of an unpaid seller and therefore
justified.

PROBLEM NO. 18
Under a contract of sale, X has dispatched one lorry load of oranges to Y. In
the meantime, Y has become insolvent. What are the rights of X? Discuss.
ANSWER:
Sec.45 of The Sale of Goods Act defines an "unpaid' seller as one who has not
received the whole of the price of the sold goods. The right of an unpaid seller are of
two types:
Rights against the goods.
Rights against the buyer personally.
Sec 46 states that notwithstanding that the property in the goods may have passed
to the buyer, the unpaid seller of goods has by implication of law, a right of stopping
the goods in transit after he has parted with the possession of them, in the case of
insolvency of the buyer.

Thus, in the above case, X having dispatched a lorry load of oranges to Y and
awaiting payment as such, finds that Y has declared insolvency. This gives X the
right of stoppage in transit of the goods dispatched already.

Now, he may advise the Transporter to withhold transit of the lorry load to the
designated consignee, viz. Y.

PROBLEM NO. 19
A of Delhi sold some goods to B of Trichy and took railway receipt in the name
of B and sent it to B. When the goods reached Trichy, B asked the railways to
carry them to Chennai. In the meantime, B became insolvent. A asks the
railways to stop the goods in transit. Decide.
ANSWER:
Sec. 46 of The Sale of Goods Act, 1930 talks about the rights of the unpaid seller. It
states that notwithstanding the fact that the property in the goods may have passed
to the buyer, the unpaid seller of goods, as such, has the following rights: a lien on
the goods for the price while he is in possession of them in case of the insolvency of
the buyer, a right of stopping the goods in transit after he has parted with the
possession of them a right of resale.

Thus, in the instant case, though A has dispatched the goods to B, he has not been
paid the goods as yet. This gives him the right of the unpaid seller as specified u/s
46 of the act, discussed above.

B who is the buyer of A's goods has in the meantime arranged for their onward
transit to Chennai from Trichy and also declared insolvency soon after. Since A has
not sold the goods on credit basis and also the buyer turning an insolvent, he has
every right to stop the goods in transit from Trichy to Chennai and have them
returned to himself.

PROBLEM NO. 20
A dentist agreed to supply a set of artificial teeth and fit it into the mouth of a
patient for Rs.5,000. All the material required was wholly found by the Dentist.
The Dentist delivered the dentures and received Rs.5,000 from the Patient.
Decide if the transaction is a contract for sale of goods.
ANSWER:
Reference is made to the Supreme Court judgment in the case, 'M/s. Kone Elevator
India P. Ltd. Vs. State of T.N & Ors, May 2014 wherein the Hon'ble Court held that
there are two contracts involved i.e. one for purchase of material and another for
installation. It held that once there is a composite contract for supply and installation,
it has to be treated as a works contract for it is not for sale of goods/ chattel.

Now, in the instant case, the service of the dentist is engaged to make dentures and
fit them in the mouth of a patient.

In this case too, there is a composite contract for (1) making the dentures (supply of
materials) and (2) fitting them in the mouth (service). Hence, it shall be treated as a
service contract and not one of sale of goods.

As the dentist has the required knowledge for making the dentures and fitting them in
the mouth is incidental to the making of dentures, requiring professional intervention,
it is treated as a service contract only and not as a contract of sale of goods.

PROBLEM NO. 21
"A" engaged 'B' a dentist to make two sets of false teeth to be fitted into her
Jaws. Before the work could be completed 'A' died. 'B' sues the heirs of 'A' to
recover his charges, will he succeed?

ANSWER:
According to the law of torts, a personal right of action does not survive to the legal
heirs.
This is known by the legal maxim 'Actio personalis moritur cum persona’ which
means, the right to sue dies with the with the death of the person.

In the above case, the dentist B was engaged to make two sets of false teeth to be
fitted in to A's jaws but the latter died before the dentures were fitted.

The dentist had put in his efforts and technical skill in the work and therefore wanted
to claim the charges from the legal heirs of the deceased A' as also that he was not
at fault for non-performance of the contract.

However, the engagement of the services of the dentist is in the nature of personal
contract and between 'A' and 'B' alone which does not have the effect of passing on
to the legal heirs in case of death of any of the parties.

The right of action for non-performance of the contract gets extinguished upon the
death of either of the parties to the contract which is of personal nature and hence
the legal heirs cannot be made liable for the dues.

'B's suit proceeding against the legal heirs of 'A' for recovery of the charges will not
be successful.

However, if 'A' has left any property, he can proceed against such property, as the
unpaid vendor can sue for price u/s 55 of The Sale of Goods Act, 1930.

PROBLEM NO. 22
'A' seller undertakes to supply 200 tons of Java Sugar warranted as equal only
to the sample. The sugar when supplied, correspond to the sample, but is not
Java sugar. Has the buyer any remedy against the seller?
ANSWER:
The buyer has remedy against the seller, because if at the time of sale agreements,
as per Sec 15 of the Sale of Goods Act, 1930 even if there was express warranty
that the sample shown would correspond equal to the bulk by quality only but not of
same name, there is implied condition that the sample should also correspond equal
to the bulk by description i.e., Java sugar.

In the given problem, though 'A' the seller undertakes to supply 200 tons of Java
Sugar warranted as equal only to the sample, as per the above section 15, there is
implied condition that sugar when supplied, should correspond not only to the
sample, but also to the description of name namely 'Java Sugar'. Hence for breach
of implied condition of description of goods, 'A' has the remedy to sue the buyer.

PROBLEM NO. 23
X purchased certain linen table clothes from an auctioneer on the basis of the
description given by the auctioneer that they belonged to 16th century. After
purchase, X found that they actually belonged to 17th century. X approaches
you for legal remedy- advise.
ANSWER:
X can successfully return the linen table clothes and also claim damages from the
auctioneer, because the linen table clothes did not belong to 16th century has
described by the auctioneer, but actually belonged to 17th century.
This is as per Sec. 15 of the Sale of Goods Act 1930 which reads -
If there is a contract for the sale of goods by description, there is an implied condition
that the goods shall correspond with the description; and, 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.