Business Law - Notes - CA Foundation

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Table of Contents
The Indian Contract Act, 1872 ................................................................................................ 2
UNIT 1 – NATURE OF CONTRACTS .............................................................................................. 2
UNIT 2 – CONSIDERATION ......................................................................................................... 17
UNIT 3 – OTHER ESSENTIAL ELEMENTS OF A CONTRACT ......................................................... 22
UNIT 4 – PERFORMANCE OF CONTRACT................................................................................... 38
UNIT 5 – BREACH OF CONTRACT AND ITS REMEDIES ............................................................... 49
UNIT 6 – CONTINGENT AND QUASI CONTRACTS ...................................................................... 54
The Sale of Goods Act, 1930................................................................................................. 61
UNIT 1 – FORMATION OF THE CONTRACT OF SALE .................................................................. 61
UNIT 2 – CONDITIONS & WARRANTIES ..................................................................................... 70
UNIT 3 – TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS.............................................. 78
UNIT 4 – UNPAID SELLER ........................................................................................................... 87
The Indian Partnership Act, 1932 ......................................................................................... 94
Unit 1 – GENERAL NATURE OF PARTNERSHIP ........................................................................... 94
UNIT 2 – RELATIONS OF PARTNERS......................................................................................... 105
UNIT 3 – REGISTRATION AND DISSOLUTION OF FIRM ............................................................ 117
The Limited Liability Partnership Act, 2008 ........................................................................ 124
The Companies Act, 2013................................................................................................... 145
Business Laws 1FIN by IndigoLearn 1

The Indian Contract Act, 1872
UNIT 1 – NATURE OF CONTRACTS
The Law of Contract is the most important branch of mercantile law. It has an impact on trade,
commerce and industry.
This Act received assent on 25th April, 1872.
It came into force on 1st September,1872. The preamble of the Act says that it is an Act “to define
and amend certain parts of the law relating to contract.” It extends to whole of India.
The Indian Contract Act, 1872 codifies the legal principles that govern ‘contracts’. The Act basically
identifies the ingredients of a legally enforceable valid contract in addition to dealing with special
type of contractual relationships.
As a result of increasing complexities of business environment, innumerable contracts are entered
into by the parties in the usual course of carrying on their business.
Some Important Terms

Contract – Section 2(h) of the Act defines Contract as “An agreement enforceable by law.”
Contract = Agreement + Enforceability by law
Enforceability by law means giving rise to legal obligation. Domestic and Social obligations are out
of scope of the Contract Act, as they are not legally enforceable.
Agreement – Section 2(e) of the Act defines Agreement as “every promise and every set of promises,
forming the consideration for each other.”
Agreement = Promise (Accepted Proposal) + Consideration
Promise – As per Section 2(b) promise means “when a person to whom proposal is made signifies
his assent on that proposal, the proposal becomes accepted. Accepted proposal becomes a
promise.”
Promise = Offer/Proposal + Acceptance

Difference between Agreement and Contract
# Agreement Contract
1 Promise + Consideration Agreement + Enforceability by law
2 Social + Legal Agreement Only Legal Agreement
3 May not create legal obligation Necessarily creates legal obligation
4 All Agreements are not contracts All Contracts are agreements.
“All Contracts are Agreements but all Agreements are not Contracts”
1. Contract = Agreement + Enforceability by law. Thus, for a Contract, there should first be
an Agreement.
2. Agreements that do not give rise to contractual obligations are not Contracts.
Example: A invites B for his son's wedding. B accepts the invitation. This is a mere
agreement, not a Contract, there being no intention to create legal obligation.
3. Agreements to do an unlawful, immoral or illegal act, like smuggling or murdering a person,

cannot be enforceable by law. Such agreements cannot be considered as a Contract.
4. Also, certain Agreements are specifically declared Void or Unenforceable.
Example: Agreements to bet i.e., wagering Agreements, Agreements in restraint of

trade, agreements to do an impossible act, etc.
5. Hence, all Agreements are not Contracts, but all contracts are in fact Agreements.
Essentials of a Valid Contract

The essentials of a valid contract are given in Section 10 but this section is not complete and
exhaustive. Therefore, there are some general essentials apart from the essentials given in
Section 10.
In terms of Section 10 of the Act, “all agreements are contracts if they are made by the free
consent of the parties competent to contract, for a lawful consideration and with a lawful
object and are not expressly declared to be void.”
These essential elements must be present in a contract, if these elements are not present in a
contract, then the contract is not valid.
Both general essentials and elements given in Section 10 shall be present in a contract for it to
be a valid contract.

Essentials of a Valid Contract
Essentials as per Section 10

General Essentials
Two Parties Agreement
Intention to create legal relationship Free Consent
Other formalities Competency of parties
Certainty of meaning Lawful Consideration
Possibility of performance Legal Object
Not expressly declared as void
1. Two Parties: A person cannot enter into a contract with himself, a contract involves at least two
parties. A contract can be made by either natural persons or other persons having legal existence.
The identities of the parties shall be ascertainable.
Case Law: State of Gujarat Vs. Ramanlal S & Co.

When on dissolution of a partnership, the assets of the firm were divided among the partners,
the sales tax officer wanted to tax this transaction. It was held that it was not a sale. The
partners being joint owner of those assets cannot be both buyer and seller.
2. Parties must intend to create legal obligations: There must be an intention on the part of the
parties to create legal relationship between them. Social or domestic type of agreements are not
enforceable in court of law and hence they do not result into contracts.
Case Law: Balfour Vs. Balfour

A husband agreed to pay to his wife certain amount as maintenance every month while he was
abroad. Husband failed to pay the promised amount. Wife sued him for the recovery of the
amount. Here in this case wife could not recover the amount as it was a social agreement and
the parties did not intend to create any legal relations.
3. Other formalities to be complied with in certain cases: A contract may be written or spoken. In
case of certain contracts some other formalities have to be complied with to make an agreement
legally enforceable.

4. Certainty of Meaning: The agreement must be certain, definite and not vague.
5. Possibility of performance: The terms of agreement should be capable of performance. An
agreement to do an act impossible in itself cannot be enforced.
6. Agreement: An Agreement is the first essential element of a valid contract. It is a result of offer
and acceptance. A Contract will not come into existence if there’s no agreement.
7. Free Consent: Consent means agreeing upon the same thing in the same sense. The consent shall
be free (i.e.) the parties must willingly enter into the contract. Consent is said to be free when it
is not caused by Coercion, Undue Influence, Fraud, Misrepresentation or mistake.
8. Capacity of parties: Capacity to contract means the legal ability of a person to enter into a valid
contract. A person is competent to contract if he satisfies all the given conditions:
a. He has attained the age of majority
b. He is a person of sound mind
c. Is not disqualified by law
9. Consideration: A valuable consideration may consist either some right, interest, profit, benefit
accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other.
10. Lawful Object: The object and consideration must be lawful (i.e) it should not be prohibited by
law or opposed to public policy.
11. Not expressly declared to be void: The agreement entered into must not be which the law
declares to be either illegal or void. A void agreement is one without any legal effects.
Types of Contract
Validity or Enforceability Formation Performance

Valid Contract Express Contract Executed
Void Contract Implied Contract Executory
Voidable Contract Quasi Contract
Unilateral Bilateral
Illegal Contract E.Com Contract
Unenforceable Contract

On the basis of Validity
1. Valid Contract: The Valid Contract is an agreement that is legally binding and enforceable. It must
qualify all the essentials of a contract.
2. Void Contract: The section 2(j) of the Act defines a void contract as “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”. This makes all those contracts
that are not enforceable by a court of law as void.
Example: Ronit and Sumit enter into a contract, where Ronit will give a live performance at a
Concert organized by Sumit and will receive Rs. 5,00,000 as consideration. Just a day before the
concert, Ronit meets with an accident and dies. In this situation the contract has now become void
since it is no longer enforceable.
3. Voidable Contract: An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others, is a voidable contract. A voidable
contract is a Valid Contract. In a voidable contract, at least one of the parties has to be bound to the
terms of the contract. The other party is not bound and may choose to repudiate or accept the terms
of the contract.
Example: Punit points a gun at Hiten’s forehead and makes him enter a contract of sale of his house
to Punit for Rs. 10,00,000 only. In this situation, Hiten’s consent is not free as he is forced to enter
into the contract due to the threat to his life. The contract is voidable at Hiten’s option.
Difference between Void and Voidable Contract
# Void Contract Voidable Contract

1 A Contract ceases to be enforceable by law An agreement which is enforceable by law at
becomes void when it ceases to be enforceable. the option of one or more of the parties thereto,
but not at the option of the other or others, is a
voidable contract.
2 Becomes void due to change in law or change in Becomes voidable if the consent of the party is
circumstances. not free.
3 A void contract cannot be performed. If the aggrieved party does not, within
reasonable time, exercise his right to avoid the
contract, any party can sue the other for
claiming the performance of the contract.
4 A void contract does not grant any right to any The party whose consent was not free has the
party. right to rescind the contract.

4. Illegal Contract: An agreement that leads to one or all the parties breaking a law or not conforming
to the norms of the society is deemed to be illegal by the court. A contract opposed to public policy is
also illegal.
Example: Rohan agrees to sell narcotics to Mohan. Although this contract has all the essential
elements of a valid contract, it is still illegal.
Difference between Void and Illegal Contract
# Void Contract Illegal Contract

1 Not necessarily illegal. Always void.
2 Not Forbidden. Are Forbidden.
3 Not liable for any punishment. Liable for punishment.
4 Collateral Agreement may or may not be void. Collateral Agreements are always void.
5. Unenforceable Contract: Unenforceable contracts are rendered unenforceable by law due to some
technical defect.
Example: A agrees to sell to B 100kgs of rice for 10,000/-. But there was a huge flood in the states
and all the rice crops were destroyed. Now, this contract is unenforceable and can not be enforced
against either party.
On the basis of Formation
6. Express Contract: The terms of the Express Contract are clearly stated either orally or in writing. So
the main aspect of the Express Contract is that the terms of the contract are expressed clearly.
Example: A person A sends a text from his phone to person B, proposing to sell their bike for a cost of
Rs. 10,000/-. The person B calls the first person and agrees to the terms of the promise. This is an
Express Contract as the terms have been stated clearly.
7. Implied Contract: A contract in which the terms of the agreement are not expressed in written or
oral form is an implied contract. These contracts come into existence by implication. This implication
is by action or conduct of parties or course of dealing.
Example: Amit drinks coffee in restaurant. There is an implied contract and Amit must pay for the
price of the coffee.
Tacit Contracts: They are a sub-type of implied contracts, these contracts are inferred by the conduct
of the parties without any words spoken or written. It is not a separate type of contract, it falls within
the scope of implied contracts.

8. Quasi Contract: They are not contracts in the sense that no agreements are made between any of
the parties. It comes into existence by a court order. It is thus enforced by the law which also creates
it. Most of the times the quasi-contract is created to stop any of the parties from taking unfair
advantage of the other.
9. E-Contract: When a contract is formed by the use of electronic devices and means, it is called an
electronic contract or an e-contract. The electronic means and devices may include emails, tests,
telephones, digital signatures etc. They are also known as the Cyber contracts, the EDI contracts or
the Electronic Data Interchange contracts.
On the basis of Performance

10. Executed Contract: When the parties to the contract perform their obligations under a contract, the
contract is executed in nature.
11. Executory Contract: In Executory contracts, the consideration is reciprocal promise or obligation.
Such consideration is to be performed in future only and therefore these contracts are described as
executory contracts.
Executory Contracts are further divided into two types:
a. Unilateral Contracts: It is a one-sided contract, in which one party has performed his duty or
obligation and the other party’s obligation is outstanding.
b. Bilateral Contracts: It is a contract where the obligation or promise is outstanding on the part of
both the parties.
Proposal/Offer
As per Section 2(a) of the Act, “when one person signifies to another his willingness to do or to abstain
from doing anything with a view to obtaining the assent of that other to such act or abstinence, he is
said to make a proposal.”
Offeror/Promisor Makes a proposal/offer to Offeree
Offeree Promisee/Acceptor
If he accepts the proposal he is
called

Types of Offer
Case Law : Carlill v.

Carbolic Smoke Ball
General Co.
Offer
Case Law:
Boulton v. Jones
Special Counter
Offer Offer
Offer
Cross Standing/
Offer Continuing/
Open Offer
1. General Offer: A General Offer is an offer that is made to the public at large. The genesis of a General
Offer came about from the Landmark case of Carlill v. Carbolic Smoke Ball Co.
Case Law: Carlill v. Carbolic Smoke Ball Co.
A company by the name Carbolic Smoke Ball offered through an Advertisement to pay 100 Pounds to
anyone who would contract increasing epidemic Influenza, colds or any disease caused by cold after
taking its Medicine according to the prescribed instructions.
It was also added that 1000 Pounds have been deposited in Alliance bank showing our sincerity in the
matter. One customer Mrs. Carlill used the medicine and still contracted Influenza and hence sued the
company for the reward. The Defendants gave the argument that the offer was not made with an
intention to enter into a legally binding agreement, rather was only to Puff the sales of the company.
Setting aside arguments of the Defendant, bench stated that in cases of such offers i.e- general offers,
there is no need for communication of acceptance, anyone who performs conditions of the contract
is said to have communicated his/her acceptance, and moreover, the money deposited by the
Defendant in Alliance Bank clearly shows that they intended to create a legally binding relationship.
Hence the Plaintiff was awarded with the amount.

2. Specific/Special Offer: A Specific offer is an offer that is made to a specific or ascertained person,
this type of offer can only be accepted by the person to whom it is made.
Case Law: Boulton v. Jones, wherein the Plaintiff had taken the business of one Brocklehurst, the
defendant used to have business with Brocklehurst and not knowing about the change in ownership
of business, sent him an order for certain goods. The Defendant came to know about the change only
after receiving an invoice, at which point he had already consumed the goods. The Defendant refused
to pay the price, as he had a set off against the original owner, for which the plaintiff sued him.
The Judges gave a unanimous judgement holding the defendant not liable
3. Cross Offer: When two parties make an identical offer to each other, in ignorance to each other’s
offer, they are said to make cross offers. Cross offers are not valid offers.
Example: A makes an offer to sell his car for 7 lakhs to B and B in ignorance of that makes an offer to
buy the same car for 7 Lakhs, they are said to make a cross offer, and there is no acceptance in this
case, hence it cannot be a mutual acceptance.
4. Counter Offer: When the offeree offers a qualified acceptance of the offer subject to modifications
and variations in terms of the original offer, he is said to have made a counter offer. The original offer
lapses as a result of a counter offer.
Example: A offers B a car for 10 Lakhs, B agrees to buy for 8 Lakhs, this amounts to a counter offer
and it would mean a rejection of the original offer.
5. Standing Offer/Open Offer/Continuing Offer: An Offer which remains open for acceptance over a
period of time is called a standing offer. Tenders that are invited for supply of goods is a kind of
Standing Offer.
Essentials of a Valid Offer

• Capable of creating legal relation: The offer must lead to a contract that creates legal relations
and legal consequences in case of non-performance. So, a social contract which does not create
legal relations will not be a valid offer.
• Certain, definite not vague: The terms of the offer or proposal should be very clear and definite.
If the terms are vague or unclear, it will not amount to a valid offer.

• Communicated to the offeree: For a proposal to be completed it must be clearly communicated
to the offeree. No offeree can accept the proposal without knowledge of the offer. acceptance
in ignorance of the proposal does not amount to acceptance.
Case Law : Lalman Shukla Vs. Gauri Dutt

A servant was sent by his master to trace his missing nephew. In the meanwhile, he also
announced a reward for anyone finding his nephew. The servant finds the boy and brings him
back to his master, unaware of the reward announced.
The servant later comes to know of the reward and demands the reward from his master,
which his master refuses. As a result of which the servant files a case in the court against his
master, contending that he is entitled to receive the reward as he has found his masters
missing nephew.
The courts give their judgement in favour of the master, stating that the servant acted in
ignorance to the offer, therefore his act does not amount to acceptance of the offer.
• It must be made with an intention of obtaining assent of the other party.
• May be conditional: While acceptance cannot be conditional, an offer might be conditional. The
offeror can make the offer subject to any terms or conditions he deems necessary.
• Offer cannot contain a negative condition: The non-compliance of any terms of the offer cannot
lead to automatic acceptance of the offer. Hence it cannot say that if acceptance is not
communicated by a certain time it will be considered as accepted.
• It may be specific or general
• It may be express or implied
• Offer is Different from a mere statement of intention, an invitation to offer, a mere

communication of information, Casual Equity, A prospectus and Advertisement.
Case Law: Harvey Vs. Facie

In this case, Privy Council succinctly explained the distinction between an offer and an
invitation to offer. In the given case, the plaintiffs through a telegram asked the defendants
two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.
The defendants replied through telegram that the lowest price for Bumper Hall Pen is £ 900.
The plaintiffs sent another telegram stating we agree to buy Bumper Hall Pen at £ 900.

However, the defendants refused to sell the property at the price.
The plaintiffs sued the defendants contending that they had made an offer to sell the property
at £ 900 and therefore they are bound by the offer.
However, the Privy Council did not agree with the plaintiffs on the ground that while plaintiffs
had asked two questions, the defendant replied only to the second question by quoting the
price but reserved their answer with regard to their willingness to sell. Thus, they made no
offer at all. Their Lordships held that the mere statement of the lowest price at which the
vendor would sell contained no implied contract to sell to the person who had enquired about
the price.
• Statement of price is not an offer.
Invitation to Offer
An invitation to offer is only a circulation of an offer, it is an attempt to induce offers and precedes
a definite offer. An offer becomes an agreement when accepted. On the other hand, an invitation
to offer becomes an offer when the public responds to it. The main objective of an invitation to
offer is to negotiate the terms on which the contract can be made.
Eg: 1. Display of goods for sale in shop windows.

2. An invitation by a company to the public to subscribe for its shares.
Although Invitation to Offer is not a type of offer per se, it is imperative to distinguish both to even
construe what an actual offer is. An invitation to offer is an offer to negotiate, an offer to receive
offers. An offer is a final expression of willingness to get into a contract upon those following terms.
Acceptance
As per Section 2(b) the term acceptance is defined as “When the person to whom the proposal is
made signifies his assent thereto, proposal is said to be accepted. The proposal, when accepted,
becomes a promise”.
According to Sir William Anson “Acceptance is to offer what a lighted match is to a train of gun
powder”
Rules regarding a valid acceptance

1. Acceptance can be given only by the person to whom offer is made: In the case of a specific
proposal or offer, it can only be accepted by the person it was made to. No third person without the
knowledge of the offeree can accept the offer.
When the proposal is a general offer, then anyone with knowledge of the offer can accept it.

2. Must be absolute and unqualified: Acceptance must be unconditional and absolute. There
cannot be conditional acceptance, that would amount to a counteroffer which nullifies the original
offer.
Case Law: Neale vs. Merret
M offered to sell his land to N for £280. N replied purporting to accept the offer but enclosed
a cheque for £ 80 only. He promised to pay the balance of £ 200 by monthly instalments of £
50 each. It was held that N could not enforce his acceptance because it was not an unqualified
one.
Union of India vs. Bahulal

A offers to sell his house to B for Rs. 1,00,000/-. B replied that, “I can pay Rs. 80,000 for it.
The offer of A is rejected by B as the acceptance is not unqualified. B however changes his mind
and is prepared to pay Rs. 1,00,000/-. This is also treated as counter offer and it is upto A
whether to accept it or not.
3. Must be communicated: For a proposal to become a contract, the acceptance of such a proposal
must be communicated to the promisor.
Case Law : Brogden vs. Metropolitan Railway Co.

B a supplier, sent a draft agreement relating to the supply of coal to the manager of railway
Co. viz, Metropolitian railway for his acceptance. The manager wrote the word “Approved” on
the same and put the draft agreement in the drawer of the table intending to send it to the
company’s solicitors for a formal contract to be drawn up. By an over sight the draft agreement
remained in drawer.
Held, that there was no contract as the manager had not communicated his acceptance to the
supplier, B.
4. Must be in prescribed mode: Acceptance of the offer must be in the prescribed manner that
is demanded by the offeror. If no such manner is prescribed, it must be in a reasonable manner that
would be employed in the normal course of business.
5. Time: Acceptance must be given within the specified time limit, if any, and if no time is stipulated,
acceptance must be given within the reasonable time and before the offer lapses. What is
reasonable time is nowhere defined in the law and thus would depend on facts and circumstances
of the particular case.
6. Mere silence is not acceptance: The acceptance of an offer cannot be implied from the silence
of the offeree or his failure to answer, unless the offeree has in any previous conduct indicated that
his silence is the evidence of acceptance.

Case Law: Felthouse vs. Bindley
F (Uncle) offered to buy his nephew’s horse for £30 saying “If I hear no more about it I shall
consider the horse mine at £30.” The nephew did not reply to F at all. He told his auctioneer,
B to keep the particular horse out of sale of his farm stock as he intended to reserve it for his
uncle. By mistake the auctioneer sold the horse. F sued him for conversion of his property.
Held, F could not succeed as his nephew had not communicated the acceptance to him.
7. It can be by conduct or implied: Section 8 of the Indian Contract Act 1872, provides that
acceptance by conduct or actions of the promisee is acceptable. So, if a person performs certain
actions that communicate that he has accepted the offer, such implied acceptance is
permissible.
Communication of Offer and Acceptance

One important common requirement for both offer and acceptance is their effective
communication. Effective and proper communication prevents avoidable revocation and
misunderstanding between parties.
When the contracting parties are face-to-face, there is no problem of communication because there
is instantaneous communication of offer and acceptance. In such a case the question of revocation
does not arise since the offer and its acceptance are made instantly.
The difficulty arises when the contracting parties utilize services such as post or email etc, in such
cases it becomes very important to ascertain what is the exact time of communication of offer and
acceptance.
Communication of Offer: In terms of Section 4 of the Act, the communication of offer is

complete when it comes to the knowledge of the person to whom it is made.
Example: A writes to B offering to fix his roof for five thousand rupees. He posts the letter on
2nd July. The letter reaches B on 4th July. So the communication is said to complete on 4th July.
In case B reads the letter on 5th July, then the date of communication of offer will be 5th July as that
is the date when the offeree comes to know about the offer.
Communication of acceptance:
Acceptance can be done in two ways, namely
Communication of Acceptance by an Act: This would include communication via words, whether
oral or written. So, this will include communication via telephone calls, letters, e-mails, telegraphs,
etc.

Communication of Acceptance by Conduct: The offeree can also convey his acceptance of the offer
through some action of his, or by his conduct. So, say when a person boards a bus, he is accepting to
pay the bus fare via his conduct.
In terms of Section 4 of the Act, communication of acceptance is complete:
a) As against the proposer, when it is put in the course of transmission to him so as to be out of the
power of the acceptor to withdraw the same;
b) As against the acceptor, when it comes to the knowledge of the proposer
Example: A accepts the offer of B via a letter. He posts the letter of acceptance on 10th July and the
letter reaches B on 14th. For B (the proposer) the communication of the acceptance is completed on
10th July itself.
Whereas from A’s point of view communication will be complete on 14th July, when B learns of the
acceptance.
Communication of special conditions:

Sometimes there are situations where there are contracts with special conditions. These special
conditions are conveyed tacitly and the acceptance of these conditions are also conveyed by the
offeree again tacitly or without him even realizing it.
Case Laws: Mukul Datta vs. Indian Airlines
Lilly White vs. R. Mannuswamy
Revocation of Offer and Acceptance

In term of Section 4, communication of revocation (of the proposal or its acceptance) is complete.
(i) as against the person who makes it (Person making revocation) when it is put into a course of
transmission to the person to whom it is made so as to be out of the power of the person who makes
it, and
(ii) as against the person to whom it is made, when it comes to his knowledge.
As per Section 5 of the Act, offer can be revoked at any time before communication of acceptance
is completed as against the offeror.
As per Section 5 of the Act, acceptance can be revoked at any time before the communication of
acceptance is complete against the acceptor.
Example: Anil send a letter of offer to Sunil on 10th August, the letter reaches Sunil of 14th August and
he reads it on the same day. Sunil posts his letter of acceptance on 17 th August. In this case, the

communication of acceptance from Anil’s point is completed on 17 th August, therefore, Anil can
revoke his offer at any time before 17th August.
Example: In the above situation, the letter of acceptance reaches Anil on 20th August, if Sunil wants to
revoke his acceptance, he can do so before 20th August (i.e) before the communication of acceptance
is complete from Sunil’s point of view.
Modes of Revocation of Offer

• Notice of revocation
• Lapse of Time: The time for acceptance can lapse if the acceptance is not given within the
specified time and where no time is specified, then within a reasonable time
• Non-fulfilment of condition: Where the acceptor fails to fulfill a condition precedent to

acceptance the proposal gets revoked.
• Death or insanity: Death or insanity of the proposer would result in automatic revocation of the
proposal but only if the fact of death or insanity comes to the knowledge of the acceptor.
• Counter Offer
• Non-acceptance of the offer according to the prescribed or usual mode
• Subsequent illegality

UNIT 2 – CONSIDERATION
Consideration is the price agreed to be paid by the promisee for the obligation of the promisor .
As per Latin maxim “Quid Pro Quo” consideration means “Something in return.”
Consideration is defined u/s 2(d) of the Act as, “When at the desire of the promisor, the
promisee or any other person has done or abstained from doing, or does or abstains from doing
or promises to do or abstain from doing something, such an act or abstinence or promise is
called consideration for the promise.”
Analysis:
Desire of promisor
Promisee or some
other person
Has done/Does or
abstain from doing
Such act or abstinence
is called consideration
Legal rules regarding consideration

1. Move at the desire of the promisor: Consideration can be offered by the promisee or a
third-party only at the request or desire of the promisor. If an action is initiated at the
desire of the third-party, it is not a consideration.
Case Law: Durga Prasad Vs. Baldeo
Defendant promised to pay the Plaintiff a certain commission on articles which would
be sold through their agency in a market. Market was constructed by Plaintiff on the
desire of the Collector, and not at the desire of the Defendant. Defendant was not
bound to pay anything to the plaintiff as it was without consideration and hence void.
2. May move from promisee or any other person: Consideration may move from the
promisee or any other person who is not the party to the contract. There can be a stranger
to consideration.

Case Law: Chinnayya Vs. Ramayya
An old lady made a gift of her property to her daughter with a direction to pay a certain
sum of money to the maternal uncle by way of annuity. On the same day, the daughter
executed in writing in favour of the brother agreeing to pay annuity. The daughter did
not, however, pay the annuity and the uncle sued to recover it. It was held that there
was sufficient consideration for the uncle to recover the money from daughter.
3. It may be Executed or executory:
4. It may be past, present or future: If the promise or act is performed before the contract
was made, it is considered past consideration.
When one of the parties in the contract has performed his part of the promise, which
constitutes the consideration to be performed by other party, it is present consideration.
When a party makes a promise in exchange for the promise from the other party and the
performance of the consideration is to be done after making the contract; then it is a
future consideration.
5. It need not be adequate: It is not mandatory for the consideration to be equivalent to

the promise. The parties are free to determine the appropriate consideration at the time
of negotiating the terms of contract.
While the law allows the parties to decide an ‘adequate’ consideration for them, it must
be real and have value in the eyes of law. While the Court will not consider inadequacy,
it will look at it to determine if the consent was given by the party with free-will or not.
6. Performance of what one is legally bound to perform: If the promisor is already obligated
either by his promise or law to perform or abstain from a certain act, then it is not a good
consideration for a promise.
7. It must be real and not illusory: Consideration has to be certain, definitive and
competent. It cannot be vague, uncertain or impossible. It must be something real and
not something imaginary.
8. It must not be unlawful, immoral or opposed to public policy: Consideration must be

lawful, anything which is immoral or opposed to public policy also cannot be valued as
consideration.

Suit by a Third Party to a Contract
As per the ‘Doctrine of Privity of Contract’ stranger to a contract cannot sue. However, it is
subject to certain exceptions (i.e) stranger to a contract can sue in the following cases:
Trust Family Settlement
Suit by Third Party Marriage Contract

Agent
Assignment of
Covenants running with land Contract
Acknowledgement or Estoppel
• If a contract is made between the trustee of a trust and another party, then the
beneficiary of the trust can sue by enforcing his right under the trust, even if he is a
stranger to the contract.
• If a contract is made under a family arrangement to benefit a stranger (person not a party
to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
• If a contract is made for the benefit of a person, then he can sue upon the contract even
though he is not a party to the agreement.
• If a contract requires that a party pays a certain amount to a third-party and he/she
acknowledges it, then it becomes a binding obligation for the party to pay the third-party.
The acknowledgment can also be implied.

• When a person purchases a piece of land with the notice that the owner of the land will
be bound by all duties and liabilities affecting the land, then he can sue upon a contract
between the previous land-owner and a settler even if he was not a party to the contract.
• If a person enters into a contract through an agent, where the agent acts within the scope
of his authority and in the name of the person (principal).
Validity of Agreement without Consideration

As per Section 25, an agreement made without consideration is void(i.e.,) a contract may only be
enforceable when there is consideration. However, this rule has certain exceptions, they are as
follows:
1. Natural Love and affection [Section 25(1)]: A written and registered agreement based
on natural love and affection between the parties standing in near relation to each other
is enforceable even without consideration.
Example: A husband by a registered deed, promises to bring a diamond necklace for

his wife. This agreement is valid, though it is without consideration.
2. Compensation for past voluntary services [Section 25(2)]: A promise to compensate,

wholly or in part, a person who has already voluntarily done something for the promisor,
is enforceable.
Example: Peter finds Sameers wallet on the road and returns it to him. Sameer is happy
to find his lost wallet and promises to pay Peter Rs 2,000. In this case, too, the no
consideration no contract rule does not apply. This contract is a valid contract.
3. Promise to pay time barred debt [Section 25(3)]: Where a promise in writing signed by
the person making it or by his authorised agent, is made to pay a debt barred by limitation
it is valid without consideration.
Example: Pratik owes Rs. 1,00,000 to Hari. He had borrowed the money 5 years ago.
However, he never paid a single rupee back. He signs a written promise to pay Rs.
50,000 to Hari as a final settlement of the loan. In this case, ‘the no consideration no
contract’ rule does not apply either. This is a valid contract.
4. Agency (Section 185): No consideration is necessary to create an agency.

5. Completed gift: In case of completed gifts, the rule no consideration no contract does not
apply. An agreement without consideration being void does not apply to gifts made by a
donor and accepted by a donee.
6. Bailment (Section 148): Bailment means the delivery of goods from one person to
another for some purpose. This delivery is made upon a contract that post
accomplishment of the purpose, the goods will either be returned or disposed of,
according to the directions of the person delivering them. No consideration is required to
effect the contract of bailment.
7. Charity: If a promisee undertakes the liability on the promise of the person to contribute
to charity, there the contract shall be valid.
Case Law: Kedarnath v. Gorie Mohammad
In this case, the defendant had agreed to subscribe Rs. 100 towards the construction
of town hall at Howrah.
The Secretary, on the faith of the promise, called for plans and entrusted the work to
contractors and undertook liability to pay them. The Defendant refused to pay the
promised amount.
It was held though the promise was for a charitable purpose and there was no benefit
to the defendant, yet he is liable for the promise made by him.

UNIT 3 – OTHER ESSENTIAL ELEMENTS OF A CONTRACT
Capacity to Contract
Capacity means competency of parties to enter into a contract.
Section 11 Age of Majority
Sound Mind
Not Disqualified by
any law
As per Section 11, “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.”
1. Age of Majority: The age of majority in India is governed by The Indian Majority Act, 1875.
Every person domiciled in India shall attain the age of majority on the completion of 18
years of age and not before.
Law relating to minor’s agreement

1. Contract with minor is void-ab-initio. A minor is not competent to contract and any
agreement with or by a minor is void from the very beginning.
Case Law: Mohori Bibi vs. Dharmo Das Ghose
In this case, a minor had borrowed some money from a money-lender by mortgaging his
house.
The money-lender moved to take possession of the minor’s house when he defaulted
payment. The court, however, said since an agreement with minor parties is void, the
money-lender could not enforce this contract.

2. A minor cannot ratify the agreement after attaining majority as the original agreement is
void-ab-initio and void agreements can never be ratified.
3. A minor can always plead minority.
4. Though a minor is not competent to contract, he can be a beneficiary to the contract (i.e.)
entitled to the benefits of the contract.
5. If a person is incapable of entering into a contract is supplied by another person with

necessities of life, the person who has supplied is entitled to get reimbursement from the
property of such incompetent person, including a minor. But if the minor has no property
of his own, then he cannot be bound to reimburse the other person. Liable for necessaries
provided
6. Where the guardian enters into a contract for the minor, which is within his competence
and for the benefit of the minor, such a contract will be valid and enforceable by the minor.
7. No court can allow specific performance of a contract with minors because it is void
altogether.
8. A minor cannot be declared insolvent.
9. A minor cannot become a partner in a partnership firm but he can be admitted to the
benefits of partnership with the consent of all the partners.
10. A minor can act as an agent. But he will not be liable to the principal for all his acts.
11. A minor is not capable of binding his parent or guardian, even for necessaries. They will be
held liable only when the minor acts as their agent.
12. In case a joint Contract is made by minor and an adult, the adult will be liable on the contract
and not the minor.
13. When an adult gives a guarantee on behalf of a minor, then the adult is liable to the third
party as if there is direct contract between the surety and the third party.
14. A minor cannot become a shareholder as he is incompetent to contract.
15. A minor is liable for tort, unless the tort in reality is a breach of contract.

Illustration: X, a Minor, was studying in 1st year B.Com in a college. On 1st July, he took a loan
of ₹ 10,000 from B for payment of his College Fees and to purchase books and agreed to repay
by 31st December. X possesses assets worth ₹ 2 Lakhs. On due date, X fails to pay back the
loan to B. B now wants to recover the loan from X out of his (X’s) assets.
In this case, B can definitely recover the loan out of X’s asset. As education is a necessity for a
minor.
Person of sound mind: According to Section 12, “a person is said to be of sound mind for the
purposes of making a contract if, at the time when he makes it is capable of understanding it and
forming rational judgement as to its effect upon his interests.”
A contract made by a person of unsound mind is void.
Contract by Disqualified persons: Besides minors and persons of unsound mind, there are other
persons who are disqualified from contracting, and contracts made by such persons are void.
Incompetency to contract may arise from political status, corporate status, legal status etc. the
following persons fall in this category: Alien Enemy, Convicts, Insolvents etc.
Free Consent
As per Section 13, Consent means when two or more persons agree upon the same thing in
same sense.
Consent is said to be free when it is not caused by
Coercion Undue Fraud Misrepresentation Mistake

Influence
Contract is Voidable Contract is Void
Bilateral Mistake Unilateral Mistake
As per Section 14, consent is said to be free when it is not caused by Coercion, Undue Influence,
Fraud, Misrepresentation or mistake.

Coercion (Section 15)
Committing or threatening to commit
Any act forbidden by Indian Penal Code
Unlawful detaining or threatening to detain
With intention of causing any person to enter into agreement
In case of Coercion, it is not necessary that it should proceed from a party to a contract neither
it is necessary that coercion must be done on the other party. It can proceed from a stranger and
it can be done on a stranger. It involves physical or mental pressure.
The status of the contract entered by coercion is always voidable. It is voidable at the option of
the party whose consent was obtained by coercion. If any benefit is received in course of this
type of contract it should be restored.
The burden of proof in case of coercion is on the aggrieved party (i.e.) the person on whom
coercion has been used.
Example: A threatens to hurt B if he does not sell his house to A for 5 lakh rupees. Here even
if B sells the house to A, it will not be a valid contract since B’s consent was obtained by
coercion.
Undue Influence (Section 16)

In case of undue influence, a person who is a party to a contract is in a position to dominate the
will of another person and he is able to secure unfair advantage from that other person. It
involves mental pressure. It is possible only when parties to the contract share fiduciary
relationship.
Example: A sold his gold watch for only Rs 500/- to his teacher B after his teacher promised
him good grades. Here the consent of A is not freely given, he was under the influence of his
teacher.
Essential ingredients
Relation between parties – A person can dominate other when there is near relation
between them.
Position to dominate will of the other – A person is deemed to dominate the will of other in
these situations:
In case he holds real authority over the other.
In case the relationship between them is a fiduciary relationship.
When a person’s mental capacity is temporarily or permanently affected.
The object must be to take undue advantage

Burden of proof – The dominant party will have to prove that they have not used their
dominant position to take unfair advantage of the other and induce them to enter a contract.
Example: A Father exerts undue influence upon his son to do something on the will of his
father. Otherwise, he will part his relation with a son.
Example: A factory owner exerts undue influence upon his employee to make a certain
agreement with him. If not he (employee) will be drawn from his job.
Difference between Coercion and Undue Influence
S# Coercion Undue Influence

1 It involves physical force or threat. It involves mental pressure.
2 It involves committing or threatening to No such illegal act is committed or
commit an act forbidden by the Indian Penal threat is given.
Code.
3 Relationship between parties is not necessary Some sort of relationship between the
parties is necessary
4 Coercion can move from a stranger and can be Undue Influence cannot be exercised
used upon a stranger by a stranger.
5 The contract is voidable at the option of the The contract is either voidable or the
aggrieved party. court may set it aside or enforce in a
modified form
6 Any benefit already received must be returned The court has discretion to direct the
once the contract is rescinded. aggrieved party to return the benefit in
whole or in part.
Fraud (Section 17)

Fraud means any of the following acts done with an intention to deceive the will of the other
a) False Suggestion
b) Active Concealment of facts
c) Promise without intention of performing
d) Other act fitted to deceive
e) Act or omission which law specially declares to be fraudulent
The other party should also be induced to act upon the representation and should have relied
upon the representation and the other party must have suffered a loss.
The following are the essential elements of the fraud:

(1) There must be a representation or assertion and it must be false. However, silence may
amount to fraud or an active concealment may amount to fraud.
(2) The representation must be related to a fact.
(3) The representation should be made before the conclusion of the contract with the intention
to induce the other party to act upon it.
(4) The representation or statement should be made with a knowledge of its falsity or without
belief in its truth or recklessly not caring whether it is true or false.
(5) The other party must have been induced to act upon the representation or assertion.
(6) The other party must have relied upon the representation and must have been deceived.
(7) The other party acting on the representation must have consequently suffered a loss.
Rescind the contract

Remedies
available
Sue for damages
Insist on performance
of contract
Mere Silence is not Fraud

Silence about facts is not fraud per se. Unless there is a obligation to talk or if it is equal to
expression, mere silence is not fraud.
Caveat Emptor (i.e) ‘let the buyer be aware’ is the rule applicable to contracts. A party
to a contract is under no obligation to disclose the whole truth to the other party.
Situations where silence amounts to fraud
1. When it is the duty of the person to speak
(a) Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty to
act with utmost good faith and make full disclosure of all material facts concerning the
agreement, known to him. (Regier V. Campbell Staurt)
(b) Contracts of Insurance: In contracts of marine, fire and life insurance, there is an implied
condition that full disclosure of material facts shall be made, otherwise the insurer is entitled to
avoid the contract.

(c) Contracts of marriage: Every material fact must be disclosed by the parties to a contract of
marriage (Hazi Ahmed v. Abdul Gassi).
(d) Contracts of family settlement: These contracts also require full disclosure of material facts
within the knowledge of the parties.
(e) Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of
shares/debentures by a joint stock company have to disclose all material facts within their
knowledge.
2. Where silence is equivalent to speech

These are the two exceptions to the rule mere silence does not amount to fraud.
Misrepresentation (Section 18)

Misrepresentation means false statement made out of innocence. In this case the person does
not have any intention to deceive the other person.
Essentials of misrepresentation:
(a) Representation should be of a material fact. Mere expression of opinion is not
Misrepresentation.
(b) It must be made with an intention that the other party should act upon it.
(c) Representation must be wrong, but the person making it should believe it to be true.
(d) There should not be an intention to deceive the other party. (In such cases, it
tantamounts to Fraud).
(e) It must be made before the conclusion of the Contract.
(f) It need not be made directly to the person involved. A wrong statement of facts made
to a third person with an intent to communicate it to the party involved amounts to
Misrepresentation
Example: A makes a positive statement to B that C will be made the director of a company. A
makes the statement on information derived, not directly from C but from M. B applies for
shares on the faith of the statement which turns out to be false. The statement amounts to
misrepresentation, because the information received second-hand did not warrant A to make
the positive statement to B.
Example: Sammy believes that his stereo system is in a very good condition. Without checking
it, he tells his friend Danny that his stereo is in excellent condition. Believing his statement,
Danny bought the stereo from Sammy, and later found that the stereo does not work at all.

Here, Sammy’s statement amounts to misrepresentation on his part, as there was no intention
to deceive in this case.
Difference between Fraud and Misrepresentation
S# Fraud Misrepresentation
1 There’s an intention to deceive the No such intention to deceive the other
other party in case of fraud. party in case of misrepresentation.
2 The person making the suggestion The person making the suggestion
believes that the statement is untrue. believes the statement is true, though
it is not true.
3 The aggrieved party can repudiate the The aggrieved party can repudiate the
contract and claim damages. contract but cannot claim damages.
4 The party using the fraudulent act Party can always plead that the injured
cannot secure or protect himself by party had the means to discover the
saying that the injured party had truth.
means to discover the truth.
Legal effects of agreements without free consent - (Section 19)

When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement
is a contract voidable at the option of the party whose consent was so caused.
A party to contract, whose consent was so caused by fraud or misrepresentation may, if he thinks
fit, insist that the contract shall be performed, and that he shall be put in the position in which
he would have been if the representation made had been true.
Exception - If such consent was caused by misrepresentation or by silence, fraudulent within the
meaning of section 17, the contract is not voidable, if the party whose consent was so caused
had the means of discovering the truth with ordinary diligence.
Explanation to Section 19 - A fraud or misrepresentation which did not cause the consent to a
contract of the party on whom such fraud was practiced, or to whom such misrepresentation
was made, does not render a contract voidable.
Mistake (Section 20)
Mistake of Law Mistake of Fact
Indian Law Foreign Law Unilateral Mistake Bilateral Mistake

Mistake of Law
This mistake may relate to the mistake of the Indian laws, or it can be a mistake of foreign laws.
If the mistake is regarding Indian laws, the rule is that the ignorance of the law is not a good
enough excuse (Ignoratia Juris Non Excuta). This means either party cannot simply claim it was
unaware of the law.
The Contract Act says that no party shall be allowed to claim any relief on the grounds of
ignorance of Indian law. This will also include a wrong interpretation of any legal provisions.
However, ignorance of a foreign law is not given a similar treatment. The parties are not expected
to know foreign legal provisions and their meaning. So, a mistake of foreign law is in fact treated
as a mistake of fact under the Indian Contract Act, 1872.
Mistake of Fact
There is other type of mistake that is mistake of fact. Such a mistake can be because of error in
understanding, ignorance or omission etc. these mistakes can be unilateral or bilateral.
Unilateral Mistake(Section 22): Only one party is under mistake. Unilateral mistake is not
allowed as a defence to avoid a Contract. So, if only one party has made a mistake of fact the
contract remains a valid contract.
Example: Avinash sold oats to Chetan by sample and Chetan, thinking that they were old oats,
purchased them. In fact, the oats were new. It was held that Chetan was bound by the
Contract.
Bilateral Mistake (Section 20): When both parties of a contract are under a mistake of fact
essential to the agreement, such a mistake is what we call a bilateral mistake. The contract shall
be treated as void. There is no agreement as there is absence of consensus. Hence, the
agreement is void.
Example: Anand agrees to sell to Bunny his buffalo. But at the time of the agreement, the
buffalo had already died. Neither Anand nor Bunny was aware of this. And so, there is no
contract at all, i.e. the contract is void due to a mistake of fact.
Legality of Object and Consideration

As per Section 23 of the Act, in each of the following cases the consideration and object of an
agreement is said to be unlawful:
➢ When consideration or object is forbidden by law
➢ When it defeats the provisions of law
➢ When it is fraudulent

➢ When it defeats any rule for time being in force
➢ When it involves injury to any person or property of another
➢ When it is opposed to public policy
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every
agreement of which the object or consideration is unlawful is void.
Let’s look at all the cases in detail:
1. Forbidden by Law: When the object of a contract or the consideration of a contract is
prohibited by law, then they are not lawful consideration or object anymore. They then become
unlawful in nature. And so, such a contract cannot be valid anymore.
Unlawful consideration of object includes acts that are specifically punishable by the law. This
also includes those that the appropriate authorities prohibit via rules and regulations. But if the
rules made by such authorities are not in tandem with the law than these will not apply.
2. Consideration or Object Defeats the Provision of the Law : This means if the contract is trying
to defeat the intention of the law. If the courts find that the real intention of the parties to the
agreement is to defeat the provisions of the law, it will put aside the said contract.
Example: A and B enter into an agreement, where A is the debtor, that B will not plead
limitation. This, however, is done to defeat the intention of the Limitation Act, and so the
courts can rule the contract as void due to unlawful object.
3. Fraudulent Consideration or Object: Lawful consideration or object can never be fraudulent.

Agreements entered into containing unlawful fraudulent consideration or object are void by
nature.
Example: A decides to sell goods to B and smuggle them outside the country. This is a
fraudulent transaction as so it is void. Now B cannot recover the money under the law if A does
not deliver on his promise.
4. Defeats any Rules in Effect: If the consideration or the object is against any rules in effect in
the country for the time being, then they will not be lawful consideration or objects. And so, the
contract thus formed will not be valid.
5. When they involve Injury to another Person or Property: In legal terms, an injury means a
criminal and harmful wrong done to another person. So, if the object or the consideration of
the contract does harm to another person or property, this will amount to unlawful
consideration.

Example: a contract to publish a book that is a violation of another person’s copyright would
be void. This is because the consideration here is unlawful and injures another person’s
property, i.e. his copyright.
6. When Consideration is Immoral: If the object or the consideration are regarded by the court
as immoral, then such object and consideration are immoral.
Example: A lent money to B to obtain a divorce from her husband C. It was agreed once B
obtains the divorce A would marry her. But the court passed the judgement that A cannot
recover money from B since the contract is void on account of unlawful consideration.
7. Consideration is Opposed to Public Policy: For the betterment of the community, there are
certain restriction on contracts in the name of public policy. But we do not use public policy in a
wide sense in this matter. If that was the case it would curtail individual freedom of people to
enter into contracts. So, for the purpose of lawful consideration and object public policy is used
in a limited scope. We only focus on public policy under the law.
Let’s look at some agreements that are opposed to public policy,
1. Trading with the Enemy: Entering into an agreement with a person from a country with
whom India is at war, void be a void agreement. For example, a trader entering into a
contract with a Pakistani national during the Kargil war.
2. Stifling Prosecution: This is a pervasion of the natural course of law, and such contracts
are void. The principle is that one should not make a trade of felony. The compromise of
any public offence is generally illegal.
However, a statutory list of compoundable offences and an agreement to drop

proceeding relating to such offences with or without the permission of the Court, as the
case may be, in consideration the accused promising to do something for the
complainant, is not opposed to public policy. In case of an uncompoundable offence, it
is void.
Example: A agrees to sell land to B if he does not participate in the criminal proceedings
against him.
3. Maintenance and Champerty: Maintenance agreement is when a person promises to

maintain a suit in which he has no real interest.
Champerty is when a person agrees to assist another party in litigation for a portion of
the damages or proceeds.

The agreement for supplying funds by way of Maintenance or Champerty is valid unless
(a) It is unreasonable so as to be unjust to other party or
(b) It is made by a malicious motive like that of gambling in litigation or oppressing other
party by encouraging unrighteous suits and not with the bonafide object of assisting a
claim believed to be just.
Example: Ravi agrees to help Kishan to get his land out of litigation, in return of half
portion of Kishan’s land once the litigation is over. This type of agreement is a
Champerty agreement, hence void.
Example: A offer B Rs. 2000, if he sues C for a case which they could have settled
mutually under provisions of law, just to annoy C. Such agreement is maintenance
agreement.
4. An Agreement to Traffic in Public Offices: An agreement to trafficking in public office is

opposed to public policy, as it interferes with the appointment of a person best qualified
for the service of the public. Public policy requires that there should be no money
consideration for the appointment to an office in which the public is interested. The
following are the examples of agreements that are void; since they are tantamount to
sale of public offices.
5. Agreements to create Monopolies: Agreements having for their object the establishment
of monopolies are opposed to public policy and therefore void.
6. An agreement to brokerage marriage for rewards is void.
7. Interfering with the Courts: An agreement whose object is to induce a judicial or state
officials to act corruptly and interfere with legal proceedings.
8. Interest Against Obligation: Agreements which tend to create interest against obligation
are void.
9. As per Section 24, if any part of a single consideration for one or more objects, or any one
or any part of any one of several considerations for a single object, is unlawful, the
agreement is void.

Trading with enemy
Consideration unlawful in part
Stifling Prosecution
Agreements
Interest against Obligation Opposed to Maintenance and
Champerty
public policy
Interference with course

Traffic relating
of justice
to public offices
Creating monopolies
Marriage Brokerage Agreements
Void Agreements
The agreements which are expressly declared void are as follows:
1) Agreement in restraint of marriage: Any agreement that restrains the marriage of a
major (adult) is a void agreement. This does not apply to minors. But if an adult agrees
for some consideration not to marry, such an agreement is expressly a void agreement.
Example: Yash agrees that if Deepak pays him Rs. 5 Crore he will not marry forever.
Such an agreement is void agreement.
2) Agreement in restraint of trade: An agreement by which any person is restrained from

carrying on a trade or practising a legal profession or exercising a business of any kind is
an expressly void agreement. Such an agreement violates the constitutional rights of a
person.
However, there are a few exceptions to this rule.

- If a person sells his business along with the goodwill then the buyer can ask the seller to
refrain from practising the same business at the local limits. So if according to such an

agreement as long as the buyer or his successor carry on such a business the agreement
to restrain the trade of the seller will be valid.
- If an outgoing partner can enter into such a restraint of a trade agreement with the
partnership firm. Also, a contract between partners not to carry out any
competing business during the continuance of a partnership is also a valid contract.
- One point to keep in mind regarding the above agreements is that the terms of such an
agreement have to be reasonable. Such reasonable terms are not defined under the act
but are to be judged according to each unique situation and circumstance.
Example: Physician Abhi who employs Kartik as his assistant for three years. For this
duration of three years, Kartik agrees not to practice medicine anywhere else. This is a
valid agreement even though it is in restraint of trade.
Example: Lalit a lawyer sells his legal practice to Jatin along with the goodwill. And Lalit
agrees never to practice as a lawyer anywhere in the state for the next 20 years. This is
not a valid agreement since the terms are completely unreasonable.
3) Agreement in restraint of legal proceedings: An agreement that prevents one party from
enforcing his legal rights under a contract through the legal process (of courts, arbitration,
etc) then such an agreement is expressly void agreement.
However, there are exceptions, if the agreement states that any dispute between parties
will be referred to arbitration and the amount awarded in such arbitration will be final
will be a valid contract.
Also, if the parties agree that any dispute between them in the present or the future will
be referred to arbitration, then such an agreement is also valid. But such a contract has
to be in writing.
4) An Agreement Whose Meaning is Uncertain: An agreement whose meaning is uncertain

cannot be a valid agreement, it is a void agreement. If the essential meaning of the
contract is not assured, obviously the contract cannot go ahead.
5) Wagering Agreements: According to the Indian Contract Act, an agreement to wager is a

void agreement. The basis of a wager is that the agreement depends on the happening or
non-happening of an uncertain event.

The essentials of a wagering agreement are as follows. If all elements are met then the
agreement will be void.
- Must contain a promise to pay money or money’s worth

- Is conditional on the happening or non-happening of an event
- The event must be uncertain. Neither party can have any control over it
- Must be the common intention to bet at the time of making the agreement
- Parties should have no other interest other than the stake of the bet
Example: A and B agree with each other that if it rains on Tuesday, A will pay Rs. 100
to B and if it does not rain on Tuesday, B will pay A Rs. 100. Such an agreement is
a wagering agreement and hence is void
Example: An IPL match is about to start between RCB and CSK. Jacky and Tiger make an
agreement where, if CSK wins Jacky will pay Rs. 5,000 to Tiger and if the result is
otherwise, Tiger will pay Rs. 5,000 to Jacky. This agreement between Jacky and Tiger is
a Wagering Agreement, hence Void.
Transactions similar to Wager

➢ Lottery Transactions: A lottery is a game of chance and not of skill or knowledge. Where
the prime motive of participant is gambling, the transaction amounts to a wager. Even if
the lottery is sanctioned by the Government of India it is a wagering transaction.
➢ Crossword Puzzles and Competitions: Crossword puzzles in which prizes depend upon
the correspondence of the competitor’s solution with a previously prepared solution kept
with the editor of a newspaper is a lottery and therefore, a wagering transaction. (Case
Law: State of Bombay vs. R.M.D. Chamarbangwala)
➢ Speculative Transactions: an agreement or a share market transaction where the parties

intend to settle the difference between the contract price and the market price of certain
goods or shares on a specified day, is a gambling and hence void.
➢ Horse Race Transaction: A horse race competition where prize payable to the bet winner
is less than Rs. 500, is a wager.
Transactions resembling to wager but are not void
➢ Chit Fund
➢ Commercial or share market transactions
➢ Games of skill and Athletic Competition
➢ Contract of insurance

Following are the agreements expressly declared as void:
Made by incompetent Parties (Section 11)
Agreement made under Bilateral Mistake (Section 20)
When consideration or object is unlawful (Section 23)
When the consideration or object of which is unlawful in parts (Section 24)
Agreements made without consideration (Section 25)
Agreement in restraint of Marriage (Section 26)
Agreement in restraint of Trade (Section 27)
Agreement in restraint of legal proceeding (Section 28)
Agreement the meaning of which is uncertain (Section 29)
Wagering Agreement (Section 30)
Agreement to do impossible Acts (Section 56)

UNIT 4 – PERFORMANCE OF CONTRACT
Section 37 – Obligation of parties to a Contract

The parties to a contract must either perform, or offer to perform, their respective promises.
Promises bind the representatives of the promisor in case of death of such promisor before
performance.
The performance may be actual or offer to perform.
Actual Performance Attempted performance
Sometimes when the promisor

Where a party to a contract offers to perform his part of the
has done what he had obligation but the promisee
promised to do or either of the refuses to accept the
parties have fulfilled their performance
obligations
Section 38 – Effect of refusal to accept offer of performance

When the promisor has made an offer of performance and the offer has not been accepted then
promisor is not responsible for non-performance.
Every such offer must fulfill certain conditions:
• It must be unconditional
• It must be made at a proper place and proper time
• The promise must have a reasonable opportunity of seeing that the things offered is the
same thing which he was bound to receive
Section 39 – Effect of a refusal of party to perform promise

If a party to a contract refuses to perform his promise in its entirety, the promisee has the
following rights:
a) To Terminate the contract
b) To indicate by words or by conduct that he is interested in continuing the contract

If the promisee decides to continue the contract, he will not be entitled to put an end to the
contract on this ground. In both the cases, the promisee would be able to claim damages that he
suffers as a result of breach.
Section 40 – Person by whom promise is to be performed

The promise under a contract may be performed by
• Promisor Himself: If the nature of a contract indicates that either of the parties intended
that the promise contained in the contract must be performed by the promisor himself
then the promisor is obligated to perform the promise, else the promise can be
performed by the promisor or his representatives or an employed agent.
Examples: Sonu is a singer and he promises to sing a song at Sameer’s wedding

reception. In this case, the nature of the contract requires Sonu to perform the promise
himself. He cannot delegate it to someone, as it requires personal skill.
• Agent: If the contract does not require personal consideration of the promisor, then the
promisor can employ a competent person to perform the promise.
• Legal Representatives: If the promisor dies before performing the promise, then the legal
representatives become responsible for the same. If the promise involves the utilization
of personal skills or expertise, then the consideration ceases with the death of the
promisor.
However, in all other scenarios, the legal representatives are obligated to perform the
promise unless the contract has a contrary intention specified. Also, the liability of the
legal representatives is limited to the value of the property inherited by them.
Example: Gopal promises to pay Sameer an amount of Rs 10,000 within one month of
delivery of certain goods. Sameer delivers the goods. However, Gopal dies before he
can pay the money to Sameer. Now, it is his legal representative’s responsibility to
ensure that Sameer receives the payment. The representative can pay himself or
employ someone for the same.
• Third Persons (Section 41): If the promisee accepts the performance of a promise from a
third person, then he cannot enforce it against the promisor at a later date. Hence, the
performance of the promise by a third-party discharges the promisor of his obligations
even if he has not authorized the third-party to perform the promise.
Example: Karan promises to pay Rajiv an amount of Rs 10,000 for painting his house.
John finishes the job but Karan is unable to pay him. Kamla, a common friend of Karan

and Rajiv, offers Rs 6,000 to John on behalf of Karan, which he accepts. Eventually, Rajiv
files a suit for recovery against Karan.
The Court holds that:
- Rajiv accepted Rs 6,000 from a third-person.
- Karan has not authorized the third-person.
- Hence, Rajiv’s act has discharged Karan of his liability to pay the entire amount.
- He can only claim Rs 4,000 from Karan now.
Joint Promisors (Section 42): If the promisors agree to perform a promise together – joint
promise – then they are jointly obligated to fulfil the promise, unless the contract specifies
a contrary intention. Also, if any of the promisors die, then their legal representatives
must fulfil the promise jointly with the surviving promisors. If all the promisors die, then
the legal representatives of each of them must perform the promise jointly.
Succession: In case of succession both the burden and benefits attaching to the contract are
succeeded by process of law.
Assignment: In case of assignment, the benefit of the contract can only be assigned but not
the liabilities.
Liability of Joint Promisor and Promisee

Section 42 – Devolution of joint liabilities
If two or more persons have made a joint promise, ordinarily all of them during their life-time
must jointly fulfill the promise. On death of the joint promisor, his legal representatives jointly
with the survivors should fulfill the promise and after the death of the last survivor the legal
representatives of all the joint promisors must fulfill the promise.
Section 43 – Any one of the joint promisors may be compelled to perform
When two or more persons make a joint promise, the promisee may, in the absence of express
agreement to the contrary, compel any one or more of such joint promisors to perform the whole
of the promise.
If any one of two or more joint promisors makes default in such contribution, the remaining joint
promisors must bear the loss arising from such default in equal shares.
Section 44 - Effect of release of one joint promisor

Where two or more persons have made a joint promise, a release of one of such joint promisors
by the promisee does not discharge the other joint promisor or joint promisors, and the joint
promisor so released will still be responsible to the other joint promisors.
Section 45 – Right of Joint Promisees
When a person has made a promise to two or more persons jointly, then unless a contrary
intention appears from the contract, the right to claim performance rests, as between him and
them, with them during their joint lives, and after the death of any of them, with the
representative of such deceased person jointly with the survivor or survivors, and after the death
of the last survivor, with the representatives of all jointly”
Time and Place for performance of promise
Section 46 – When the promisor has to perform his part of the contract without any application
by the promisee and there is no specified time in the contract, then the promisor should perform
the promise within reasonable time.
Section 47 – Where promise is to be performed on a certain day and the promisor has to perform
the promise without application by the promisee, the promisor has to perform the promise
during the usual business hours on the specified day.
Section 48 – When the promise has to be performed on a certain day and the promisee is ought
to make application, then it is the duty of the promisee to make application for performance at
a proper place and within usual business hours.
Section 49 – When promise is to be performed without application by the promisee and no place
is fixed for its performance, then it becomes the duty of the promisor to apply to the promisee
to appoint a reasonable place for the performance of the promise.
Section 50 – The performance of any promise may be made in any such manner, or at any time
which the promisee prescribes or sanctions.

Performance of Reciprocal Promise
As per Section 2(f) of the Act reciprocal promises are promises which form the consideration or
part of the consideration for each other.
(i) Mutual and independent promises
Where one party has to perform his promise independently without waiting for the performance
or willingness of the other party, the promises are mutual and independent.
(ii) Mutual and dependent

Where the performance of the promise by one party depends upon the prior performance of the
promisor or by the other party, the promises are conditional and dependent. For example, X
agrees to construct a house for Y. Y agrees to supply cement for building the house. The promises
are conditional and dependent.
(iii) Mutual and concurrent

Where the two promises are to be performed simultaneously, they are said to be mutual and
concurrent.
Section 51 – Simultaneous performance of reciprocal promises

When a contract consists of reciprocal promises to be simultaneously performed, the promisor
is not liable to perform the promise unless the promisee is ready and willing to perform his part
of the promise.
Example: When you go to a shop, the shopkeeper agrees to give you the product in exchange
for money. This is an example of a reciprocal promise where you promise to pay the value of
the product and the shopkeeper promises to give you the goods on receipt of the payment. If
either of you is unwilling to perform your promise, then the other can treat the contract ended.
Section 52 – Order of performance of reciprocal promises

When the order of performance is specifically fixed it has to be performed in that manner and if
no order is fixed it has to be performed in the order which the nature of transaction requires.
Example: Peter promises to help John find a house in lieu of John’s promise to pay him
a commission for the same. The contract does not specify the order of performance of the
promise. However, the nature of the transaction suggests that Peter should first help John get
a house before he expects him to perform his promise of paying him the commission.

Section 53 – Liability of a party preventing the other party from performing the promise
When one party to a contract prevents the other party to perform his part of the promise, the
contract becomes voidable at the option of the party who is prevented from performing his part
of the promise and he is also entitled to compensation from the other party for any loss he may
have suffered as a consequence of non-performance
Example: Ashok is willing to supply coats to Navya, but on the day of delivery, Navya does not
show up or locks Ashok in his shop; then Ashok can avoid the contract and collect
compensation.
Section 54 – Reciprocal and dependent promises

If the promisor who has to perform his promise before the performance of the other’s promise
fails to perform it, he cannot claim performance of the other’s promise, and is also liable for
compensation for his non- performance.
Example: Aaryan is a carpenter and Sara provides wood. They have a contract that Sara will
provide wood to Aaryan and then he will make a table for her. If Sara refuses to provide the
wood, then she can not expect Aaryan to make the table. If Aaryan faces any loss due to the
fact Sara failed to provide wood, then he can ask for compensation.
Section – 55 Effects of Failure to Perform at a Time Fixed in a Contract in which Time is Essential
When a party to a contract promises to do certain thing at or before the specified time, and fails
to do any such thing at or before the specified time, the contract, or so much of it as has not been
performed, becomes voidable at the option of the promise, if time is the essence of the contract.
In case when time is not essential part of the contract, the contract does not become voidable
by failure to perform the contract within time, but the promisee is entitled to compensation for
any loss occasioned to him by such failure.
If the promisee accepts the performance of the promise at any time other than the agreed time,
he cannot claim compensation for any loss occasioned by non-performance of the promise at
the agreed time.
Section 56 – Agreement to do impossible Acts

Agreement to do an act which is impossible in itself is void.
Impossibility of act may be of two types :
(a) Initial Impossibility: When the parties agree upon doing of something which is obviously
impossible in itself the agreement would be void.

If the promisor, enters a contract with a promisee for doing an act which he knows is
impossible or unlawful, then the promisor has to compensate the promisee’s losses
sustained due to non-performance of the contract. It is important that the promisee is
not aware that the act is unlawful or impossible in these cases.
(b) Supervening Impossibility: When performance of promise become impossible or illegal

by occurrence of an unexpected event or a change of circumstances beyond the
contemplation of parties, the contract becomes void. Such impossibility is called the
subsequent or supervening. It is also called the post-contractual impossibility.
Example: Gopal promises to deliver 100 kilograms of thin plastic bags to Sameer.
However, the State passes a law which bans all plastic bags. Gopal could not prevent it
and due to the recent law, he cannot perform his promise. Hence, the contract is void.
Section 57 - Reciprocal promise to do certain things that are legal, and also some other things
that are illegal
Where persons reciprocally promise, first to do certain things which are legal and secondly, under
specified circumstances, to do certain other things which are illegal, the first set of promises is a
valid contract, but the second is a void agreement.
Section 58 – Alternative promise one branch being illegal
In case of an alternative promise where one part is legal and other is illegal only the legal part is
enforceable.
Appropriation of payment
When a debtor owes several debts to the same creditor and makes payment, which is not
sufficient to discharge all the debts. In such cases, the payment is appropriated (i.e. adjusted
against the debts) as per Section 59 to 61 of the Indian Contract Act
(i) Section 59 – Application where debt to be discharged is indicated
Where a debtor, owing several distinct debts to one person, makes a payment to him either
with express intimation or under circumstances implying that the payment is to be applied
to the discharge of some particular debt, the payment, if accepted, must be applied
accordingly.
(ii) Section 60 – Application of payment where debt to be discharged is not indicated
The creditor may apply it at his discretion to any lawful debt actually due and payable to
him from the debtor.

(iii) Section 61 – Application of payment where neither party appropriates
Where neither party makes any appropriation, the payment shall be applied in discharge
of the debts in order of time. If the debts are of equal standing, the payments shall be
applied in discharge of each proportionately.
Contracts which need not be performed – with consent of both the parties
1. Section 62 – Effect of Novation, Recission and Alteration of contract
(a) Novation: The parties to a contract may substitute a new contract for the old one.
The old contract is discharged and need not be performed. The parties to the
contract may be same or different. It can take place only by mutual agreement
between parties.
(b) Rescission: In case of rescission the old contract is rescinded and no new contract
comes into existence. The contract is discharge by mutual agreement
(c) Alteration: In case of alteration the terms of the contract may be altered by mutual
agreement by the contracting parties but the parties to the contract remains same.
Difference between Novation and Alteration

Novation Alteration
The old contract is substituted with a In alteration, there may be some change
new one in case of novation. in the terms and conditions of original
contract.
There may be a change in the The contract is altered by mutual
contracting parties in case of novation. agreement, but the parties to the
contract remain the same.
2. Section 63 – Promisee may waive or remit performance of promise

Every promisee may dispense with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such performance or may accept
instead of it any satisfaction which he thinks.
3. Section 64 – Restoration of benefit under a voidable contract

When a person at whose option a contract is voidable rescinds it, the other party thereto
need to perform any promise therein contained in which he is the promisor. The party
rescinding a voidable contract shall, if he have received any benefit thereunder from
another party to such contract restore such benefit, so far as may be, to the person from
whom it was received.

Such a contract can be terminated at the option of the party who is empowered to do so.
If he has received any benefit under the contract, he must restore such benefit to the
person from whom he has received it.
4. Section 65 – Agreement or contract that becomes void

When an agreement is discovered to be void or when a contract becomes void, any
person who has received any advantage under such agreement or contract is bound to
restore it, or to make compensation for it to the person from whom he received it.
5. Section 66 – Communication of Recission

Rescission must be communicated to the other party in the same manner as a proposal
is communicated under Section 4 of the Contract Act. Similarly, a rescission may be
revoked in the same manner as a proposal is revoked.
6. Section 67 – Effects of neglect of promise to afford promisor reasonable facilities for

performance
If any promisee neglects or refuses to provide the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such neglect or refusal as to any
non-performance caused thereby.
Discharge of Contract
Performance Merger
of rights
Lapse of time Section 63
Breach Operation of seS

law
Mutual Agreement Impossibility of Section 67

performance
1. Discharge by Performance: When the parties to a contract fulfil the obligations arising
under the contract within the time and manner prescribed, then the contract is
discharged by performance.

For Instance, Gopal agrees to sell his cycle to Sameer for an amount of Rs 10,000 to be
paid by Sameer on the delivery of the cycle. As soon as it is delivered, Sameer pays the
promised amount.
Since both the parties to the contract fulfil their obligation arising under the contract,
then it is discharged by performance. Now, discharge by the performance of a contract
can be by: Actual performance or Attempted performance
2. Discharge by Mutual Agreement: If all parties to a contract mutually agree to replace the
contract with a new one or annul or remit or alter it, then it leads to a discharge of the
original contract due to a mutual agreement.
3. Discharge by Lapse of Time: The Limitation Act, 1963 prescribes a specified period
for performance of a contract. If the promisor fails to perform and the promisee fails to
take action within this specified period, then the latter cannot seek remedy through law.
It discharges the contract due to the lapse of time.
4. Discharge by breach of contract: If a party to a contract fails to perform his obligation

according to the time and place specified, then he is said to have committed a breach of
contract. Breach can be of two types, actual breach or anticipatory breach. In both cases,
the breach discharges the contract.
5. Discharge by Impossibility of performance: If it is impossible for any of the parties to the

contract to perform their obligations, then the impossibility of performance leads to a
discharge of the contract. If the impossibility exists from the start, then it is impossibility
ab-initio. However, the impossibility might also arise later due to:
- An unforeseen change in the law

- Destruction of the subject-matter essential to the performance
- The non-existence or non-occurrence of a particular state of things which was considered
a given for the performance of the contract
- A declaration of war
6. Operation of Law: A contract can be discharged by operation of law which includes

insolvency or death of the promisor.
7. Discharge by remission: A promisee can waive or remit the performance of promise of a

contract, wholly or in part. He can also extend the time agreed for the performance of the
same.

8. Discharge by Non-Provisioning of Facilities: In many contracts, the promisee agrees to
offer reasonable facilities to the promisor for the performance of the contract. If the
promisee fails to do so, then the promisor is discharged of all liabilities arising due to non-
performance of the contract.
9. Discharge due to Merger of Rights: In some situations, it is possible that inferior and
superior right coincides in the same person. In such cases, both the rights combine leading
to a discharge of the contract governing the inferior rights.

UNIT 5 – BREACH OF CONTRACT AND ITS REMEDIES
Breach means failure of party to perform his or her obligation under a contract. It may arise in
two ways:
Actual Anticipatory
Breach of Breach of
Contract Contract
Anticipatory Breach of Contract

An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived. Anticipatory breach of contract take place in either of the following
ways:
➢ Expressly by words spoken or written
➢ Impliedly by conduct of one of the parties
Example: Leela enters into a contract with Alia on June 01, 20XX. As per the contract, Leela
agrees to sell her guitar to Alia on June 10, 20XX, for an amount of Rs 5,000. However, she
sells this guitar to Oliver on June 07, 20XX. Hence, it is an anticipatory breach of contract
due to Leela’s conduct.
Effect of Anticipatory Breach of Contract

The promisee is excused from performance or further performance of the contract. He further
has the following options:
➢ He can rescind the contract and sue the other party for damages immediately without
waiting till the due date of performance
➢ He may decide not to rescind the contract and treat it as still operative and wait till the
time of performance and then hold the other party responsible.

Actual Breach of Contract
While an anticipatory breach is before the time of performance, an actual breach of contract is
on the scheduled time of performance of the contract. An actual breach of contract can be
committed either:
➢ At the time when the performance of contract is due; or
➢ During the time of performance. An actual breach of contract can also occur when one
party fails to perform his obligation, during the performance of the contract. This refusal
can be expressed in words or by action.
Remedies for Breach of Contract
Rescission of
Suit For Damages
Contract
Suit for Specific Suit upon Quantum

Suit for Injunction Meruit
Performance
Suit For Damages

As per Section 73 of the Indian Contract Act, 1872, on the breach of a contract, it is the
entitlement of the suffering party to receive compensation from the party who breaks the
contract for losses sustained due to the breach. Here are some rules:
• The suffering party can claim compensation for any loss arising naturally in the usual
course of events.
• Even if the party knew that on the breach of the contract, they might suffer certain losses,
he can claim compensation.
• Special damages, if any, can be claimed only if the suffering party has given notice about
it earlier. Also, the party suffering a loss is expected to take reasonable steps to minimize
it.
• The suffering party cannot claim compensation for indirect or remote losses/damages.
• Also, while estimating the loss incurred, all the means which existed to remedy the
inconvenience caused by the non-performance of the contract should be considered.

Example: Yash agrees to sell and deliver 50 kilograms of rice to Rohan for Rs 5,000. The amount
is to be paid on delivery. However, he fails to perform the promise. Rohan buys 50 kilograms
of rice from a neighbourhood trader for Rs 7,500. Rohan can claim compensation from Yash.
The compensation amount is the additional amount that Rohan had to pay to procure the
same quantity of rice of similar quality from the market. In this case, it is Rs 1,500.
Types of Damages
General/Ordinary Damages: The damages which arise naturally in the usual course of things
from breach of contract. [Case Law: Hadley Vs. Baxendale]
Special Damages: Where a party to a contract receives a notice of special circumstances

affecting the contract, he will be liable for special damages also.
Vindictive/Exemplary Damages: These damages are awarded in two cases:

• Breach of promise to marry
• Wrongful dishonor of a customer’s cheque by banker
Nominal Damages: Nominal damages are awarded where the plaintiff has proved that there
has been a breach of contract but he has not in fact suffered any real damage.
Damages for deterioration caused by delay: In the case of deterioration caused to goods by
delay, damages can be recovered from carrier even without notice. The term deterioration not
only implies physical damage but also includes loss of sale opportunity.
Pre-Fixed Damages: Sometimes the party to a contract stipulate at the time of formation of
contract that in case of breach of contract certain amount will be paid as damage.

Penalty and Liquidated Damages
English Law makes distinction between liquidated damages and penalty, but no such distinction
is made as per Indian Law.
Liquidated Damages is the sum fixed in the contract which represents a genuine pre-estimate
by the parties of the loss which would be caused by future breach of contract.
When the sum fixed in the contract is unreasonable and is used to force the other party to
perform the contract; it is penalty.
The Indian Law makes no distinction between liquidated damages and penalty. The
compensation awarded cannot exceed the amount mentioned in the contract. According to
Section 74 of the Indian Contract Act, 1872, if the parties fix the damages, the Court will not allow
more. However, it may award a lesser amount, depending on the case. Hence, the suffering party
gets reasonable compensation but no penalty.
There is an exception to Section 74 which states that if a party enters into a contract with the
State or Central government for the performance of an act in the interest of the general public,
then a breach of such a contract makes the party liable to pay the entire amount mentioned in
the contract.
Distinction between Penalty and Liquidated Damages
• If the sum payable is far in excess of the probable damage on breach of the contract, then
it is a penalty.
• If a contract mentions an amount payable at a certain date and an additional amount if a

default happens, then the additional sum is a penalty. This is because a mere delay in
payment is unlikely to cause damage.
• Even if the contract specifies a sum as ‘penalty’ or ‘damages’, the Court needs to discern
from the facts of the case if the amount mentioned therein is, in fact, a penalty or
liquidated damages.
• The crux of the penalty is the payment of money as a terrorem of the defaulting party.
Liquidated damages, on the other hand, are the true pre-estimate of the damage.
• While the English law distinguishes between a penalty and liquidated damages, in India,
there is no such distinction. The Indian Courts focus on awarding a reasonable
compensation to the suffering party which does not exceed the amount fixed in the
contract.

Rescission of contract: When a contract is broken by one party, the other party may treat the
contract as rescinded. In such a case he is free from all his obligations under the contract and is
entitled to compensation for any damages that he might have suffered.
Suit for Quantum Meruit: ‘Quantum Meruit’ means as much as is earned/as much as
the party doing the service has deserved.
The object of allowing a claim on quantum meruit is to recompensate the party or person for
value of work which he has done.
The claim for Quantum Meruit arises in the following cases:
➢ Agreement discovered to be void or when contract becomes void.
➢ Without intention of doing some gratuitously
➢ Express or implied contract but no agreement as to remuneration
➢ Party refuses or abandons to perform contract
➢ Divisible contract and party not in default has enjoyed benefit of part performance
➢ When an indivisible contract for a lump sum is completely performed but badly the
person who has performed the contract can claim the lump sum, but the other party
can make a deduction for bad work.
Suit for Specific Performance: Where damages are not an adequate remedy in the case of breach
of contract, the court may in its discretion on a suit for specific performance direct party in
breach, to carry out his promise according to the terms of the contract.
Suit for Injunction: Where a party to a contract is negating the terms of a contract, the court may
by issuing an ‘injunction orders’, restrain him from doing what he promised not to do.
An injunction is basically like a decree for specific performance but for a negative contract. An
injunction is a court order restraining a person from doing a particular act.
Party rightfully rescinding contract, entitled to compensation (Section 75)

A person who rightfully rescinds a contract is entitled to compensation for any damage which
he has sustained through non-fulfillment of the contract.

UNIT 6 – CONTINGENT AND QUASI CONTRACTS
The word contingent means when an event or situation is contingent i.e. it depends on some
other event.
A contract may be absolute or contingent. An absolute contract is one where the promisor
undertakes to perform the contract in any event without any condition.
Contingent Contract – Section 31
A contract to do or not to do something, if some event, collateral to such contract, does or does
not happen.
In simple words, contingent contracts, are the ones where the promisor perform his obligation
only when certain conditions are met. The contracts of insurance, indemnity, and guarantee are
some examples of contingent contracts.
Example: Neil promises to pay Manny a sum of Rs. 1,00,000 if Manny’s goods are destroyed
by fire. The payment of this amount is contingent on the goods being destroyed by fire. If
there’s no fire, Manny cannot claim the amount from Neil who is not liable to pay since the
fire that was the collateral condition, did not happen.
Collateral Event - An event which is neither a performance directly promised as part of the
contract, nor the whole of the consideration for a promise. (Pollock and Mulla)
Essentials of a Contingent Contract

Performance depends upon the happening or non-happening of some event or condition.
The event referred to is a collateral event. The event on whose happening or non-happening of the
event on which the performance of the contract is dependent should not be a part of the consideration
of the contract. The happening or non-happening of the event should be collateral to the contract and
should exist independently.
The contingent event should not be a mere ‘will’ of the promisor. The event so considered as for
contingency should not at all to be dependent on the promisor. It should be totally a futuristic and
uncertain event.
The event must be uncertain. If the performance of the contract is dependent on an event, which is
although a future event, but certain and sure to happen, then it’ll not be considered as a contingent
contract.

Rules relating to enforcement
1. Section 32 – Contracts contingent on happening of an event
When the contingent contract is made to do or not to do anything if an uncertain event
happens, it can be enforced by law only on happening of such event and if the event
becomes impossible the contract becomes void.
Example: Vinod promises to pay Yash, Rs. 100,000 if he marries Zara. This is a
contingent contract. Unfortunately, Zara dies in a car accident. Since the happening of
the event no longer possible, the contract is void.
2. Section 33 – Contracts contingent on non-happening of an event

When the contingent contract is made to do or not to do anything if an uncertain event
does not happen, it can be enforced only when the happening of that event becomes
impossible not before that.
Example: X promises to pay Y a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks. On the other hand, if the ship returns,
then the contract is void.
3. Section 34 - If a contract is contingent upon as to how a person will act at an unspecified

time, the event shall be considered to have become impossible when such person does
anything which renders it impossible that he should so act within any definite time or
otherwise than under further contingencies
Example: X agrees to pay Y, Rs. 100,000 if Y marries Z. However, Z marries A. The

marriage of Y to Z must now be considered impossible, although it is possible that A
may die and that Z afterward marry Y.
4. Section 35 – Contracts contingent on happening of specified event within fixed time

When contracts are made to do or not to do anything if an uncertain event happens
within a fixed time, the contract becomes void when the event does not happen at the
expiry of the time or if the event becomes impossible before the time fixed
Example: X promises to pay Y a sum of money if a certain ship returns before 1st April
2021. The contracts may be enforced if the ship returns within the fixed time. On the
other hand, becomes void if the ship sinks.

Section 35 – Contracts contingent on not happening of event within fixed time
When contracts are made to do or not to do anything if an uncertain event does not
happens within a fixed time, the contract can be enforced when the event does not
happen till the time fixed has expired or if it becomes certain that the event will not
happen.
Example: X promises to pay Y a sum of money if a certain ship does not return before
31st March 2021. The contract may be enforced if the ship does not return before 31st
March 2021. Also, if the ship burnt before the given time, the contract is enforced by
law since the return is impossible.
5. Section 36 – Contingent on an impossible event

Contingent agreements to do or not to do anything, if an impossible event happens are
void, whether the impossibility of the event is known or not to the parties to the
agreement at the time when it is made.
Summary Table of all rule of enforcement of contingent contracts

Section Contingency When Valid and When Void and not
Enforceable enforceable
Section 32 Contingent on When Event Happens Event becomes
Happening of an event impossible
Section 33 Contingent on Non- When event becomes Event Happens
Happening of an event impossible or does not
happen
Section 35 Contingent on Event happens within When Time Lapses or
Happening of an event specified time Event becomes
within specified time Impossible
Section 35 Contingent on Non- When Time Lapses or Event happens within
Happening of an event Event becomes specified time
within specified time Impossible
Section 36 Impossible Event Never Always

Difference between Contingent Contract and Wagering Contract
S# Contingent Contract Wagering Contract
1 A contingent contract is a contract to do or A wagering agreement is a promise to pay
not to do something with reference to a money or money’s worth with reference
collateral event happening or not happening. to an uncertain event happening or not
happening.
2 They may not contain reciprocal promises These agreements consist of reciprocal
promises.
3 The event is a collateral event. The uncertain event is the core factor of
the agreement.
4 Contingent contract may not be Wagering in A Wagering agreement is essentially
nature. contingent in nature.
5 Parties to the contract have interest in the The contracting parties have no interest in
subject matter of contract. the subject matter of the contract.
6 These contracts are based on doctrine of A wagering contract is a game, losing and
mutuality of lose and gain. gaining alone matters.
7 Contingent contract is Valid. Wagering Agreement is Void.
Quasi Contracts
Sometimes law implies a promise imposing obligation on one party and conferring right in favour
of other even when there is no offer no acceptance no genuine consent lawful consideration etc.
These contracts are based on principles of equity, justice, and good conscience.
These cases are not contracts but court recognizes them as relations resembling those of
contracts and enforces them as if they were contracts.
These contracts work on the rule of preventing ‘Unjust Enrichment’.
“No man must grow rich out of another person’s loss.”
Example: Gopal and Rajesh enter a contract under which Gopal agrees to deliver a basket of
fruits at Rajesh’s residence and he promises to pay Rs 1,500 after consuming all the fruits.
However, Gopal erroneously delivers a basket of fruits at Sameer’s residence instead of
Rajesh’s. When Sameer gets home, he assumes that the fruit basket is a birthday gift and
consumes them.
Although there is no contract between Gopal and Sameer, the Court treats this as a Quasi-
contract and orders Sameer to either return the basket of fruits or pay Gopal.

Features of a Quasi Contract
• It is usually a right to money and is generally (not always) to a liquated sum of money
• The right is not an outcome of an agreement but is imposed by law.
• The right is not available against everyone in the world but only against a specific
person(s). Hence it resembles a contractual right.
Cases deemed as Quasi Contracts
Obligation of a person
Payment by
Claims for necessaries enjoying benefit of
interested person
supplied (Section 68) non-gratuitous act
(Section 69)
(Section 70)
Responsibility of Money paid by

finder of goods mistake or under
(Section 71) coercion (Section 72)
Sections 68 – 72 of the Indian Contract Act, 1872 give five circumstances under which a Quasi
contract comes to existence. There is no real contract between the parties and the law imposes
the contractual liability due to the peculiar circumstances.
1. Section 68 - Necessaries Supplied to person incapable of contracting – When a person

incapable of entering into a contract is supplied by another person with necessaries
suited to condition his life, the person who has provided such supplies is entitled to be
reimbursed from the property of such incapable person.
Example: Jai is a lunatic. Jagan supplies Jai with certain necessaries suited to his
condition in life. However, Jai does not have the money or sanity and fails to pay Jagan.
This is termed as a Quasi contract and Jagan is entitled to reimbursement from Jai’s
property.
However, to establish his claim, he needs to prove two things:
- Jai is a lunatic
- The goods supplied were necessary for Jai at the time they were delivered or
sold.

2. Section 69 - Payment by an interested person – When a person who is interested in the
payment of money which some other person is bound to pay and pays it on his behalf,
he is entitled to be reimbursed by the other.
Example: Pratap is a zamindar. He has leased his land to Ramlal, a farmer. However,
Pratap fails to pay the revenue due to the government. After sending notices and not
receiving the payment, the government releases an advertisement for sale of the land
(which is leased to Ramlal). According to the Revenue law, once the land is sold,
Ramlal’s lease agreement is annulled.
Ramlal does not want to let go of the land since he has worked hard on the land and it
has started yielding good produce. In order to prevent the sale, he pays the government
the amount due from Pratap.
In this scenario, Pratap is obligated to repay the said amount to Ramlal.
3. Section 70- Obligation of person enjoying the benefits of a Non-Gratuitous act – When
a person lawfully does something without intention of doing so gratuitously and the
other person enjoys benefit of such act, the person enjoying the benefit is bound to pay
compensation to the other person.
For a suit to succeed in this case, the plaintiff must prove:

• That he had done the act or had delivered the thing lawfully
• That he did not do so gratuitously, and
• That the other person enjoyed the benefit
Case Law : Shyamlal vs. State of U.P.
4. Section 71- Responsibility of Finder of goods – A person who finds goods belonging to
another and takes them into his custody is subject to same responsibility as if he were a
bailee.
He shall take proper care of the goods just like a man of ordinary prudence would do, he
shall not appropriate the goods in any manner and must restore the goods when the
owner is found.
Example: Sarah finds a diamond lying on the floor in a shop. She picks it up and keeps
it in her safe possession. Sarah makes all reasonable efforts to find the true owner of
the diamond. The diamond actually belonged to Nadia. Sarah has the right to hold the
possession of the diamond against all the world except Nadia, and is supposed to make
reasonable efforts to find her, and return it to her.

Case Law : Hollins vs. Howler L. R. & H. L
5. Section 72- Money paid under coercion or mistake – A person to whom money has
been paid or anything delivered by mistake or under coercion, must repay or return it.
Similarly, money paid by coercion which includes oppression, extortion or any such
means, is recoverable.
Example: Aarti and Disha share a flat and contribute in half for the rent to be
paid. Aarti, without knowing that Disha has already paid the due rent to the landlord
in whole, pays again to the landlord. The landlord, in this case, is liable to give back the
money delivered to him by mistake.
Case Law : Shivprasad vs. Sirish Chandra

Sales tax officer vs. Kanhaiyalal
Seth Khanjelekvs National Bank of India
Trikamdas vs. Bombay Municipal Corporation

The Sale of Goods Act, 1930
UNIT 1 – FORMATION OF THE CONTRACT OF SALE

The Sale of Goods Act, 1930 allows parties to modify provisions of the law by express stipulations.
The Act applies to contracts where property in goods are transferred for a monetary
consideration. It is an Act that specifies rule regarding sale of goods.
This Act extends to whole of India.

It came into force on 1st July, 1930.
Some important Definitions:

Buyer [Section 2(1)]: Buyer means a person who buys or agrees to buy goods.
Seller [Section 2(13)]: Seller means a person who sells or agrees to sell goods
Goods [Section 2(7)]: Goods means every kind of movable property other than actionable claims
and money and includes stock and shares, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before sale or under the contract of
sale.
Every kind of
movable property
which includes Does not
include
Goods Stock & shares,
Actionable
Growing crops, grass
claims and
and things attached
Money in
to or forming part circulation
of the land which
are agreed to be
severed.

Specific Goods
Existing Goods Ascertained

Goods
Goods Future Goods

Unascertained
Goods
Contingent Goods
1. Existing Goods: The goods which are in existence at the time of contract of sale (Section
6). The existing goods may be of the following kinds:
a) Specific Goods: Goods identified and agreed upon at the time a contract of sale is
made [Section 2(14)]
Example: Specified and finally decided goods like iPhone 12, Lloyd Air Conditioner
etc.
Example: ‘A’ wants to sell his HP Laptop of a particular model number and
advertises the same. ‘B’ agrees to purchase the laptop. Both entered into the
contract of sale. Here the laptop is a specific good.
b) Ascertained Goods: The goods which are identified in accordance with the agreement
after the contract of sale is made. When from a lot or out of large quantity of
unascertained goods, the number or quantity contracted is identified, such identified
goods are called ascertained goods.
Example: Raj has 500 apples. Out of these 500 apples, Raj decides to sell 200 apples.
To sell these 200 apples, Raj will need to separate them from the 500 (larger set).
Thus, Raj selects 200 apples from a larger group of unspecified apples. These 200
apples are now the ascertained goods.

c) Unascertained Goods: The goods which are specifically not identified or ascertained
at the time of making of the contract. Basically, these are the goods which are yet to
be selected from a larger quantity or number.
Example: Say, from Raj’s 500 apples, he decides to sell 200 apples but doesn’t
specify which ones he wants to sell. A seller will have the liberty to choose any 200
apples from the lot. These are thus the unascertained goods.
Example: From 1000 quintals of wheat, the seller agreed to sell 500 quintals. Here
the goods are not specified. The seller has the liberty to choose from the bulk.
2. Future Goods: Goods to be manufactured or produced or acquired by the seller after

making the contract of sale. The contract of sale of future goods will never have actual
sale in it, it will always be an agreement to sell [Section 2(6)].
Example: Amit is a manufacturer of chairs. Shyam ordered Amit to manufacture 200

units of chairs of specific design and they made an agreement for the same. This is the
sale with respect to future goods.
Example: Sandy has an apple orchard with apples in it. He agrees to sell 1000 apples to
a buyer after the apples ripe. This is a sale that has to occur in the future, but the goods
have been identified already and the agreement made. Such goods are known as future
goods.
3. Contingent Goods: The acquisition of which by the seller depends upon an uncertain
contingency are called ‘contingent goods’.
Example: ‘A’ has agreed to sell ‘B’ certain goods at a particular date if the former
receives the goods from the manufacturer before the said date. This agreement is
based on contingencies, hence such goods are called contingent goods.
Delivery [Section 2(2)]: Delivery means voluntary transfer of possession from one person to
another. The transfer of possession is the end result of the whole delivery process. The
delivery could occur even when the goods are transferred to a person other than the buyer
but who is authorized to hold goods on behalf of the buyer.

Actual Delivery
Forms of
delivery
Constructive
Delivery
Symbolic
Delivery
Actual Delivery: If the goods are physically given into the possession of the buyer, the delivery is
actual delivery.
Constructive Delivery: The transfer of goods can be done even when the transfer is effected
without change in possession or custody of goods.
For example, a case of the delivery by attornment or acknowledgment will be a constructive
delivery. If you pick up a parcel on behalf of your friend and agree to hold on to it for him, it is a
constructive delivery.
Symbolic Delivery: This kind of delivery involves the delivery of a thing in token of a transfer of
some other thing. For instance, keys of a car, godown etc.
Goods are said to be in deliverable state when they are in such a condition that the buyer would
under a contract be bound to take delivery of them [Section 2(3)]
Document of title of goods [Section 2(4)]: It is a document used as a proof of the possession or
control of goods. A document amounts to a document of title only where it shows an
unconditional undertaking to deliver the goods to the holder of document.
It “includes the bill of lading, dock-warrant, warehouse keeper’s certificate, railway receipt,
multimodal transport document, warrant or order for the delivery of goods and any other
document used in the ordinary course of business as proof of the possession or control of goods
or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of
the document to transfer or receive goods thereby represented.”
There is difference between ‘Document showing
title’ and ‘Document of Title’. A document Is Document to Title and
showing title merely shows that the person Document showing Title same?
named in the document is its owner. It does not
allow that person to transfer the ownership by
mere endorsement of the document.

Mercantile Agent [Section 2(9)]: An agent having in the customary course of business agent
authority either to sell goods or to consign goods for the purpose of sale or to buy goods.
Property [Section 2(11)]: ‘Property’ here means ‘ownership’ or general property. In every
contract of sale, the ownership of goods must be transferred by the seller to the buyer, or there
should be an agreement by the seller to transfer the ownership to the buyer.
Insolvent [Section 2(8)]: A person is said to be insolvent when he ceases to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due, whether he has
committed an act of insolvency or not.
Price [Section 2(10)]: Price means the money consideration for a sale of goods.
Quality of goods includes their state or condition. [Section 2(12)]
Sale and Agreement to Sell [Section 4]

Section 4(1) 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.
Section 4(2) A contract of sale may be absolute or conditional.
Section 4(3) where the transfer of the property in the goods is to take place at a future time
or subject to some condition thereafter to be fulfilled, the contract is called an
agreement to sell.
Section 4(4) An agreement to sell becomes a sale when the time elapses or the conditions
are fulfilled subject to which the property in the goods is to be transferred.
Example: S agrees to sell his Car to P for ₹ 2,00,000 after one month. P agrees to buy the car
and make payment after one month. This an agreement to sell and it will become a sale after
one month when P make the payment and gets the ownership of car.
In case of a contract of sale, there is immediate transfer of property from the seller to the buyer.
A sale is generally carried out on deliverable goods. However, in an agreement to sell, the
property in goods is not transferred immediately. The objective of the agreement is to transfer
the goods at a future date, once some contingent clauses in the agreement or certain conditions
are satisfied.

Therefore, a contract for sale of goods can either be sale or an agreement to sell. This depends
on the condition whether it results into immediate transfer of property from seller to buyer or
whether the transfer will take place at some future date.
The following elements must exist for a contract of sale:
a) At least two parties. One shall be the seller and the other a buyer.
b) The subject matter must be goods (i.e) only movable goods. This “movable property”
may constitute existing goods, goods in the possession or the ownership of the seller or
future goods.
c) A price in money should be paid or promised. The price consideration or the actual
payment could be partly in kind and partly in money but never in kind alone.
d) A transfer of property in goods from seller to the buyer must take place.
e) A contract of sale may be absolute or conditional.
f) All other essential elements of a valid contract must be present in the contract of sale.
The crucial elements of a contract like competency of parties, the legality of object and
consideration etc. have to be present like in any other contract.
Distinction between Sale and an Agreement to Sell

# Sale Agreement to sell
1 The property in the goods passes to the Property in the goods passes to the buyer
buyer immediately. on future date or on fulfilment of some
condition.
2 It is Executed Contract. It is Executory Contract.
3 The seller can sue the buyer for price of the The aggrieved party can sue for damages
goods. only and in case price as payable at a stated
date then he can sue for price also.
4 Subsequent loss or destruction of goods is Subsequent loss or destruction of goods is
liability of buyer. the liability of seller.
5 Risk of loss is of buyer. Risk of loss is of seller.
6 Creates Jus in Rem Creates Jus in Personam.
7 The seller cannot resell the goods The seller may sell the goods.
Distinction between Sale and Hire Purchase

# Sale Hire Purchase
1 Property in goods passes to the buyer The property in goods passes to hirer upon
immediately at the time of contract. payment of last installment.

2 Buyer is the owner of goods. Hirer is the bailee till he pays last
installment.
3 The buyer cannot terminate the contract. The hirer may terminate the contract.
4 The seller takes the risk of any loss resulting The owner takes no such risk, for if the hirer
from the insolvency of the buyer. fails to pay an installment, the owner has
right to take back the goods.
5 The buyer can pass a good title to a bona fide The hirer cannot pass any title even to a
purchaser from him bona fide purchaser
6 The buyer in sale can resell the goods. The hire purchaser cannot resell unless he
has paid all the installments.
Distinction between Sale and Bailment

# Sale Bailment
1 The property in goods is transferred from There is only transfer of possession of goods
the seller to the buyer. from the bailor to the bailee.
2 The return of goods in contract of sale is not
The bailee must return the goods to the
possible. bailor on the accomplishment of the
purpose for which the bailment was made
3 The consideration is the price in terms of The consideration may be gratuitous or non-
money. gratuitous.
Sale and contract of work and labour:

A contract of sale of goods is one in which some goods are sold or to be sold for a
price. But where no goods are sold, and there is only the doing or rendering of some
work of labour, then the contract is only of work and labour and not of sale of
goods.

How is contract of sale made? (Section 5)
A contract of sale may be made in any of the following modes:
Contract of sale is made by an offer to buy There may be immediate delivery
or sell goods for a price and acceptance of of goods.
such offer.
Immediate delivery of the goods and
There may be immediate payment of an immediate payment of price
price, but it may be agreed that the
delivery is to be made at some future date agreed that the delivery or payment or
both are to be made in installments
agreed that the delivery or payment or
both are to be made at some future date
Subject matter of contract of sale

The goods which are subject matter of contract of sale may be either existing goods that are
acquired, owner or possessed by the seller, or future goods.
The contract of sale may also be of the goods the acquisition of which by seller depends upon a
contingency, which may or may not happen.
Goods perishing before making of contract (Section 7): Where there is a contract for the sale of
specific goods, the contract is void if the goods without the knowledge of the seller have, at the
time when the contract was made, perished or become so damaged as no longer to answer to
their description contract.
Goods perishing before sale but after agreement to sell (Section 8): Where there is an
agreement to sell specific goods, and subsequently the goods without any fault on the part of
the seller or buyer perish or become so damaged as no longer to answer to their description in
the agreement before the risk passes to the buyer, the agreement is thereby avoided.
If the future goods are specific, the destruction of such goods will amount to supervening
impossibility and the contract shall become void.
Ascertainment of Price
Price is an essential condition of a contract of sale of goods
Price [Section 2(10)]: Price means monetary consideration for sale of goods.
As per Section 9, price in the contract of sale may be –
Fixed by the contract Agreed to be fixed in a manner Determined by the course of

provided by the contract dealings between the parties.

Section 10 Agreement to sell at valuation
Section 10 provides for the determination of price by a third party.
Where there is an agreement to sell goods on the terms that price has to be fixed by the third
party and he either does not or cannot make such valuation, the agreement will be void.
If the good or any part thereof have been delivered to, and appropriated by, the buyer, he shall
pay a reasonable price.
In case the third party is prevented by the default of either party from fixing the price, the party
at fault will be liable to the damages to the other party who is not at fault.

UNIT 2 – CONDITIONS & WARRANTIES
Certain provisions need to be fulfilled as demanded in the contract of sale or any other contract.
The condition is a fundamental precondition on the basis of which the whole contract is based
upon, on the other hand, warranty is the written guarantee wherein the seller commits to repair
or replace the product in case of any fault in the product. Section 11 to 17 of the Sale of Goods
Act enlightens the provisions relating to Conditions and Warranties.
The stipulations are the essence of the contract of sale and a breach of these stipulations provides
a remedy to the grieved party.
Section 11 – Stipulation as to time

A representation which forms part of the contract of sale and affects the contract is called
stipulation.
Condition as to time of payment is not considered the essence of the contract of sale
Stipulations as to time of delivery are usually the essence of the contract or not depends on the
terms of the contract.
Conditions and Warranties (Section 12):

A stipulation in a contract of sale with reference to goods which are the subject thereof may be
a condition or a warranty.
Condition [Section 12(2)]: A condition is a stipulation essential to the main purpose of the
contract, the breach of which gives rise to a right to treat the contract as repudiated.
Example: A wants to buy a car which can give a mileage of 20 kms/litre. B, the car dealer, points
out at a particular car and says “this car will suit you”. A buys the car. But later on he finds that
the car is giving a mileage of only 10 kms/litre. THERE IS A BREACH OF CONDITION, because
the stipulation made by B forms the very basis of the contract.
Warranty [Section 12(3)]: A warranty is a stipulation collateral to the main purpose of the
contract, the breach of which gives rise to a claim for damages but not to a right to reject the
goods and treat the contract as repudiated
Example: A goes to B, a car dealer, and says, “I want a good car” The car dealer shows him a :
car and says, “it can give you a mileage of 20 kms/litre”. A buys the car. Later on, A finds that
the car is giving a mileage of 10 kms/litre only. THERE IS A BREACH OF WARRANTY, because
the J stipulation made by the seller was only collateral one.

Thus, the buyer’s only remedy is to claim damages. This is not a breach of the condition but rather a
breach of warranty, because the stipulation made by the seller was only a collateral one.
A stipulation in a contract of sale is a condition or a warranty depends in each case on the
construction of the contract.
Difference between condition and warranties

# Condition Warranty
1 Essential to main purpose Collateral to main purpose
2 Aggrieved party can repudiate the contract Aggrieved party can claim only damages
and claim damages
3 A breach of condition may be treated as a A breach of warranty cannot be treated as a
breach of warranty breach of condition.
Section 13 – Condition to be treated as warranty

In the following cases, a contract is not avoided even on account of a breach of condition:
Voluntary Waiver
Buyer waives
the
performance
of the
condition
Buyer
decides to
treat breach
of condition
as breach of
warranty
Fulfillment
Non- of
severable conditions
Contract excused by
law
Compulsory Waiver
Section 13 specifies cases where a breach of condition will be treated as breach of warranty. As
a result of which the buyer loses his right to rescind the contract and can claim damages only.

Compulsory waiver of a condition [Sec. 13(2)]
Where a contract of sale is not severable (ie. indivisible) and the buyer has accepted the goods
or a part thereof, he cannot repudiate the contract but can only sue for damages. In such a case,
the breach of condition can only be treated as a breach of warranty, unless there is a contract to
the contrary. [Sec. 13 (2)]
Example: W bought laptops from M and resold it to C without examining the laptops. The
laptops were defective. It was held that W must be deemed to have accepted the goods and
therefore he could not repudiate the contract but could claim only damages.
Express and Implied Conditions and Warranties

Conditions and Warranties may be either express or implied. Implied conditions are incorporated
by law in the contract of sale.
Conditions which are agreed upon between parties at the time of contract and are expressly
provided in the contract.
Implied conditions are those which are presumed by law, implied conditions may be negated or
waived by express agreement.
Following are the implied conditions in a contract of sale unless otherwise agreed in the contract:
(i) Condition as to title: In every contract of sale, the condition implied that the seller
has the right to sell goods at the time when the property is to pass. If the seller’s title
turns out to be defective, the buyer must return the goods to the true owner and
recover price from the seller.
Condition as to Title [Section 14(a)]: Seller has the right to sell the goods at the time when
property in goods is transferred.
(ii) Sale by Description: If there is a contract of sale of goods by description, a default

implied condition is that these goods must correspond with this description. The
buyer is not bound to accept and pay for the goods which are not in accordance with
the description of goods.
Sale by description [Section 15]: The goods shall correspond with the description of the
goods given.

(iii) Sale by sample: When the goods are to be supplied on the basis of a sample provided
to the seller by the buyer while the formation of a contract the following conditions
are implied:
• Bulk supplied should correspond with the sample in quality

• Buyer shall have a reasonable opportunity to compare the goods with the sample
• The good shall be free from any apparent defect on reasonable examination by
the buyer.
Sale by sample [Section 17]: The bulk shall correspond with the sample in quality and the buyer
shall have reasonable opportunity to compare the bulk with sample.
(iv) Sale by Sample as well as Description: Where goods are sold by sample as well as
description the implied condition is that the bulk shall correspond both with sample
and the description. In case the goods correspond with sample but do not tally with
description or vice versa or both, the buyer can repudiate the contract.
Sale by sample as well as description [Section 15]: The bulk goods shall correspond with both
sample and description.
(v) Condition as to quality or fitness: Generally, there is no implied condition as to the

quality or fitness of the goods that are sold for a particular purpose. However, the
condition as to the reasonable fitness of goods for a particular purpose may be implied
on the part of the seller for which the buyer wants them. Following are the conditions
to be satisfied:
a. If the buyer had made known to the seller the purpose of his purchase
b. and the buyer relied on the seller’s skill and judgment, and
c. seller’s business to supply goods of that description.
Condition as to quality or fitness [Section 16(1)]: This condition applies only when the
buyer has relied upon the skill and judgement of seller to select the best goods, and the
seller has been ordinarily dealing in those goods.

(vi) Condition as to Merchantability: This is implied only where the sale is by description
and the goods should be of ‘merchantable quality’ i.e. the goods must be such as are
reasonably saleable under the description by which they are known in the market.
Example: A purchases a certain quantity of black yarn from B who is a dealer in

yarn. A finds the black yarn to be damaged by the white ants. Thus the condition as
to merchantability has been broken and A is entitled to reject it as unmerchantable.
Condition as to merchantability [Section 16(2)]: When goods are bought by seller who deals in
goods of that description there is implied condition that goods shall be of merchantable quality.
(vii) Condition as to Wholesomeness: In the case of eatables and provisions, there is

another implied condition that the goods shall be wholesome, in addition to the
implied condition as to merchantability.
Condition as to wholesomeness: In case of edibles and provisions there is another implied

conditions that the goods shall be wholesome.
Implied Warranties
Section 16(3):
Section 14(b) Warranty as to quality

or fitness by usage of
Warranty as to trade
undisturbed possession
Disclosure of dangerous
nature of goods
Section 14(c):
Warranty as to non-existence
of encumbrance

Implied Warranty which the law implies into the contract of sale. It is a stipulation which has not
been included in contract of sale in express words, but law presumes that the parties have
incorporated it into their contract.
Warranty as to Undisturbed Possession: ‘An implied warranty that the buyer shall have and
enjoy quiet possession of the goods’ which means a buyer is entitled to the quiet possession of
the goods purchased as an implied warranty which means the buyer after receiving the title of
ownership from the true owner should not be disturbed either by the seller or any other person
claiming superior title of the goods. In such a case, the buyer is entitled to claim compensation
and damages from the seller as a breach of implied warranty.
Example: A buys a laptop from B. After the purchase, A spends some money on its repair and
uses it for some time. Unknown to the parties, it turns out that the laptop was stolen and was
taken from A and delivered to its rightful owner. B shall be held responsible for a breach and
A is entitled to damages of not only the price but also the cost of repairs.
Warranty as to non-existence of encumbrance: An implied warranty that the goods shall be free
from any charge or encumbrance in favour of any third party not declared or known to the buyer
before or at the time the contract is entered into.
Example: A pledges his computer to another person B against a loan of Rs. 30,000. “A” also
promises B that A will produce the laptop and give it to B the next day. Later that day, A goes
on to sell the laptop to C who is unaware of the course of dealings between A and B. In this
case, C can ask A to clear the loan immediately or clear the loan by himself or herself and then
proceed to file a suit against A for the recovery of the money spent including the interest
Warranty as to quality or fitness by usage of trade: An implied warranty as to quality or fitness

for a particular purpose may be annexed or attached by the usage of trade.
Disclosure of dangerous nature of goods: In case the goods are inherently dangerous or they are
likely to be dangerous to the buyer and the buyer is ignorant or unaware of the danger, an implied
warranty on the part of the seller emerges. The seller must warn the buyer duly about the
dangerous nature of the goods if any. In case of a breach of this warranty, the seller will be liable
in damages.
Example: X purchases a bottle of disinfectant from a person Y. Y knows that the cap of the
bottle is defective or cheap and if opened by a novice without care, it may spill and result in
partial burning or other damages of the person. When X opens the bottle, he is injured. In this
case, X is liable in damages to Y as Y should have been duly warned of the probable danger.

Caveat Emptor
The doctrine of Caveat Emptor means ‘Let the buyer be aware’.
This doctrine states that the seller is in no way responsible for the bad selection of the buyer. If
the goods turn out to be defective and do not serve the purpose and the buyer has made decision
based on his own skill and judgement, then the buyer cannot hold the seller responsible.
So, the doctrine attempts to make the buyer more conscious of his choices. It is the duty of the
buyer to check the quality and the usefulness of the product he is purchasing. If the product turns
out to be defective or does not live up to its potential the seller will not be responsible for this.
Example: A bought a horse from B. A wanted to enter the horse in a race. Turns out the horse
was not capable of running a race on account of being lame. But A did not inform B of his
intentions. So, B will not be responsible for the defects of the horse. The Doctrine of Caveat
Emptor will apply.
However, the buyer can shift the responsibility to the seller if the three following conditions
are fulfilled.
• if the buyer shares with the seller his purpose for the purchase
• the buyer relies on the knowledge and/or technical expertise of the seller
• and the seller sells such goods in the ordinary course of his business.
Exceptions to the doctrine of Caveat Emptor:

1. Fitness as to quality or use: Where the purpose for which the buyer is purchasing the
goods is made known to the seller and he relies on the seller’s skill and the goods are of
a description which is in the course of seller’s business, it is the duty of the seller to supply
such goods as are reasonably fit for that purpose.
Case Law: Priest vs. Last a hot water bottle was bought by the plaintiff, a draper, who
could not be expected to have special skill knowledge with regard to hot water bottles,
from a chemist, who sold such articles. While being used by the plaintiff’s wife, the
bottle bursted and injured her. Held, the seller was responsible for damages.
Bombay Burma Trading Corporation Ltd. Vs. Aga Muhammad, timber was purchased
for the express purpose of using it as railway sleepers and when it was found to be unfit
for the purpose, the court held that the contract could be avoided.

2. Good purchased under patent or brand name: In case the goods are purchased under
patent name or brand name, there is no implied condition that the goods shall be fit for
any particular purpose.
3. Goods sold by description: Where the goods are sold by description there is an implied
condition that the goods shall correspond with the description.
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller
who deals in goods of that description there is an implied condition that the goods shall
be of merchantable quality.
So, if the goods are not of marketable quality then the buyer will not be the one who is
responsible. It will be the seller’s responsibility. However, if the buyer has had a
reasonable chance to examine the product, then this exception will not apply.
5. Sale by Sample: The rule of Caveat Emptor does not apply if bulk does not correspond
with the sample, the buyer cannot be held responsible in this case it is the seller who will
be responsible
6. Goods by sample as well as description: Caveat Emptor is not applicable in case the goods
do not correspond with both the sample and description or either of the condition
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular

purpose may be annexed by the usage of trade and if the seller deviates from that, this
rule of Caveat Emptor is not applicable
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by
making some misrepresentation or fraud and the buyer relies on it or when the seller
actively conceals some defect in the goods so that the same could not be discovered by
the buyer on a reasonable examination, then the rule of Caveat Emptor will not apply.

UNIT 3 – TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS
Passing of property Delivery of goods Passing of risk
Section 19 – Property passes when intended to pass:

Property in goods is transferred to the buyer at such time as the parties to the contract intend to
be transferred.
For the purpose of ascertaining the intention of the parties regard shall be had to the terms of
the contract, the conduct of the parties and the circumstances of the case. [sub-section (2)]
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. [sub-section (3)]
Stages of goods while passing of property
Specific goods in a deliverable state
Specific goods to be put into a deliverable state
Specific goods in a deliverable state when seller

has to ascertain price.
Section 20 – Specific goods in a deliverable state

Where there is an unconditional contract for the sale of specific goods in deliverable state, the
property in goods passes to the buyer when the contract is made.
This rule holds true even if the time of payment of price or delivery of the goods or both is
postponed.

Example: Peter goes to an electronics store and buys a television set. He asks the shopkeeper
to deliver it to his house. The shopkeeper agrees. The television immediately becomes the
property of Peter.
Section 21 – Specific goods to be put in deliverable state

When the seller is bound to do something to put the goods in deliverable state, the property
does not pass until such thing is done and buyer has notice thereof.
In such cases, the passing of property happens only after the seller does the things and informs
the buyer.
Example: Peter buys a laptop from an electronics store and asks for a home delivery. The
shopkeeper agrees to it. However, the laptop does not have a Windows operating
system installed. The shopkeeper promises to install it and call Peter before making the
delivery. In this case, the property transfers to Peter only after the shopkeeper has installed
the OS making the laptop ready for delivery.
Section 22 – Specific goods in a deliverable state, when the seller has to do anything thereto in
order to ascertain price
When there is contract of sale of specific goods in a deliverable state but the seller is bound to
do something with reference to the goods for the purpose of ascertaining the price, the property
does not pass until such act or thing is done and the buyer has notice thereof.
Example: Prem sells a carpet to Jitesh and agrees to lay it in Jitesh’s house as a part of the
contract. He delivers the carpet and informs Jitesh that he will lay it the next day. That night
the carpet gets stolen from Jitesh’s premises. In this case, Jitesh is not liable for the loss since
the property had not passed to him. According to the terms of the contract, the carpet would
be in a deliverable state only after it is laid.
Goods must be ascertained

Where there is contract of sale of unascertained goods, the property in goods does not pass to
the buyer unless and until goods are ascertained.
The rules in respect of passing of property of unascertained goods are as follows:
1. Sale of unascertained goods by description [Section 23(1)]: In case of contract of sale of
unascertained/future goods by description and such goods are unconditionally
appropriated to the contract, either by seller with the assent of the buyer or vice versa,
the property in goods passes to the buyer.

2. Delivery to the carrier [Section 23(2)]: When the seller delivers the goods to the buyer or
to a carrier or other bailee for the purpose of transmission to the buyer and he does not
reserve the right of disposal, he is deemed to have unconditionally appropriated the
goods.
Goods sent on approval or “on sale or return” (Section 24)
When goods are delivered to the buyer on approval or “on sale or return” the property passes to
the buyer-
He signifies his Does not approve

approval to the but retains goods
seller or does any without notice of
act adopting the rejection
transaction
Does any act

which is
equivalent to
accepting goods
Example: A the seller of a precious necklace gives it to “B” the buyer on “Sale or return” basis.
B after observing the necklace finds it very beautiful and put forth his consent on buying the
necklace. In this case, the goods will be transferred to the buyer. However, if the buyer doesn’t
wish to give the acknowledgement for the product then the goods shall be duly returned back
to B.
Example: Sandeep brings a Tuxedo from his friends shop on sale or return basis and without
confirming his acceptance, he wears the tuxedo for his brother’s wedding. In this situation
Sandeep has done an act (i.e., using the tuxedo) which is equivalent to his acceptance. Sandeep
is now liable to pay his friend the price of the tuxedo.
Sale for cash only or Return

In case goods have been delivered “on sale or return” on the terms that the goods were to remain
the property of the seller till they are paid for, the property does not pass until the terms are
complied with(i.e.) cash is paid for.

Example: If Harry agrees to deliver the necklace to Tom under cash only or return basis and
Tom pledges the necklace with Charlie before paying cash for it, the pledge is deemed invalid
by law and Harry can recover the necklace from Charlie.
Reservation of right of disposal (Section 25)

In certain cases, the seller may reserve the right of disposal of goods until certain conditions are
fulfilled, in such case irrespective of delivery of goods to a buyer the property in goods does not
pass to the buyer until conditions imposed by seller are fulfilled.
Example: Peter sends furniture to John’s company by a truck. He instructs the driver not to
deliver the furniture until he confirms receipt of payment from the company. The truck reaches
John’s company and the furniture is unloaded. However, the property passes to
the company only upon receipt of the payment.
Where goods are shipped, or delivered to a railway administration for carriage by railway and by
the bill of lading or railway receipts, as the case may be, the goods are deliverable to the order
of the seller or his agent, the seller is prima facie deemed to reserve the right of disposal.
A seller can draw on the buyer for the price and transmit a bill of exchange along with the bill of
lading/ railway receipt, to secure acceptance or payment of the bill of exchange. If the buyer does
not honor the bill of exchange, then he is liable to return the bill of lading/ railway receipt. Even
if he wrongfully retains it, the property in the goods does not pass to him.
Circumstances in which right to disposal may be reserved:
When goods are shipped or delivered for carriage and by bill of lading or railway receipt, the
goods are deliverable to the order of the seller or his agent.
When he draws a bill on the buyer for the price and sends it with the bill of lading to secure
acceptance or payment, the buyer must return the bill of lading, if he does not accept or pay
the bill.
Risk Prima Facie passes with property (Section 26)

The goods remain at the seller’s risk until the property is transferred to the buyer, when the
property is transferred to the buyer the goods are at the buyer’s risk.
When there is delay in delivery of goods because of fault of buyer or seller, the goods are at the
risk of the party at fault as regards any loss.

Risk Follows Ownership
Regardless of the buyer or the seller bearing the risk, the duties and responsibilities of both of
them as a bailee of goods for the other party, remain unaffected.
Hence, we can say that under ordinary circumstances, the seller bears the risk until the property
is passed to the buyer which also passes the risk to him. The parties may, however, decide to pass
the risk before or after passing the property in the goods to the buyer.
Transfer of Title by Non-Owners (Section 27 - 30)

Sale by person not the owner (Section 27): The seller can sell only such goods of which he is the
absolute owner.
The sale of goods by a non-owner, without the consent of the owner, doesn’t lead to the passage
of good title; only the owner has the liberty to sell his own property. The goods sold to the buyer,
without the consent of the owner, by the third party who is not the owner of goods, doesn’t have
the authority to sell and can’t pass a better title.
The main purpose behind this is that there should be a rightful transfer of ownership and
possession from the seller to the buyer. This is based on a Latin principle Nemo dat quod non-
habet which means that no one can transfer a better title than what he already has. Only the
owner of goods can transfer a better title to the buyer.
“Nemo dat quod non habet” means No one can give what he has not got.
If the seller is not the owner of the goods then the buyer will also not become the owner; it
means the buyer shall get the same title as the seller of the goods.
Exceptions:
In the following cases even a non-owner can convey better title to the bona fide buyer of goods:
Sale by a Mercantile Agent: The sale by a mercantile agent would pass a good title if he was in
possession of the goods with consent of the owner, acting in ordinary course of business and
the buyer has acted in good faith.
Sale by one of the joint owners (Section 28): If any one of several joint owners has the
possession of the goods with the permission of the other co-owners, if a person buys these
goods in good faith and has not noticed that the seller has no authority to sell then the property
in goods is transferred to the buyer.

Sale by a person in possession under voidable contract (Section 29) : When a seller who has
obtained goods under a voidable contract sells the goods; the buyer will get a good title to the
goods he has bought provided that the contract has not been rescinded until the time of sale.
Sale by one who has already sold the goods but continues in possession thereof [Section 30(1)]:
When even after selling the goods the seller continues to be in possession of goods; he may sell
them to a third person and if such person obtains the delivery in good faith and without notice
of previous sale, he would get a good title to the goods.
Sale by buyer obtaining possession before the property in the goods has vested in him
[Section 30(2)]: Where the buyer obtains possession of the goods he may sell, pledge or
dispose the goods to a third person, and if such person obtains delivery in good faith and
without notice of the lien or other right of the original seller, he would get a good title to the
goods.
Effect of Estoppel: Where the owner is estopped by the conduct from denying the seller’s
authority to sell, the transferee will get a good title as against the true owner.
Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or stoppage
in transit resells the goods, the buyer acquires a good title to the goods as against the original
buyer
Sale under the provisions of other Acts: Sale by an Official Receiver or Liquidator of the
Company will give the purchaser a valid title.
Performance of contract of sale (Section 31 – 44)
Delivery [Section 2(2)]: It means voluntary transfer of possession from one person to another.
Duties of seller and buyer (Section 31): It is the duty of the seller to deliver the goods and of the
buyer to accept and pay for them, in accordance with the terms of the contract of sale.
Payment and delivery are concurrent conditions (Section 32): The seller shall be ready and
willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall
be ready and willing to pay the price in exchange for possession of the goods.

Rules regarding delivery of goods (Section 33 – 41)
The performance of contract of sale implies delivery of goods by the seller and acceptance of the
delivery of goods and payment of price for them by the buyer in accordance of the terms of the
contract.
If possession of goods is obtained by unfair means, there is no delivery of goods.
Duties of buyer and seller (Section 31): It is the duty of the seller to deliver the goods and of the
buyer to accept and pay for them, in accordance with the terms of the contract.
Payment and Delivery are concurrent conditions (Section 32): The delivery of goods and
payment of price are concurrent conditions (i.e) the seller shall be ready and willing to give
possession of the goods to the buyer in exchange for the price, and the buyer shall be willing to
pay the price in exchange for possession of goods.
1. Delivery (Section 33): The delivery of goods can be made either by putting the goods in
the possession of the buyer or any person authorized by him to hold them on his behalf
or by doing anything else that the parties agree to.
2. Effect of part delivery (Section 34): If a part-delivery of the goods is made in progress of
the delivery of the whole, then it has the same effect for the purpose of passing the
property in such goods as the delivery of the whole. However, a part-delivery with an
intention of severing it from the whole does not operate as a delivery of the remainder.
3. Buyer to apply for delivery (Section 35): A seller is not bound to deliver the goods until
the buyer applies for delivery unless the parties have agreed to other terms in
the contract.
4. Place of delivery [Section 36(1)]: When a sale contract is made, the parties might agree
to certain terms for delivery, express or implied. Depending on the agreement, the buyer
might take possession of the goods from the seller or the seller might send them to the
buyer.
If no such terms are specified in the contract, then as per law on sales
• The goods sold are delivered at the place at which they are at the time of the sale
• The goods to be sold are delivered at the place at which they are at the time of
the agreement to sell. However, if the goods are not in existence at such time,
then they are delivered to the place where they are manufactured or produced.
5. Time of Delivery [Section 36(2)]: Where under a contract of sale, the seller is bound to
send the goods to the buyer, but no time for sending them is fixed, the seller is bound to
send them within reasonable time.
6. Goods in possession of third party [Section 36(3)]: If at the time of sale, the goods are in
possession of a third party. Then there is no delivery unless the third party acknowledges

to the buyer that the goods are being held on his behalf. It is important to note that
nothing in this section shall affect the operation of the issue or transfer of any document
of title to the goods.
7. Time for tender of delivery [Section 36(4)]: It is important that the demand or tender of
delivery is made at a reasonable hour. If not, then it is rendered ineffectual. The
reasonable hour will depend on the case.
8. Expenses for delivery [Section 36(5)]: The seller will bear all expenses pertaining to
putting the goods in a deliverable state unless the parties agree to some other terms in
the contract.
9. Delivery of wrong quantity (Section 37):
• Sub-section 1 – If the seller delivers a lesser quantity of goods as compared to the

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

contracted quantity, then the buyer may accept the quantity included in the contract and
reject the rest. The buyer can also reject the entire delivery. If he wants to accept the
increased quantity, then he needs to pay at the contract rate.
• Sub-section 3 – If the seller delivers a mix of goods where some part of the goods are
mentioned in the contract and some are not, then the buyer may accept the goods which
are in accordance with the contract and reject the rest. He may also reject the entire
delivery.
• Sub-section 4 – The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
10. Instalment deliveries (Section 38): The buyer does not have to accept delivery in
installments unless he has agreed to do so in the contract. If such an agreement exists,
then the parties are required to determine the rights and liabilities and payments
themselves.
11. Delivery to carrier [Section 39(1)]: The delivery of goods to the carrier for transmission
to the buyer is prima facie deemed to be ‘delivery to the buyer’ unless contrary terms
exist in the contract.

12. Deterioration during transit (Section 40): If the goods are to be delivered at a distant
place, then the liability of deterioration incidental to the course of the transit lies with the
buyer even though the seller agrees to deliver at his own risk.
13. Buyer’s right to examine the goods (Section 41): The buyer has the right to ascertain that
the goods delivered to him are in conformity with the contract. The seller is bound to
honor the buyer’s request for a reasonable opportunity of examining the goods unless
the contrary is specified in the contract.
Rule related to Acceptance of Delivery of Goods (Section 42):

Acceptance is deemed to take place –
intimates to the seller that he had accepted the goods
does any act to the goods, which is inconsistent with the

ownership of the seller
retains the goods after the lapse of a reasonable time,

without intimating to the seller that he has rejected them
Buyer not bound to return rejected goods (Section 43):

Where goods are delivered to the buyer and he refuses to accept them, having the right so to do,
he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that
he refuses to accept them.
Liability of buyer for neglecting or refusing delivery of goods (Section 44):
When the seller is ready and willing to deliver the goods and requests the buyer to take delivery
and the buyer does not within reasonable time of such request take the delivery, he is liable for
any loss caused by his neglect or refusal to take delivery and also for reasonable charge for the
care and custody of the goods.

UNIT 4 – UNPAID SELLER
As per Section 45(1), the seller of goods is deemed to be unpaid seller when-
➢ When whole of the price has not been paid and the seller had an immediate right of action
for price.
➢ when a bill of exchange or other negotiable instrument has been received as conditional
payment, and the condition on which it was received has not been fulfilled
Rights of an Unpaid Seller
As per Section 46, the unpaid seller of the goods has the following rights:
a. Right to lien on the goods for the price when he is in possession of the goods
b. Stopping goods in transit
c. Right of re-sale
Rights of an unpaid seller against the goods
When property in When property in

goods has passed to goods does not pass
the buyer to the buyer
1. Seller’s Lien (Section 47)

The unpaid seller of goods who is in possession of them is entitled to retain possession of them
until payment in the following cases:
Goods sold without any Goods sold on credit but Buyer becomes
stipulation as to credit the credit term has insolvent
expired
The unpaid seller can exercise his rights of lien while he is in possession of the goods by acting as
an agent or bailee of the buyer. This is called possessory lien and can be exercised by the seller
as long as he is in possession of the goods.
As per Section 48, when an unpaid seller has made part delivery of the goods, he may exercise
right of lien on the remaining goods.

Termination of lien (Section 49): unpaid seller of goods loses his lien in the following cases:
Delivery of goods to carrier for By waiver Buyer or his agent lawfully

the purpose of transmission obtains possession
without reserving right of
By Estoppel
disposal
2. Right of stoppage in transit (Section 50 – 52)

When the buyer of the goods becomes insolvent, and the unpaid seller who has parted with
possession has the right of stopping them in transit. The right of stoppage in transit is lost when
transit comes to an end.
The Right of Stoppage in transit is exercised only when the following conditions are fulfilled:
• The seller must be Unpaid.

• He must have parted with the possession of goods.
• The goods are in Transit.
• The buyer has become insolvent.
T – Transit
I – Insolvent
P – Parted with possession
U – Unpaid Seller
Transit comes to an end in the following cases:
• When the buyer or other bailee obtains delivery.
• Buyer obtains delivery before the goods have arrived at the destination.
• When carrier or other bailee acknowledges to the buyer or his agent that he holds the
goods as soon as the goods as loaded on ship (if the seller has reserved the right of
disposal of goods then the transit will not come to an end in this case).
• The goods carrier wrongfully refuses to deliver the goods to the buyer.

• Goods delivered to carrier hired by the buyer.
• In case part delivery has been made to the buyer, transit will come to an end for the
remaining goods which are yet in the course of transmission.
• Goods delivered to ship chartered by the buyer.
Modes of stoppage in transit
By taking Giving notice

actual to the
possession carrier not
of goods to deliver
# Right of Lien Right of Stoppage in Transit

1 Retain Possession Regain Possession
2 Seller should be in possession of goods Seller should have parted with possession,
the carrier should have the possession and
the buyer should not have acquired the
possession
3 Can be exercised even when buyer is not Can be exercised only when the buyer is
insolvent insolvent
4 Right of stoppage in transit begins where The end of Right of Lien is the starting point
right of lien ends of the Right of stoppage in transit
Effects of sub-sale or pledge by buyer (Section 53):

The right of lien or stoppage in transit is not affected by the buyer selling or pledging the goods
unless the seller has assented to it.
The right of stoppage is defeated if the buyer has transferred the document of title or pledges
the goods to a sub-buyer in good faith and for consideration.

Effect of stoppage: The contract of sale is not rescinded when the seller exercises his right of
stoppage in transit, the contract still remains in force and the buyer can ask for delivery of goods
on payment of price.
Right of re-sale (Section 54): The unpaid seller can exercise the right to re-sell the goods under
the following conditions:
When goods are of perishable nature
When notice of intention to re-sell is given to the buyer
The seller can recover damages and retain the profits only when the goods are resold after giving
the notice of resale to the buyer.
In case no notice is given to the buyer before reselling the goods, the seller cannot recover the
loss on resale and above this he must return the profit on resale to the original buyer.
Where an unpaid seller who has exercised his right to lien or stoppage in transit, resells the goods;
the new buyer gets a good title to the goods as against the original buyer.
When the right to re-sale is expressly reserved in a contract of sale, the seller is not required to
give notice of resale to the original buyer.
The unpaid seller in addition to his remedies has a right to withhold the delivery of the goods. It
is similar to right of lien and is called “Quasi Lien”.
Rights of unpaid seller against the buyer (Section 55-61)

An unpaid seller can enforce certain rights against the goods as well as buyer personally. These
rights are known as seller’s remedies for breach of contract of sale.
The right against the buyer are as follows:
1. Suit for price (Section 55): When the seller has passes the property in goods to the buyer
and the buyer wrongfully neglects or refuses to pay for the goods, the seller may sue him
for the price of the goods.

When a particular day is ascertained for payment irrespective of delivery and the buyer
refuses to pay such price, then the seller may sue him for the price even if the property
in goods had not passed and the goods have not been appropriated.
2. Suit for damages for non-acceptance (Section 56): Where the buyer wrongfully neglects
or refuses to accept and pay for the goods, the seller may sue him for damages for non-
acceptance.
3. Repudiation of contract before due date(Section 60): Where the buyer repudiates the
contract before the date of delivery, the seller may treat the contract as rescinded and
sue damages for the breach.
4. Suit for interest (Section 61): Where there is specific agreement between the seller and
the buyer as to interest on the price of the goods from the date on which payment
becomes due, the seller may recover interest from the buyer.
However, in case there’s no specific agreement to this effect, the seller may charge
interest on the price when it becomes due from such day as he may notify to the buyer.
In absence of a contract to the contrary, the court may award interest to the seller in a
suit by him at such rate as it thinks fit on the amount of the price from the date of tender
of goods or from date on which price was payable.
Remedies of Buyer against the seller

Breach of contract by seller
Fails to deliver the goods at the time or in manner prescribed
Repudiates the contract
Deliver non-conforming goods and buyer rejects and revokes

acceptance

Rights of the buyer against the seller
Suit for
Damages for non- Suit for specific Suit for breach of
anticipatory
delivery performance warranty Suit for interest
breach
[Section 57] [Section 58] [Section 59]
[Section 60]
• Damages of Non-Delivery: If the seller wrongfully or neglectfully refuses to deliver the

goods to the buyer, then the buyer can sue for non-delivery of the goods. According to
Section 57 of the Sale of Goods Act, if the buyer faces losses due to the wrongful actions
of the seller (non-delivery) he can sue for damages caused due to this.
• Suit for Specific Performance: If the seller commits a breach of contract, the buyer can
approach the court to ask the seller for specific performance. The court after deliberation
can command the seller for specific performance. One important point to keep in mind is
that this remedy is only available if the goods are ascertained or specific.
• Suit for Breach of Warranty: When the seller breaches the warranty of the goods, the
buyer cannot simply reject the goods on such basis. The buyer has two options in such a
case,
o set up against the buyer the said breach of warranty in the extinction of the price
o or sue the seller for breach of warranty
• Repudiation of Contract: If the seller repudiates the contract, the buyer does not have
to wait until the date of the contract. He can treat the contract as rescinded and sue for
damages immediately. This will be an anticipatory breach of contract.
• Suit for Interest: The Act specifically states that nothing in the act will affect the right of
the seller or the buyer to recover interest or special damages due to him by the contract.
And if there is no specific clause in the contract, the court can come to the rescue of the
affected party.
Auction Sale (Section 64)

An ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is sold to
the highest bidder.

Rule of Auction sale:
a. Where goods are sold in lots: Where goods are put up for sale in lots, each lot is prima
facie deemed to be subject of a separate contract of sale.
b. Completion of the contract of sale: The sale is complete when the auctioneer announces
its completion by the fall of hammer or in any other customary manner and until such
announcement is made.
c. Right to bid may be reserved: Right to bid may be reserved expressly by or on behalf of
the seller and where such a right is expressly reserved.
d. Where the sale is not notified by the seller: Where the sale is not notified to be subject
to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself
or to employ any person to bid at such sale.
e. Reserved Price: The sale may be notified subject to a reserved price.
f. Pretended Bidding: If the seller makes use of pretended bidding to raise the price, the
sale is voidable at the option of the buyer.
Inclusion of increased or decreased taxes in contract of sale (Section 64A)

Following taxes are applied on the sale or purchase of goods:
• Any duty of customs or excise on goods

• Any tax on sale or purchase of goods
The buyer would have to pay the increased price where the tax increases and may derive the
benefit of reduction if taxes are curtailed. Thus, seller may add the increased taxes in the price.
The effect of provision can, however, is excluded by an agreement to the contrary. It is open to
the parties to stipulate anything regard to taxation.

The Indian Partnership Act, 1932
Unit 1 – GENERAL NATURE OF PARTNERSHIP
Introduction
The Act received assent of the Governor General on 8th April 1932 and it came into force on 1st
October 1932. This Act extends to whole of India.
Section 4 – Definition of Partnership, Partner, Firm and Firm Name
Partnership is a relation between persons who have agreed to share profits of a business carried
on by all or any of them acting for all.
Persons entering into partnership with one another are individually called as ‘partners’ and
collectively called ‘a firm’.
The name under which the business is carried on is called the ‘Firm name’.
Element of Partnership
It must be the
Association of two To carry on some
result of an
or more persons business
agreement
To share profits of Business carried

the business on by all or any of
them acting for all
1. Association of two or more persons: It is an association of 2 or more persons, only the

persons recognized by law can enter into an agreement of partnership. A firm cannot be
a partner as it is not recognized as a person in the eyes of law.
The limit on maximum number of partners is put by Section 464 of the Companies Act,
2013 (i.e.) 50 partners.

2. Agreement: There must be an agreement entered into by all persons concerned. The
nature of the partnership is voluntary and contractual. The agreement from which
relationship of partnership arises may be express. It may be oral or in writing.
3. Business: The term business includes every trade, occupation and profession. Two
propositions must be kept in mind, firstly there must exist a business and secondly the
motive of the business is acquisition of gains.
Existence Acquisition
of business of gains
4. Agreement to share profits: Sharing of profits is an essential feature of partnership. The

partners may agree to share the profits in any manner they choose. No partnership comes
into existence where only one partner is entitled to whole of the profits of the business.
Agreement to share losses is not an essential element. One or more partners may agree
to share all the losses. However, in event of losses if nothing has been specifically agreed
upon, the losses are to be share in the profit-sharing ratio.
5. Business carried on by all or any of them acting for all: The business must be carried on
by all the partners or by anyone acting on behalf of all. This is the Cardinal principle of
partnership law. A binding contract of mutual agency shall be present. If the element of
mutual agency is absent, then there will be no partnership.
Case Law: KD Kamath & Co.
The Supreme Court has held that two essential conditions to be satisfied are that:
(1) There should be an agreement to share the profits as well as the losses of
business and
(2) The business must be carried on by all or any of them acting for all.
The fact that exclusive power and control, by agreement of the parties, is vested in one
partner or the further circumstance that only one partner can operate bank account or
borrow on behalf of the firm are not destructive of the theory of partnership provided the
two essential conditions are satisfied.
The true test of partnership is mutual agency rather than sharing of profits. If the element
of mutual agency is absent, then there will be no partnership.

True test of partnership
Mode of determining existence of partnership (Section 6):
In determining whether a group of persons is or is not a firm, regard shall be had to the real
relation between the parties as shown by all relevant facts taken together.
For determining the existence of partnership, it must be proved that
1. There was an agreement between all the persons concerned
2. The agreement was to share the profits of the business and
3. The business was carried on by all or any of them acting for all.
Agreement: Partnership is created by agreement and not by status. The relation of partnership
arises from contract and not from status, members of Hindu Undivided Family carrying on a
family business as such are not partners in such business.
Sharing of profit: The sharing of profits or of gross returns arising from property by persons
holding a joint or common interest in that property does not itself make such persons partners.
The receipt by a person of a share of the profits of a business, or of a payment contingent upon
the earning of profits or varying with the profits earned by a business, does not of itself make
him a partner with the persons carrying on the business; and in particular, the receipt of such
share or payment-
(a) by a lender of money to persons engaged or about to engage in any business,
(b) by a servant or agent as remuneration,
(c) by a widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part owner of the business, as consideration for the sale of the
goodwill or share thereof, does not of itself make the receiver a partner with the persons
carrying on the business.
Although the right to participate in profits is a strong test of partnership, and there may be cases
where, upon a simple participation in profits, there is a partnership, yet whether the relation
does or does not exist must depend upon the whole contract between the parties.
According to Section 6, regard must be had to the real relation between the parties as shown by
all relevant facts taken together. The rule is easily stated and is clear but its application is difficult.
Cumulative effect of all relevant facts such as written or verbal agreement, real intention and
conduct of the parties, other surrounding circumstances etc., are to be considered while deciding
the relationship between the parties and ascertaining the existence of partnership.
Agency: Each partner carrying on the business is the principal as well as agent of the other
partners. The act of one partner done on behalf of the firm, binds all the partners. Existence of

Mutual Agency which is the cardinal principle of partnership law, is very much helpful in reaching
a conclusion in this regard. The act of one partner done on behalf of firm, binds all the partners.
If the elements of mutual agency relationship exist between the parties constituting a group
formed with a view to earn profits by running a business, a partnership may be deemed to exist .
Case Law: Santiranjan Das Gupta Vs. Dasyran Murzamull
In Santiranjan Das Gupta Vs. Dasyran Murzamull, following factors weighed upon the Supreme
Court to reach the conclusion that there is no partnership between the parties:
(a) Parties have not retained any record of terms and conditions of partnership.
(b) Partnership business has maintained no accounts of its own, which would be open to
inspection by both parties.
(c) No account of the partnership was opened with any bank.
(d) No written intimation was conveyed to the Deputy Director of Procurement with respect
to the newly created partnership.

Difference between partnership and other forms of organization
Partnership v. Joint Stock Company
# Partnership Joint Stock Company

1 It is not a separate legal entity Separate Legal entity (Salomon v.
Salomon)
2 Every partner is an agent of other partners as Member is not an agent of the other
well as firms. members of the company
3 Profit is distributed amongst the partners No compulsion to distribute its profits
among its members. Some portion of
profits become distributable among the
shareholders only when dividends are
declared
4 The liability of partners is unlimited The liability is limited to the extent of
unpaid amount on his shares
5 The property of the firm is joint property of The property is separate from its members
all the partners
6 Share in partnership cannot be transferred Transferring of shares is unrestricted in
without the consent of all the partners case the shares are listed on a stock
exchange in other cases it shall be subject
to the provisions contained in the Articles
7 Registration is not compulsory It comes into existence only after it is
registered
8 Can be dissolved at any time if all the It is either wound up by NCLT or its name
partners agree struck off by the Registrar of the
companies
9 As per the provisions of companies Act the In case of Pvt Co. the maximum number of
number of partners shall not exceed 100. members is 200 but should not be less
Whereas the rule given restrict the present than 2. In case of public company, the
limit to 50 minimum member shall not be less than 7.
10 Death, insolvency, or retirement of a partner A Company enjoys perpetual succession.
results in dissolution of the firm

Partnership v. Club
# Partnership Club
1 It is an association of persons formed for It is an association of persons formed with
earning profits from a business carried on by the objective of promoting some beneficial
all or any of them acting for all. purpose.
2 Persons forming partnership are called as Persons forming club are members and
partners and a partner is an agent of the they are not agent of the other members.
other partners
3 Partner has interest in the property of the Member has no interest in the property of
firm. club
4 Change in the partners of the firm affect its Change in membership of club does not
existence affect its existence
Partnership v. Hindu Undivided Family
# Partnership HUF
1 It is created by an agreement It is created by birth in the family
2 Death of partner leads to dissolution of Death of a member does not give rise to
partnership dissolution of the family business
3 All partners are equally entitled to take part The right of management of business vests
in partnership business in karta, the governing male or female
member of family
4 Every partner can by his act, bind the firm. The Karta or the manager has the authority
to contract
5 The liability of partner is unlimited. The liability of Karta is unlimited, the other
coparceners are liable only to the extent of
their share in the profits
6 Partner can bring suit against the firm for On separation of joint family, member is
accounts, provided he also seeks dissolution not entitled to ask for account of the family
of firm. business.
7 Partnership is governed by the Indian A Joint Hindu Family business is governed
Partnership Act, 1932 by the Hindu Law
8 Minor cannot become a partner, although A minor becomes the member of ancestral
he can be admitted to the benefits of the business by the incidence of birth.
partnership.
9 A firm gets dissolved by death or insolvency A Joint Hindu Family has the continuity till
of a partner it is divided. It is not affected by the death
of the member.
10 Number of members should not exceed 50. Members of HUF who carry on a business
may be unlimited in number.
11 In partnership each partner has a defined No coparceners have a definite share.
share.

Partnership v. Co-Ownership
# Partnership Co-ownership
1 It arises out of a contract It may arise either from agreement or by
operation of law
2 Partner is an agent of other partners Co-owner is not an agent of other co-
owners
3 There is community of interest that is profit Co-ownership does not necessarily involve
and losses must be shared sharing of profits and losses
4 Share in partnership is transferred only by the Co-owner may transfer his interest or
consent of other partners rights without consent of other co-owners
Partnership v. Association
# Partnership Association
1 It means setting up relation of agency They evolve out of social cause where
between two or more persons who have there is no necessary motive to earn and
entered into a business for gains. share profits
Kinds of Partnership
Kinds of Partnership
Based on duration Extent of the business
At Will Fixed Period Particular General
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 duration of the partnership
b. There is no provision made as to determination of the partnership
So, if there is an agreement between the partners about the duration or the
determination of the firm, this will not be a partnership at will.

A partnership at will may be dissolved by any partner by giving a notice in writing to all
other partners of his intention to dissolve the same.
2. Partnership for a fixed period: When the provision for the duration of the partnership is
made by the contract, the contract is called ‘Partnership for a fixed period’. After the
expiration of such duration, the partnership shall also end.
However, there may be cases when the partners continue their business even after the
expiration of duration. They continue to share profits and there is an element of mutual
agency. Then in such case, the partnership will now be a partnership at will.
3. Particular Partnership: A partnership can be formed for carrying on continuous business,

or it can be formed for one particular venture or undertaking. If the partnership is formed
only to carry out one business venture or to complete one undertaking such a partnership
is known as a particular partnership.
After the completion of the said venture or activity, the partnership will be dissolved.
However, the partners can come to an agreement to continue the said partnership. But
in the absence of this, the partnership ends when the task is complete.
In a particular partnership the liabilities of the partners is only limited to the defined
business undertaking. True or False?
Ans: This statement is True. In a limited liability, the partners are only liable for the
liabilities arising out of the particular business venture for which the partnership was
formed. Acts not relating to the said venture will not be liabilities of all the partners.
4. General Partnership: Where a partnership is constituted with respect to a business in

general, it is a general partnership.
Unlike a particular partnership in a general partnership the scope of business to be carried
out is not defined. So all partners will be liable for all the actions of the partnership.
Partnership Deed
No particular formalities are required for an agreement of partnership. It may be in writing
or formed verbally. The document in writing containing various terms and conditions as to
the relationship of the partners to each other is called the ‘Partnership Deed’. Where the
partnership comprises immovable property, the instrument of partnership comprises
immovable property, the instrument of partnership must be in writing, stamped and
registered under Registration Act.

Partnership deed may contain the following information:
Name Name of Nature and Date of Duration of

of firm all place of Commen- partnership
partners business -cement
Capital Profit Admission

Rate of Provision of
Contrib- sharing and
interest settlement
-ution ratio Retirement
of accounts
Provision Provision
for Salaries for
or expulsion
commission of partner
A few advantages of a partnership are as follows:

1. It controls and monitors the rights, responsibilities, and liabilities of partners.
2. Avoids dispute between partners.
3. Avoids confusion on profit and loss distribution among partners.
4. Individual partners responsibilities are mentioned clearly.

Types of Partners
Becomes partner by
agreement
Active or
Ostensible
Actively participates
in conduct of
partnership
Partner by
Agreement
Sleeping or
Dormant
Partner
Does not actively
take part in conduct
of business
Lends his name without having

any real interest in the firm
Nominal
Partner
Not entitled to share profits, does
not take part in conduct of business
Liable to third parties

for all acts of the firm
Entitled to share profits only,

not liable for losses
Partner
in profits
only Liable to third parties for all
the acts of profits only

Incoming Partner: Partner admitted to already existing firm with
consent of all existing partners
Outgoing Partner: Partner leaving the firm in which rest of the

partners continue to carry on business is retiring or outgoing partner
When person represents himself or

knowingly permits himself
Partner by
holding
out To be represented as a partner in a firm,
he is liable like a partner in the firm
To anyone who on the faith of such

representation has given credit to the firm
Partner by holding out (Section 28): Partnership by holding out is also known as partnership by
estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then stopped
from denying the character assumed and upon the faith of which creditors may be presumed to
have acted.
A person may himself, by his words or conduct have induced others to believe that he is a partner
or he may have allowed others to represent him as a partner.
It is only the person to whom representation has been made and who has acted upon it has the
right to enforce liability arising out of ‘holding out’.
This section is also applicable to a former partner who has retired from the firm without giving
proper public notice of his retirement.

UNIT 2 – RELATIONS OF PARTNERS
Partners can determine their mutual rights and duties by a contract called partnership deed,
which determines aspects of general administration, such as which partner will do what work,
what will be their share in profits, etc. It may be varied by express or implied consent of all the
partners.
Such deed can be expressly made or implied by a course of dealing. For example, if one partner
checks accounts of the firm daily and others do not object, his conduct will be presumed to be a
right of all partners in the absence of a written partnership deed between them. So, they can
themselves determine the rights of partners.
Relation of partners to one another

1. General Duties of Partners (Section 9): Partners are bound to carry on the business of
the firm to the greatest common advantage, to be just and faithful to each other and to
render true accounts and full information of all things affecting the firm to any partner
or his legal representative. A partner must observe utmost good faith in his dealings with
the other partners.
2. Duty to indemnify for loss caused by fraud (Section 10): Partner committing fraud in the
conduct of the business of the firm must make good the loss sustained by the firm by his
misconduct and the amount so brought in partnership should be divided between
partners.
An act of a partner imputable to the firm or the principles of agency, which is a fraud on
his co-partners, entitles the co-partners as between themselves, to throw the whole of
the consequences upon him.
3. Determination of rights and duties of partners by contract between the partners

(Section 11): The rights and duties of the partners may be determined by contract
between the partners. Such contract may be varied by consent of all the partners.
The contract of partnership may provide that a partner shall not carry on any business
other than that of the firm while he is a partner.
4. The Conduct of the business (Section 12):
Right to take part in conduct of the business [Section 12(a)]: Every partner has the right
to take part in the business of the firm. This is because partnership business is a business
of the partners and their management powers are generally co-extensive.

Each partner has an equal right to take part in the conduct of their business. Partners can
curtail this right to allow only some of them to contribute to the functioning of the
business if the partnership deed states so.
Right to be consulted [Section 12(c)]: Another one of the rights of partners is their right
to freely express their opinion. Partners, by a majority, can determine differences with
respect to ordinary matters connected with the business. Each partner can express his
opinion to decide such matters. In case of routine matters of business is shall be
determined by majority and in case of change in nature of business consent of all partners
is required.
Right to access to books [Section 12(d)]: Every partner is entitled to have access to any
of the books of the firm and to inspect or take out a copy thereof. This right is applicable
equally to active and dormant partners.
Right of legal heirs/representatives/ their duly authorized agents [Section 12(e)]: In the
event of death of a partner, his heirs or legal representatives or their duly authorized
agents shall have a right of access to and to inspect and copy of any books of the firm.
5. Mutual rights and liabilities (Section 13): Subject to contract between the partners:
(a) A partner is not entitled to receive remuneration for taking part in conduct of business
(b) The partners are entitled to share equally in the profits earned, and shall contribute
equally to the losses sustained by the firm
(c) Where a partner is entitled to interest on the capital subscribed by him such interest
shall be payable only out of profits
(d) A partner making, for the purposes of the business any payment or advance beyond
the amount of capital he has agreed to subscribe, is entitled to interest thereon at the
rate of 6% per annum
(e) The firm shall indemnify a partner in respect of payments made and liabilities incurred
by him-
(i) In the ordinary and proper conduct of business, and
(ii) In doing such act, in an emergency, for the purposes of protecting the firm
from loss, as would be done by a person of ordinary prudence, in his own case
under similar circumstances
(f) A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the
conduct of business of the firm.

Right to remuneration [Section 13(a)]: No partner is entitled to receive any remuneration
in addition to his share in the profits of the firm for taking part in the business. However,
the rule can be varied by an express agreement, or by a course of dealings, in which event
the partner will be entitled to remuneration.
Right to share profits [Section 13(b)]: Partners are entitled to share equally the profits
earned and so contribute equally to the losses sustained by the firm. There is no
connection between the proportion in which the partners shall share the profits and the
proportion in which they have contributed towards capital of the firm.
Interest on Capital [Section 13(c)]: The partner is entitled to interest on money brought
by him in the partnership business if there is an express agreement to that effect or any
trade custom to that effect or a statutory provision which entitles him to such interest.
Interest on advances [Section 13(d)]: In case where a partner gives an advance to the
firm in addition to the amount of capital contributed by him, the partner is entitled to
claim interest @6% per annum. The interest on advances keep running even after
dissolution upto the date of payment.
Right to be indemnified [Section 13(e)]: Every partner has the right to be indemnified by
the firm in respect of payments made and liabilities incurred by him in the ordinary and
proper conduct of the business as well as in performance of an act.
Right to indemnify the firm [Section 13(f)]: A partner must indemnify the firm for any
loss caused to it by willful neglect in the conduct of the business of the firm.
Partnership Property (Section 14)

1. The property of the firm: The expression ‘property of the rm’, also referred to as
‘partnership property’, ‘partnership assets’, ‘joint stock’, ‘common stock’ or ‘joint
estate’, denotes all property, rights and interests to which the firm, that is, all partners
collectively, may be entitled. The property which is deemed as belonging to the firm,
comprises of the following items:
(i) All property, rights and interests which partners may have brought into the
common stock as their contribution to the common business
(ii) All the property, rights and interests acquired or purchased by or for the firm, or
for the purposes and in the course of the business of the firm; and
(iii) Goodwill of the business

Goodwill may be defined as the value of the reputation of a business house in respect of profits
expected in future over and above the normal level of profits earned by undertaking belonging
to the same class of business.
Where the property is exclusively belonging to a person, it does not become a property of the
partnership merely because it is used for the business of the partnership, such property will
become property of the partnership if there is an agreement.
2. Application of the property of the firm (Section 15): The property of the firm shall be held and
used exclusively for the purpose of the firm.
Personal profit earned by partners (Section 16)

Where a partner derives any profit for himself from any transaction of the firm or from the use
of the property or business connection of the firm or firm name, he must account for that profit
and pay it to the firm.
Where a partner carries on a competing business, he must account for and pay to the firm all
profits made by him in that business.
Example: Danny, Sameer and Richie stated a partnership business of manufacturing

readymade garments. Danny establishes a similar business in the name of his wife Sheela and
induced the customers of firm to purchase garments from his wife, in this situation the profit
earned by Danny in the similar business shall be paid to the firm.
Rights and duties of partner after a change in the firm (Section 17)
Following are the situations when there is a change in the constitution of the firm:
Admission Death or Partnership carries Fixed period partnership

of a partner retirement of a on business other carried on even after
partner than original one expiry of fixed period
According to Section 17, subject to the contract between the partners-

a) When change occurs in the constitution of a firm, the mutual rights and duties of the
partners in the reconstituted firm remain the same as they were immediately before the
change
b) Where a firm constituted for a fixed period continues to carry on business after expiry of
that term, the mutual rights and duties of the partners remain the same as they were
before the expiry.

c) Where a firm constituted to carry out one or more adventures or undertakings carries out
other adventures or undertakings are the same as those in respect of the original
adventures or undertakings.
Relation of partners to third parties

1. Partner to be agent of the firm (Section 18): A partner is the agent of the firm for the
purpose of the business of the firm. The rule that a partner is the agent of the firm for the
purpose of the business of the firm cannot be applied to all transactions and dealings
between the partners themselves. It is applicable only to the act done by partners for the
purpose of the business of the firm.
2. Implied authority of partner as agent of the firm (Section 19): The authority of a partner
to bind the firm conferred by this section is called his “implied authority”. The implied
authority of a partner does not empower him to-
Submit dispute Open bank account of compromise or relinquish
to arbitration firm in his own name any claim or portion
withdraw a suit or admit any liability in a acquire immovable

proceedings filed suit or proceedings property on behalf of firm
transfer immovable enter into partnership

property on behalf of the firm
Mode of doing act to bind firm (Section 22): The act of a partner which is done to carry
on, in the usual way, business of the kind carried on by the firm binds the firm, provided
that the act is done in the firm name, or any manner expressing or implying an intention
to bind the firm.
3. Extension and restriction of partner’s implied authority (Section 20): The partners in a
firm may, by contract between the partners, extend or restrict implied authority of any
partners.
Under the following circumstances the restrictions imposed on the implied authority of
partner by agreement shall be effective against a third party:
a. The third party knows about the restrictions, and
b. The third party does not know that he is dealing with a partner in a firm
Example: Suchit, a partner in a partnership firm borrows Rs. 50,000 from Govind, in
name of the firm but in excess of his authority and utilizes the amount in paying off the
debts of the firm. Borrowing money for business purpose is within the implied authority

of A, however a restriction has been put on A’s implied authority by an express
agreement between him and the other partners.
If Govind, the lender is unaware of the restrictions imposed on Suchit, the firm will be
liable to repay the money to him.
On the contrary, if Govind was aware of the restriction, the firm would not be liable to
repay the amount to him.
The extension or restriction of implied authority is only possible with the consent of all
the partners. Any one partner or majority of partners, cannot restrict or extend the
implied authority
4. Partners Authority in an emergency (Section 21): A partner has authority, in an

emergency, to do all such acts for the purpose of protecting the firm from loss as would
be done by a person of ordinary prudence, in his own case, acting under similar
circumstances, and such acts bind the firm.
Effect of Admissions by a partner (Section 23)

An admission or representation made by a partner concerning the affairs of the firm is evidence
against the firm, if it is made in the ordinary course of business. Such admissions made by partner
will bind the firm.
However, if the admission is made by a person before he became the partner of a firm, then it
cannot be considered to be evidence against the firm.
Effect of notice to acting partner (Section 24)

Notice to a partner who habitually acts in the business of the firm of any matter relating to the
affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm
committed by or with the consent of that partner.
The partner to whom such notice is given must be acting in the business at that time. A notice to
dormant or sleeping partner would not operate as notice to the firm.
Consider a situation where the firm has appointed a person to manage its work and the person
does that. What will happen if a notice is sent to such a person?
An acting partner is a person 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. If a notice is sent to such a person, it will
be considered as a notice sent to a firm.

Liability to third parties (Section 25 to 27)
1. Liability of a partner for acts of the firm (Section 25): 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.
The partners are jointly and severally liable to third parties for all acts which come under
the scope of their express or implied authority.
2. Liability of the firm for wrongful acts of a partner (Section 26): The firm is liable to the
same extent as the partner for any loss or injury caused to a third party by the wrongful
acts of a partner, if they are done by the partner while acting in ordinary course of
business and with the authority of partners.
3. Liability of firm for misapplication by partners (Section 27): Where-

(a) A partner acting within his apparent authority receives money or property from a third
party and misapplies it, or
(b) A firm in the course of its business receives money or property from a third party, and
the money or property is misapplied by any of the partners while it is in the custody
of the firm, the firm is liable to make good loss.
Clause (a) covers the case where a partner acts within his authority and receives money
or property belonging to a third party and misapplies that money or property. It is not
necessary that the money should actually come into the custody of the firm.
The provision on clause (b) would be attracted when such money or property has come
into the custody of the firm and it is misapplied by any of the partners.
The firm would be liable in both the cases.
If the partner receives money beyond authority, his receipt cannot be regarded as
receipt of the firm and the other partners will not be liable, unless the money received
comes into their possession or control.
Rights of transferee of a partner’s interest (Section 29)

A share in a partnership is transferable like any other property, but as the partnership
relationship is based on mutual confidence, the assignee of a partner’s interest by sale, mortgage
or otherwise cannot enjoy the same rights and privileges as the original partner.

Following are the rights of the transferee:
cannot interfere in the receive share of

conduct of business assets of the firm
On Dissolution
During the
of firm or
continuance of
retirement of
business
transferor
for entitled to
cannot ask for cannot inspect ascertaining accounts of
accounts books of firm the share the firm
The transferee is only entitled to receive the share of

the profits of the transferring partner, and he is bound
to accept the profits agreed by the partners
Minors admitted to the benefits of partnership (Section 30)

A minor cannot become a partner in a firm because partnership is founded on a contract, he can
be validly given a share in the partnership profits When this has been done and it can be done
with the consent of all the partners then the rights and liabilities of such a partner will be
governed under Section 30 as follows:
Rights:
➢ Right to his agreed share of the profits
➢ Have access to, inspect and copy the accounts of the firm
➢ He can sue the partners for accounts or for payment of his share but only when severing
his connection with the firm, and not otherwise.
➢ On attaining majority he may within 6 months elect to become a partner or not to
become a partner. If he elects to become a partner, then he is entitled to the share to
which he was entitled as a minor. If he does not, then his share is not liable for any acts
of the firm after the date of the public notice served to that effect.
Liabilities:
Before attaining majority:
• confined only to the extent of his share in the profits and the property of the firm
• no personal liability for the debts of the firm incurred during his minority
• cannot be declared insolvent
After attaining majority:

➢ On attaining majority, he may within 6 months elect to become a partner or not to
become a partner. If he elects to become a partner, then he is entitled to the share to
which he was entitled as a minor. If he does not, then his share is not liable for any acts
of the firm after the date of the public notice served to that effect.
When he becomes partner: If the minor becomes a partner on his own willingness or by his
failure to give public notice within specified time, his rights and liabilities are as follows:
(i) He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(ii) His share in the property and the profits of the firm remains the same to which he was
entitled as a minor
When he elects not to become a partner:
(i) His rights and liabilities continue to be those of a minor up to the date of giving public
notice.
(ii) His share shall not be liable for any acts of the firm done after the date of the notice.
(iii) He shall be entitled to sue the partners for his share of the property and profits. The
minor shall give notice to registrar that he has or has not become a partner.
Legal consequences of partner coming in and coming out (Section 31-35)

Any change in the relation of partners will result in the reconstitution of the firm. Therefore, on
admission of a partner, retirement of a partner, expulsion of a partner, insolvency of partner, etc
a firm will be reconstituted.
1. Introduction of a partner (Section 31): No new partners can be introduced in a firm
without the consent of all existing partners. The new partner will ordinarily be liable for
the obligations commencing from the date he is admitted as a partner.
The new partner may agree to be liable for obligations already existing prior to the date
of him being admitted as a partner. The creditor’s consent is necessary to make the new
partner liable for the debts of the firm, mere agreement between the existing partners
and new partner making him liable for existing debts of the firm will not give the creditors
any right against him.
2. Retirement of a partner (Section 32): A partner is said to retire when he ceases to be a

member of the firm without bringing to an end the subsisting relations between the other
members, or between the firm and third parties.
The retiring partner will continue to remain liable for all the acts of the firm done till the
time he was a partner. He may be discharged from any liability to any third party, for acts

of the firm done before his retirement by an agreement made by him with such third
party and the partners of the reconstituted firm.
The retiring partner will continue to remain liable for all acts of the firm, until public
notice of his retirement is given.
A partner may retire where the partnership is at will by giving a notice in writing to all the
other partners of his intention to retire.
Case Law: Vishnu Chandra Vs. Chandrika Prasad
The Supreme Court held that the expression ‘if any partner wants to dissociate from
partnership business’, in a clause of the partnership deed which was being construed,
comprehends a situation where partner wants to retire from the partnership. The
expression clearly indicated that in the event of retirement, the partnership business
will not come to an end.
3. Expulsion of a partner (Section 33): The power of expulsion must have existed in a
contract between the partners, the power has been exercised by a majority of the
partners and has exercised in good faith.
Expulsion is not deemed to be in bonafide interest of the business of the firm, if all the
following conditions are not satisfied:
(i) Power of expulsion must exist in the contract
(ii) Exercised by majority of partners
(iii) Exercised in good faith
The test of good faith includes three things:
Expulsion must be in
interest of the partnership
The partner to be expelled is

served with a notice
Given an opportunity of being

heard

The expulsion of partner does not necessarily result in dissolution of the firm.
4. Insolvency of a partner (Section 34): When a partner in a firm is adjudicated an insolvent,

he ceases to be a partner on the date of the order of adjudication whether or not the rm
is thereby dissolved.
Insolvent partner cannot be continued as partner
Effects of Ceased to be a partner from the date on which the adjudication is made
Insolvency
His estate will not be liable for the acts of the firm done after date of
order of adjudication
Firm is not liable for any act of the insolvent partner after
the date of the order of adjudication
The insolvency of a partner results in dissolution of a firm; partners are competent to agree among
themselves that the adjudication of a partner as an insolvent will not give rise to dissolution of the firm
5. Liability of estate of deceased partner (Section 35): Where under a contract between the
partners, the firm is not dissolved by the death of a partner, the estate of a deceased
partner is not liable for any act of the firm done after his death.
Ordinarily death of a partner leads to dissolution of firm, but the rule regarding dissolution
of partnership by death of a partner is subject to contract between partners. Partners are
competent to agree that the death of a partner will not have an effect of dissolving the
firm.
It is not necessary to give any public notice either to public or to the persons dealing with
the firm, to absolve the estate of the deceased partner from liability for future obligations
of the firm.
Rights of outgoing partner to carry on competing business (Section 36)

An outgoing partner may carry on the business competing with that of the firm and he may
advertise such business, he may not use the firm name, 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.

A partner may make an agreement with his partner that on ceasing to be a partner he will not
carry on any business similar to that of the firm, such agreement shall be valid if the restrictions
imposed are reasonable.
Right of outgoing partner in certain cases to share subsequent profits (Section 37)
Section 37 deals with rights of outgoing partners. It lays down a substantial law relating to a
liability of the surviving or continuing partner, who without a settlement of accounts with legal
representatives of the deceased partner utilizes the assets of partnership for continuing the
business.
Where any person ceases to be a partner because of his death or retirement, and the other
partners continue the business of the firm without final settlement of accounts, in such a
situation the outgoing partner or his representatives are entitled to either
(i) Share in the profits of the firm made since he ceased to be a partner as attributable
to the use of his share of property of the firm, or
(ii) Interest at the rate of 6% per annum on the amount of his share in the property of
the firm
Revocation of continuing guarantee by change in firm (Section 38)

Mere changes in the constitution of the firm operates to revoke the guarantee as to all future
transactions. Such change may occur by the death, or retirement of a partner, or by introduction
of a new partner.

UNIT 3 – REGISTRATION AND DISSOLUTION OF FIRM
Registration of firm
Application for registration (Section 58): The registration of a partnership is optional and one
partner cannot compel another partner to join in the registration of the firm. It is not essential
that the firm should be registered from the very beginning. When the partners decide to get the
firm registered as per the provisions of Section 58 of the Indian Partnership Act, 1932, they have
to file the statement in the prescribed form and prescribed fee, stating-
Firm’s Name Duration of firm
Place or Principal place of Date when each partner

business joined
Other places where the Names in full and permanent

firm carries on business addresses of partners
Registration (Section 59): When the Registrar is satisfied that the provisions of Section 58 have
been duly complied with, he shall record an entry of the statement in a Register called the
Register of Firms and shall file the statement. Then he shall issue a Certificate of Registration.
registration is deemed to be completed as soon as an application in the prescribed form with the
prescribed fee and necessary details concerning the particulars of partnership is delivered to the
Registrar.
The firm when registered shall use the bracket and word (Registered) immediately after its name.
Late Registration on payment of penalty (Section 59A-1): If the statement in respect of any firm
is not sent or delivered to the Registrar within the time specified in Section 58(1A), then the firm
may be registered on payment, to the Registrar, of a penalty of one hundred rupees per year of
delay or part thereof.
Section 58(1A): The statement in prescribed from for the purpose of registration of firm shall
be sent or delivered to the Registrar within a period of one year from the date of constitution
of the firm.
Note: It is not mandatory for the firm to get registered. A firm may get registered at any time,
in case the firm is not registered within a period of one year from the date of its constitution,
then at the time of registration a penalty of Rs. 100 per year or part thereof has to be paid for
the delay.

Consequences of Non-Registration (Section 69)
Under English Law, registration of firm is compulsory. The Indian Partnership Act does not make
the registration of firms compulsory nor does it impose any penalty for non-registration.
However, u/s 69 non-registration of partnership gives rise to a number of disabilities. The
disabilities are as follows:
a. No suit in a civil court by firm or other co-partners against third party: The firm or any
other person cannot bring an action against the third party for breach of contract, unless
the firm is registered and persons suing are or have been shown in the register of firms
as partners in the firm. In simple words, only a registered firm can file suit against a third
party.
b. No relief to partners to set-off of claim: If an action is brought against the firm by a third
party, then neither firm nor the partner can claim any set-off, if the suit be valued for
more than Rs. 100 or pursue other proceedings to enforce the rights arising from any
contract.
c. Aggrieved partner cannot bring legal action against other partner or the firm: A partner
of an unregistered firm cannot bring any legal action against the firm or any other partner.
Nevertheless, he may sue for dissolution of the firm or for accounts and realization of his
share in the firm’s property where the firm is dissolved.
d. Third party can sue firm: Even if the firm is unregistered, a third party may bring an action
against the firm.
Exceptions:
1. Right of third parties to sue the firm or any partner
2. Right of partners to sue for the dissolution of firm or for the settlement of accounts of a
dissolved firm or for realization of the property of a dissolved firm
3. Power of an Official Assignees, Receiver of court to release the property of the insolvent
partner and to bring an action
4. Right to sue or claim a set-off if the value of suit does not exceed Rs. 100 in value.
5. Right to suit and proceeding instituted by legal representatives or heirs of the deceased
partner of a firm for accounts of the firm or to realise the property of the firm.

Dissolution of Firm (Section 39-47)
As per Section 39, the dissolution of partnership between all the partners of a firm is called the
‘Dissolution of the firm.’
When a particular partner goes out, but the remaining partners carry on the business of the firm
it is called dissolution of the partnership.
Dissolution of Firm Vs. Dissolution of Partnership
# Dissolution of Firm Dissolution of Partnership

1 Discontinuation of business in partnership. Does not affect continuation of business.
2 It involves winding up of the firm and requires It involves only reconstitution and requires
realization of assets and settlement of only revaluation of assets and liabilities of
liabilities the firm.
3 A firm may be dissolved by the order of the Dissolution of partnership is not ordered
court. by the court.
4 It necessarily involves dissolution of It may or may not involve dissolution of -
partnership. firm.
5 It involves final closure of books of the firm. It does not involve final closure of the
books
Modes of Dissolution of a firm (Section 40-44)

The dissolution of partnership firm may be in any of the following ways:
1. Dissolution without the order of the court or Voluntary Dissolution:
a. Dissolution by agreement (Section 40): A firm may be dissolved with the consent of
all the partners or in accordance with a contract between the partners.
b. Compulsory Dissolution (Section 41): A firm is compulsorily dissolved
• By the happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry it on in partnership; or
• By adjudication of all the partners or of all the partners but one as insolvent
c. Dissolution on happening of certain contingencies (Section 42): Subject to contract

between the partners, a firm can be dissolved on the happening of any of the
following contingencies:
• where the firm is constituted for a fixed term, on the expiry of that term
• where the firm is constituted to carry out one or more adventures or
undertaking, then by completion thereof

• by the death of a partner
• by the adjudication of a partner as an insolvent.
d. Dissolution by notice of partnership at will (Section 43): Where the partnership is at

will, the firm may be dissolved by any partner giving notice in writing to all the other
partners of his intention to dissolve the firm.
The firm is dissolved from the date mentioned in the notice as date of dissolution, in
case no date is mentioned, then the date of communication of notice will be the date
of dissolution.
2. Dissolution by the court (Section 44): Court may, at the suit of the partner, dissolve a firm
on any of the following ground:
➢ Insanity/Unsound Mind: When a partner other than a sleeping partner has become of
unsound mind, other partners or next friend of insane partner may file a suit to dissolve
the firm. The courts may dissolve the firm on the basis of such suit.
➢ Permanent incapacity: When a partner, other than the partner filing the suit, has become
permanently incapable of performing his duties as a partner, then the court may dissolve
the firm.
➢ Misconduct: Where a partner, other than the partner filing the suit, is guilty of conduct
which unreasonably affects the business of the firm, the courts may order dissolution of
the firm, giving regard to the nature of the business.
➢ Persistent breach of agreement: When a partner wilfully or continuously commits breach

of agreements relating to the management of the affairs of the firm or conduct of the
business, then the courts may dissolve the firm at the instance of any of the partners.
Following comes into the category of breach of contract:
o Embezzlement
o Keeping erroneous accounts
o Holding more cash than allowed
o Refusal to show accounts despite repeated requests.
➢ Transfer of interest: Where a partner has transferred whole of his interest to a third party
or has allowed his share to be charged or sold by the court for recovery of arrears of land
revenue due by him, the courts may dissolve the firm at the instance of any other partner.

➢ Continuous/Perpetual losses: Where the business of the firm cannot be carried on except
at a loss in future also, the court may order its dissolution.
➢ Just and Equitable grounds: Where the court considers any other ground just and
equitable for dissolution of the firm, it may dissolve the firm. The following are the cases
of just and equitable grounds:
o Deadlock in the management
o Partners not in talking terms
o Loss of substratum
o Gambling by a partner on stock exchange
Dissolution of Firm
Without the order of the By order of the court

court [Section 40-43] (Section 44)
Insanity Misconduct Permanent Persistent Transfer Continuous

Incapacity breach of of Loss
agreement interest
Just and Equitable

grounds
By Mutual Compulsory Happening of By Notice

Agreement Dissolution certain event
Consequences of Dissolution [Section 45-55]

Consequent to the dissolution of a partnership firm, the partner have certain rights and liabilities,
as follows:
a. Liability of acts of partners done after dissolution (Section 45): the dissolution of a firm,
the partners continue to be liable as such to third parties for any act done by any of them

which would have been an act of the firm if done before the dissolution, until public notice
is given of the dissolution.
However, there are exceptions to this provision(i.e.), even when no notice of dissolution
has been given, there will be no liability for subsequent acts in case of :
• The estate of deceased partner
• An insolvent partner
• A dormant partner
b. Right of partners to have business wound up after dissolution (Section 46): On the
dissolution of a firm every partner or his representative is entitled, as against all the other
partners or their representative, to have the property of the firm applied in payment of
the debts and liabilities of the firm, and to have the surplus distributed among the
partners or their representatives according to their rights.
c. Continuing authority of partners for purposes of winding up (Section 47): After the
dissolution of a firm the authority of each partner to bind the firm, and the other mutual
rights and obligations of the partners, continue notwithstanding the dissolution, so far as
may be necessary to wind up the affairs of the firm and to complete transactions begun
but unfinished at the time of the dissolution, but not otherwise.
d. Settlement of partnership accounts (Section 48): Accounts between the partners shall
be settled in the manner prescribed by partnership agreement. Partners, by their
agreement, express any different intention as to the mode in which losses will have to be
borne eventually or the manner in which capital or advances will have to be paid to any
partner, such an intention must be given effect to. However, any such agreement cannot
affect the rights of the creditors of the firm.
In settling the accounts of the firm, the following rules shall be observed:
(i) Losses, including deficiency in capital, shall be first paid out of profits, next out of
capital and lastly, if necessary, by the partners individually in the proportions in
which they were entitled to share profits
(ii) The assets of the firm, including any sums contributed by partners to make up
deficiencies of capital, must be applied in the following manner and order:
a. In paying debts due to third parties
b. Paying partner what is due to him from capital
c. Paying partner what is due to him on account of capital

d. The residue, if any, shall be divided among the partner in proportion in which
they are entitled to share profits (Profit Sharing Ratio).
e. Payment of firm debts and of separate debts (Section 49): Where there are joint debts
due from the firm and also separate debts due from any partner:
(i) The property of the firm shall be applied in the first instance in payment of the
debts of the firm, and if there is any surplus, then the share of each partner shall
be applied to the payment of his separate debts or paid to him
(ii) The separate property of any partner shall be applied first in the payment of his
separate debts and surplus, if any, in the payment of debts of the firm.
Mode of giving Public Notice (Section 72)

A public notice under this Act is given-
a. Where it relates to the retirement or expulsion of a partner from a registered firm, or to
the dissolution of a registered firm, or to the election to become or not to become a
partner in a registered firm by a person attainting majority who was admitted as a minor
to the benefits of partnership, by notice to the Registrar of Firms.
b. In any other case, by publication in the Official Gazette and in at least one vernacular
newspaper circulating in the district where the firm to which it relates has its place or
principal place of business.

The Limited Liability Partnership Act, 2008
Introduction
The Ministry of Law and Justice on 9th January 2007 notified the Limited Liability Partnership
Act, 2008.
The Parliament passed the Limited Liability Partnership Bill on 12th December 2008 and the
President of India has assented the Bill on 7th January 2009 and called as the Limited Liability
Partnership Act, 2008 and most of its sections got enforced from 31st March 2009.
This Act have been enacted to make provisions for the formation and regulation of Limited
Liability Partnerships and for matters connected therewith or incidental thereto.
The LLP Act, 2008 has 81 sections and 4 schedules.
• The First Schedule deals with mutual rights and duties of partners, as well limited liability
partnership and its partners where there is absence of a formal agreement with respect
to them.
• The Second Schedule deals with conversion of firm into LLP.
• The Third Schedule deals with conversion of private company into LLP.
• The Fourth Schedule deals with conversion of unlisted public company into LLP.
The Ministry of Corporate Affairs (MCA) and the Registrar of Companies (ROC) are entrusted
with the task of administrating the LLP Act, 2008. The Central Government has the authority to
frame rules with regard to the LLP Act, 2008 and can amend them by notification in the official
gazette, from time to time.
The Indian Partnership Act, 1932 is not applicable to LLPs.
Need of new form of Limited Liability Partnership

In order to meet the contemporary growth of the Indian Economy, the lawmakers contemplated
the need for bringing out the new legislation for creation of LLP.
LLP is an alternative corporate business form that gives the benefits of limited liability company
and the flexibility of partnership. In order to enable professional expertise and entrepreneurial
initiative and combine, organize and operate in flexible, innovative and efficient manner, the LLP
Act, 2008 was enacted.
LLP as a form of business organization is an alternative corporate business vehicle. LLPs allow for
a partnership structure where each partner’s liability is limited to the amount they put in the
business. Owing to flexibility in its structure and operation, LLP is a suitable vehicle for small
enterprises and for investment by venture capital. LLPs are common in professional business like
law firms, accounting firms, and wealth managers.

Limited Liability Partnership – Meaning and Concept
A LLP is a new form of legal business entity with limited liability. The LLP is a separate legal entity,
is liable to the full extent of its assets but liability of partners is limited to their agreed
contribution in the LLP.
LLP as a separate legal entity and business organization is an alternative corporate business form
that gives the benefits of limited liability of a company and the flexibility of a partnership.
Since LLP contain elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’
LLP is called a hybrid between a company and a partnership.
Limited Liability Partnership [Section 2(n)]: Limited Liability Partnership means a partnership
formed and registered under this Act.
Characteristics of LLP
1. Body Corporate: LLP is a body corporate formed and incorporated under this Act and is a
legal entity separate from that of its partners and shall have perpetual succession.
The term Body Corporate has been defined in Section 2(d) as follows:
It means a company as defined in Section 3 of the Companies Act, 1956(now Companies
Act, 2013) and includes –
(i) A LLP registered under this Act
(ii) A LLP incorporated outside India; and
(iii) A company incorporated outside India,
But does not include –
(i) A Corporation Sole
(ii) A Co-operative Society registered under any law for the time being in force;
and
(iii) Any other body corporate which the Central Government may, by
notification in the official gazette, specify in this behalf.
2. Perpetual Succession: The existence of LLP is not affected as a result of change in its
partners. Death, insanity, retirement, or insolvency of partners has no impact on the
existence of LLP. The LLP enjoys perpetual succession.
3. Separate Legal Entity: The LLP as a Separate Legal Entity, is liable to the full extent of its
assets but liability of the partners is limited to the extent of their agreed contribution in
the LLP. It has some of the same rights in law as a person.
4. Mutual Agency: No partner is liable on account of the independent or un-authorised
actions of the other partners, thus individual partners are shielded from the joint liability
created by other partner’s wrongful business decisions or misconduct. No partner can

bind the other partners with his acts. Unlike a normal partnership firm, the concept of
mutual agency does not hold good in case of a LLP.
5. LLP Agreement: Mutual rights and duties of the partners within a LLP are governed by an
agreement between the partners. The Act provides flexibility to partners to make the
agreement as per their choice. In absence of such agreement the rights and duties of
partners are governed by The First Schedule of the LLP Act, 2008.
Limited Liability Partnership Agreement [Section 2(o)]: It means any written agreement
between the partners of the LLP or between the LLP and its partners which determines the
mutual rights and duties of the partners and their rights and duties in relation to that LLP.
6. Artificial Legal Person: A LLP is an artificial person because it is created by a legal process
and is clothed with all rights of an individual. It can enter into contracts in its own name,
hold property in its name, open a bank account etc. A LLP is invisible, intangible, immortal
but not fictitious because it really exists.
7. Common Seal: A LLP being an artificial person can act through its partners and designated
partners. LLP may have a common seal, if it decides to have one. Thus, it is not mandatory
for a LLP to have a common seal. It shall remain under the custody of some responsible
official and it shall be affixed in the presence of atleast 2 designated partners of LLP.
8. Limited Liability: The liability of partners will be limited to their agreed contribution in
the LLP, unlike a normal partnership firm where the liability of the partners is unlimited
and extends to their personal assets.
9. Minimum and Maximum number of partners: Every LLP shall have at least two partners
and shall also have at least two individuals as designated partners, of whom atleast one
shall be resident in India. There is no limit on the maximum number of partners.
Partner [Section 2(q)]: Partner in relation to LLP, means a person who becomes a partner
in the LLP in accordance with the LLP Agreement.
Designated Partner [Section 2(j)]: “Designated Partner” means partner designated as such
pursuant to Section 7
10. Management of business: The partners in the LLP are entitled to manage the business of
LLP. But only the designated partners are responsible for legal compliances.
11. Business of Profit Only: The essential requirement for forming LLP is carrying on a lawful
business with a view to earn profit. Thus, LLP cannot be formed for charitable or non-
economic purpose.
Business [Section 2(e)]: Business includes every trade, profession, service and occupation.

12. Investigation: The Central Government shall have powers to investigate the affairs of an
LLP by appointment of competent authority for the purpose.
13. Compromise and Arrangement: Any Compromise or agreements including merger and
amalgamation of LLPs shall be in accordance with the provisions of the LLP Act, 2008.
14. Conversion into LLP: A firm, private company or an unlisted public company would be
allowed to be converted into LLP in accordance with the provisions of LLP Act, 2008.
15. E-filing of Document: Every form or application of document required to be filed or
delivered under the Act and rules made thereunder, shall be filed in computer readable
electronic form on its website www.mca.gov.in and authenticated by a partner or
designated partner of LLP by the use of electronic or digital signature.
16. Foreign LLPs: Section 2(m) defines Foreign LLP as a Limited Liability partnership formed,
incorporated or registered outside India which established a place of business within
India. Foreign LLP can become a partner in Indian LLP.
Non-applicability of the Indian Partnership Act, 1932 (Section 4): Save as otherwise provided,
the provisions of the Indian Partnership Act, 1932 shall not apply to a LLP.
Partners (Section 5): Any individual or body corporate may be a partner in a LLP. However, an
individual shall not be capable of becoming a partner of a LLP, if –
(a) He has been found to be of unsound mind by a Court of competent jurisdiction and the
finding is in force;
(b) He is an undischarged insolvent; or
(c) He has applied to be adjudicated as an insolvent and his application is pending.
Minimum number of partners (Section 6):
(i) Every LLP shall have at least two partners.
(ii) If at any time the number of partners of a LLP is reduced below two and the LLP carries
on business for more than six months while the number is so reduced, the person,
who is the only partner of the LLP during the time that it so carries on business after
those six months and has the knowledge of the fact that it is carrying on business with
him alone, shall be liable personally for the obligations of the LLP incurred during that
period.
Example: Coffee & Latte LLP has two partners Mr. Neil and Mr. Peter. Neil meets with an
accident and dies on 20th April 20XX. Peter alone continues with the business after Neil’s
death. Peter continues with the business even after 20th September (i.e) for more than six
months alone without any partner. In such a situation, Peter shall be personally liable for
all the obligations of LLP incurred during that period.

Designated Partners (Section 7):
(i) Every LLP shall have at least two designated partners who are individuals and atleast
one of them shall be a resident in India.
(ii) If in LLP, all the partners are bodies corporate or in which one or more partners are
individuals and bodies corporate, at least two individuals who are partners of such LLP
or nominees of such bodies corporate shall act as designated partners.
Example: Rinfy LLP has two partners Reliance Industries Limited and Infosys Limited.
In this case, since both the partners are body corporates, the representatives or
nominees of the body corporates shall become the partners of the LLP.
(iii) Resident in India: The term ‘resident of India’ means a person who has stayed in India
for a period of not less than 182 days during the immediately preceding one year.
Advantages of LLP form of organisation
• Limited Liability: Limited liability protects the member’s personal assets from the
liabilities of the business. LLPs are a separate legal entity to the members.
• Flexibility: The operation of the partnership and distribution of profits is determined by
written agreement between the members. This may allow for greater flexibility in the
management of the business.
• Easy to form and dissolve: Not only it is easy to start but it’s also easier to wind up an
LLP.
• Flexible capital structure
• Fewer Compliance requirements as compared to a company.
Incorporation of LLP
Incorporation Document (Section 11): The most important document needed for registration is
the incorporation document.
(1) For a LLP to be incorporated:
(a) Two or more persons associated for carrying on a lawful business with a view to
profit shall subscribe their names to an incorporation document;
(b) The incorporation document shall be filed in such manner and with such fees, as
may be prescribed with the Registrar of the State in which the registered office of
the LLP is to be situated; and
(c) Statement to be filed:
• There shall be filed along with the incorporation document, a statement
in the prescribed form,

• Made by either an advocate, or a Company Secretary or a Chartered
Accountant or a Cost Accountant, who is engaged in the formation of LLP
and
• By any one who subscribed his name to the incorporation document.
• That all the requirements of this Act and the rules made thereunder have
been complied with,
• In respect of incorporation and matters precedent and incidental thereto.
(2) The incorporation document shall –

(a) Be in a form as may be prescribed;
(b) State the name of the LLP;
(c) State the proposed business of LLP
(d) State the address of registered office of LLP
(e) State the name and address of each of the persons who are to be partners of the
LLP on incorporation;
(f) State the name and address of the persons who are to be designated partners of
the LLP on incorporation;
(g) Contain such other information concerning the proposed LLP as may be prescribed
(3) If a person makes a statement as discussed above which he-

(a) Knows to be false; or
(b) Does not believe to be true, shall be punishable
• With imprisonment for a term which may extend to 2 years and
• With fine which shall not be less than Rs. 10,000 but which may extend to
Rs. 5,00,000.
Incorporation by Registration (Section 12):
(1) When the requirements imposed by clauses (b) and (c) of sub-section (1) of section 11 have
been complied with, the Registrar shall retain the incorporation document and, unless the
requirement imposed by clause (a) of that sub-section has not been complied with, he shall,
within a period of 14 days—
(a) register the incorporation document; and
(b) give a certificate that the LLP is incorporated by the name specified therein.
(2) The Registrar may accept the statement delivered under clause (c) of sub-section (1) of
section 11 as sufficient evidence that the requirement imposed by clause (a) of that sub-section
has been complied with.
(3) The certificate issued under clause (b) of sub-section (1) shall be signed by the Registrar and
authenticated by his official seal.

(4) The certificate shall be conclusive evidence that the LLP is incorporated by the name specified
therein.
Registered office of LLP and change therein (Section 13):
(1) Every LLP shall have a registered office to which all communications and notices may be
addressed and where they shall be received.
(2) A document may be served on a LLP or a partner or designated partner thereof by sending it
by post under a certificate of posting or by registered post or by any other manner, as may be
prescribed, at the registered office and any other address specifically declared by the LLP for the
purpose in such form and manner as may be prescribed.
(3) A LLP may change the place of its registered office and file the notice of such change with the
Registrar in such form and manner and subject to such conditions as may be prescribed and any
such change shall take effect only upon such filing.
(4) If the LLP contravenes any provisions of this section, the LLP and its every partner shall be
punishable with fine which shall not be less than Rs. 2,000 but which may extend to Rs. 25,000.
Effect of Registration (Section 14):

On registration, a LLP shall, by its name, be capable of-
a. Suing and being sued
b. Acquiring, owning, holding and developing or disposing of property, whether movable or
immovable, tangible or intangible;
c. Having a common seal, if it decides to have one, and
d. Doing and suffering such acts and things as bodies corporate may lawfully do and suffer.
C – Can file a case (can sue) on others and can be sued upon
O – Other acts which a body corporate may lawfully do
P – Acquire, Own, Hold etc, Property
S – Common Seal

Name (Section 15):
(1) Every limited liability partnership shall have either the words “limited liability partnership” or
the acronym “LLP” as the last words of its name.
(2) No LLP shall be registered by a name which, in the opinion of the Central Government is—
(a) undesirable; or
(b) identical or too nearly resembles to that of any other partnership firm or LLP or body
corporate or a registered trade mark, or a trade mark which is the subject matter of an
application for registration of any other person under the Trade Marks Act, 1999.
Note: The name of LLP shall not contains terms such as National, Royal, Charter, etc. Also the
name of LLP shall not be same as the name of any other LLP, partnership firm or any other
body corporate.
Reservation of name (Section 16):

(1) A person may apply in such form and manner and accompanied by such fee as may be
prescribed to the Registrar for the reservation of a name set out in the application as—
(a) the name of a proposed LLP; or

(b) the name to which a LLP proposes to change its name.
(2) Upon receipt of an application under sub-section (1) and on payment of the prescribed fee,
the Registrar may, if he is satisfied, subject to the rules prescribed by the Central Government
in the matter, that the name to be reserved is not one which may be rejected on any ground
referred to in sub-section (2) of section 15, reserve the name for a period of 3 months from the
date of intimation by the Registrar.
Note: The application for reservation of name has to be filed, for ascertaining the availability
and reservation of the name. Six names in order of preference can be indicated in the form.
Change of name of LLP (Section 17)
(1) Notwithstanding anything contained in sections 15 and 16, where the Central Government is
satisfied that a LLP has been registered (whether through inadvertence or otherwise and whether
originally or by a change of name) under a name which —
(a) is a name referred to in sub-section (2) of section 15; or

(b) is identical with or too nearly resembles the name of any other LLP or body corporate or other
name as to be likely to be mistaken for it, the Central Government may direct such LLP to change

its name, and the LLP shall comply with the said direction within 3 months after the date of the
direction or such longer period as the Central Government may allow.
(2) (i) Any LLP which fails to comply with a direction given under sub-section (1) shall be
punishable with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 5 Lakhs.
(ii) The designated partner of such LLP shall be punishable with fine which shall not be less than
Rs. 10,000 but which may extend to Rs. 1 Lakh.
Steps for incorporation of LLP

Step 1: Reservation of name
 The first step while incorporating a LLP is the reservation of name of LLP.
 The name of a LLP shall not be similar to that of an existing LLP, Company or a Partnership
Firm.
 The applicant has to file e-form 1, for ascertaining the availability and reservation of name.
6 names in order of preference can be indicated.
 The name should contain the suffix "Limited Liability Partnership" or "LLP".
Step 2: Incorporation
 In the second step, the applicant has to file e-form 2 for incorporating a new LLP.
 This form contains the details of the proposed LLP and the Partners and Designated
Partners along with their consent to act as such.
Step 3: Execute a LLP Agreement
 It is mandatory to execute LLP Agreement. [Sec. 23]
 LLP agreement shall be filed with the registrar in e-form 3 within 30 days of incorporation
of LLP
 The contents of the LLP Agreement are enumerated below:
1. Name of LLP
2. Name and address of partners and designated partners
3. Form of contribution & interest on contribution
4. Profit sharing ratio
5. Remuneration of Partners
6. Rights & Duties of Partners
7. Proposed Business
8. Rules for governing LLP.

Partners and their Relation
Eligibility to be partners (Section 22): On the incorporation of a LLP, the persons who subscribed
their names to the incorporation document shall be its partners and any other person may
become a partner of the LLP by and in accordance with the LLP agreement.
Relationship of partners (Section 23):
(1) Save as otherwise provided by this Act, the mutual rights and duties of the partners of a LLP,
and the mutual rights and duties of a LLP and its partners, shall be governed by the LLP agreement
between the partners, or between the LLP and its partners.
(2) The LLP agreement and any changes, if any, made therein shall be filed with the Registrar in
such form, manner and accompanied by such fees as may be prescribed.
(3) An agreement in writing made before the incorporation of a LLP between the persons who
subscribe their names to the incorporation document may impose obligations on the LLP,
provided such agreement is ratified by all the partners after the incorporation of the LLP.
(4) In the absence of agreement as to any matter, the mutual rights and duties of the partners
and the mutual rights and duties of the LLP and the partners shall be determined by the
provisions relating to that matter as are set-out in the First Schedule.
Cessation of partnership interest (Section 24):
(1) A person may cease to be a partner of a LLP in accordance with an agreement with the other
partners or, in the absence of agreement with the other partners as to cessation of being a
partner, by giving a notice in writing of not less than 30 days to the other partners of his intention
to resign as partner.
(2) A person shall cease to be a partner of a LLP—

(a) on his death or dissolution of the LLP; or
(b) if he is declared to be of unsound mind by a competent court; or
(c) if he has applied to be adjudged as an insolvent or declared as an insolvent.
(3) Where a person has ceased to be a partner of a LLP (hereinafter referred to as “former
partner”), the former partner is to be regarded (in relation to any person dealing with the LLP)
as still being a partner of the LLP unless—
(a) the person has notice that the former partner has ceased to be a partner of the LLP; or
(b) notice that the former partner has ceased to be a partner of the LLP has been delivered to
the Registrar.

(4) The cessation of a partner from the LLP does not by itself discharge the partner from any
obligation to the LLP or to the other partners or to any other person which he incurred while
being a partner.
(5) Where a partner of a LLP ceases to be a partner, unless otherwise provided in the LLP
agreement, the former partner or a person entitled to his share in consequence of the death or
insolvency of the former partner, shall be entitled to receive from the LLP—
(a) an amount equal to the capital contribution of the former partner actually made to the LLP;
and
(b) his right to share in the accumulated profits of the LLP, after the deduction of accumulated
losses of the LLP, determined as at the date the former partner ceased to be a partner.
(6) A former partner or a person entitled to his share in consequence of the death or insolvency
of the former partner shall not have any right to interfere in the management of the LLP.
Registration of changes in partners (Section 25):
(1) Every partner shall inform the LLP of any change in his name or address within a period of 15
days of such change.
(2) A LLP shall—

(a) where a person becomes or ceases to be a partner, file a notice with the Registrar within 30
days from the date he becomes or ceases to be a partner; and
(b) where there is any change in the name or address of a partner, file a notice with the Registrar
within 30 days of such change.
(3) A notice filed with the Registrar under sub-section (2)—

(a) shall be in such form and accompanied by such fees as may be prescribed;
(b) shall be signed by the designated partner of the LLP and authenticated in a manner as may
be prescribed; and
(c) if it relates to an incoming partner, shall contain a statement by such partner that he consents
to becoming a partner, signed by him and authenticated in the manner as may be prescribed.
(4) If the LLP contravenes the provisions of sub-section (2), the LLP and every designated partner
of the LLP shall be punishable with fine which shall not be less than Rs. 2,000 but which may
extend to Rs. 25,000.
(5) If any partner contravenes the provisions of sub-section (1), such partner shall be punishable
with fine which shall not be less than Rs. 2,000 but which may extend to Rs. 25,000.
(6) Any person who ceases to be a partner of a LLP may himself file with the Registrar the notice
referred to in sub-section (3) if he has reasonable cause to believe that the LLP may not file the

notice with the Registrar and in case of any such notice filed by a partner, the Registrar shall
obtain a confirmation to this effect from the LLP unless the LLP has also filed such notice.
However, where no confirmation is given by the LLP within 15 days, the registrar shall register
the notice made by a person ceasing to be a partner under this section.
Extent and Limitation of liability of LLP and Partners
Partner as agent (Section 26): Every partner of a LLP is, for the purpose of the business of the
LLP, the agent of the LLP, but not of other partners.
Extent of liability of LLP (Section 27):
(1) A LLP is not bound by anything done by a partner in dealing with a person if—
(a) the partner in fact has no authority to act for the LLP in doing a particular act; and
(b) the person knows that he has no authority or does not know or believe him to be a partner
of the LLP.
(2) The LLP is liable if a partner of a LLP is liable to any person as a result of a wrongful act or
omission on his part in the course of the business of the LLP or with its authority.
(3) An obligation of the LLP whether arising in contract or otherwise, shall be solely the obligation
of the LLP.
(4) The liabilities of the LLP shall be met out of the property of the LLP.
Extent of liability of partner (Section 28):

(1) A partner is not personally liable, directly or indirectly for an obligation referred to in sub-
section (3) of section 27 solely by reason of being a partner of the LLP.
(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall not
affect the personal liability of a partner for his own wrongful act or omission, but a partner shall
not be personally liable for the wrongful act or omission of any other partner of the LLP.
Holding out (Section 29):

(1) Any person,
• who by words spoken or written or by conduct,
• represents himself, or knowingly permits himself to be represented to be a partner in a
LLP
• is liable to any person
• who has on the faith of any such representation
• given credit to the LLP, whether the person representing himself or represented to be a
partner does or does not know that the representation has reached the person so giving
credit.

However,
• where any credit is received by the LLP as a result of such representation,
• the LLP shall,
• without prejudice to the liability of the person so representing himself or represented to
be a partner,
• be liable to the extent of credit received by it or any financial benefit derived thereon.
(2) Where after a partner’s death the business is continued in the same LLP name, the continued
use of that name or of the deceased partner’s name as a part thereof shall not of itself make his
legal representative or his estate liable for any act of the LLP done after his death.
Unlimited liability in case of fraud (Section 30):
(1) In case of fraud:

In the event of an act carried out by a LLP, or any of its partners, with intent to defraud creditors
of the LLP or any other person, or for any fraudulent purpose, the liability of the LLP and partners
who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for
all or any of the debts or other liabilities of the LLP.
However, in case any such act is carried out by a partner, the LLP is liable to the same extent as
the partner unless it is established by the LLP that such act was without the knowledge or the
authority of the LLP.
(2) Where any business is carried on with such intent or for such purpose as mentioned in sub-
section (1), every person who was knowingly a party to the carrying on of the business in the
manner aforesaid shall be punishable with
• imprisonment for a term which may extend to 2 years and
• with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs.
(3) Where a LLP or any partner or designated partner or employee of such LLP has conducted the
affairs of the LLP in a fraudulent manner, then without prejudice to any criminal proceedings
which may arise under any law for the time being in force, the LLP and any such partner or
designated partner or employee shall be liable to pay compensation to any person who has
suffered any loss or damage by reason of such conduct.
However, such LLP shall not be liable if any such partner or designated partner or employee has
acted fraudulently without knowledge of the LLP.
Whistle blowing (Section 31):

(1) The Court or Tribunal may reduce or waive any penalty leviable against any partner or
employee of a LLP, if it is satisfied that—
• such partner or employee of a LLP has provided useful information during investigation of
such LLP; or

• when any information given by any partner or employee (whether or not during investigation)
leads to LLP or any partner or employee of such LLP being convicted under this Act or any other
Act.
(2) No partner or employee of any LLP may be discharged, demoted, suspended, threatened,
harassed or in any other manner discriminated against the terms and conditions of his LLP or
employment merely because of his providing information or causing information to be provided
pursuant to sub-section (1).
Note: Whistleblower is a person, who could be an employee of an organization, disclosing

information to the public or some higher authority about any wrongdoing, which could be in
the form of fraud, corruption etc.
Maintenance of books of account, other records and audit, etc. (Section 34)
(1) Proper Books of account:

The LLP shall maintain such proper books of account as may be prescribed relating to its affairs
for each year of its existence on cash basis or accrual basis and according to double entry system
of accounting and shall maintain the same at its registered office for such period as may be
prescribed.
(2) Statement of Account and Solvency:

Every LLP shall, within a period of 6 months from the end of each financial year, prepare a
Statement of Account and Solvency for the said financial year as at the last day of the said
financial year in such form as may be prescribed, and such statement shall be signed by the
designated partners of the LLP.
The Financial Year of the LLP ends on 31st March every year, therefore the Statement of
Account and Solvency as on 31st March shall be filed by the LLP by 30th September of that year
(i.e) six months from the end of the financial year. This Statement shall be signed by the
designated partners of the LLP.
Every LLP shall file within the prescribed time, the Statement of Account and Solvency prepared
pursuant to sub-section (2) with the Registrar every year in such form and manner and
accompanied by such fees as may be prescribed.
The accounts of LLP shall be audited in accordance with such rules as may be prescribed.
However, the Central Government may, by notification in the Official Gazette, exempt any class
or classes of LLP from the requirements of this sub-section.
(5) Any LLP which fails to comply with the provisions of this section shall be punishable with fine
which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs

Every designated partner of such LLP shall be punishable with fine which shall not be less than
Rs. 10,000 but which may extend to Rs. 1 Lakh.
Annual return (Section 35):

(1) Every LLP shall file an annual return duly authenticated with the Registrar within 60 days of
closure of Its financial year in such form and manner and accompanied by such fee as may be
prescribed.
The Financial Year of the LLP ends on 31st March, therefore the Annual Return has to be filed
by 30th May of that year (i.e.) 60 days from the closure of the financial year.
(2) Any LLP which fails to comply with the provisions of this section shall be punishable with
fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs.
(3) If the LLP contravenes the provisions of this section, the designated partner of such LLP
shall be punishable with fine which shall not be less than Rs. 10,000 but which may extend to
Rs. 1 Lakh.
Conversion from firm into LLP (Section 55): A firm may convert into a LLP in accordance with
the provisions of this Chapter and the Second Schedule.
Conversion from private company into LLP (Section 56): A private company may convert into a
LLP in accordance with the provisions of this Chapter and the Third Schedule.
Conversion from unlisted public company into LLP (Section 57): An unlisted public company may
convert into a LLP in accordance with the provisions of this Chapter and the Fourth Schedule.
Registration and effect of conversion (Section 58):
Registration:
(i) The Registrar, on satisfying that a firm, private company or an unlisted public company, as
the case may be, has complied with the provisions of the various Schedules, provisions of this
Act and the rules made thereunder, register the documents issue a certificate of registration in
such form as the Registrar may determine stating that the LLP is, on and from the date specified
in the certificate, registered under this Act.
(ii) The LLP shall, within 15 days of the date of registration, inform the concerned Registrar of
Firms or Registrar of Companies, as the case may be, with which it was registered under the
provisions of the Indian Partnership Act, 1932 or the Companies Act, 1956 (Now Companies Act,
2013) as the case may be, about the conversion and of the particulars of the LLP in such form
and manner as may be prescribed.

(iii) Upon such conversion, the partners of the firm, the shareholders of private company or
unlisted public company, as the case may be, the LLP to which such firm or such company has
converted, and the partners of the LLP shall be bound by the provisions of the various Schedules,
as the case may be, applicable to them.
(iv) Upon such conversion, on and from the date of certificate of registration, the effects of the
conversion shall be such as specified in the various schedules, as the case may be.
Effect of Registration: Notwithstanding anything contained in any other law for the time being
in force, on and from the date of registration specified in the certificate of registration issued
under the various Schedule, as the case may be,—
(a) there shall be a LLP by the name specified in the certificate of registration registered under
this Act;
(b) all tangible (movable or immovable) and intangible property vested in the firm or the
company, as the case may be, all assets, interests, rights, privileges, liabilities, obligations relating
to the firm or the company, as the case may be, and the whole of the undertaking of the firm or
the company, as the case may be, shall be transferred to and shall vest in the limited liability
partnership without further assurance, act or deed; and
(c) the firm or the company, as the case may be, shall be deemed to be dissolved and removed
from the records of the Registrar of Firms or Registrar of Companies, as the case may be.
Foreign limited liability partnerships (Section 59): The Central Government may make rules for
provisions in relation to establishment of place of business by foreign LLP within India and
carrying on their business therein by applying or incorporating, with such modifications, as
appear appropriate, the provisions of the Companies Act, 1956 or such regulatory mechanism
with such composition as may be prescribed.
Winding up and dissolution (Section 63)

The winding up of a LLP may be either voluntary or by the Tribunal and LLP, so wound up may
be dissolved.
Circumstances in which LLP may be wound up by Tribunal (Section 64): A LLP may be wound
up by the Tribunal:
(a) if the LLP decides that LLP be wound up by the Tribunal;
(b) if, for a period of more than six months, the number of partners of the LLP is reduced
below two;
(c) if the LLP is unable to pay its debts;

(d) if the LLP has acted against the interests of the sovereignty and integrity of India, the security
of the State or public order;
(e) if the LLP has made a default in filing with the Registrar the Statement of Account and
Solvency or annual return for any five consecutive financial years; or
Note: The default in filing should be made for five continuous years.
(f) if the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
Example: Just and equitable grounds as per the Tribunal could be situations where there is a
deadlock in the management, loss of substratum, partners not on talking terms.
Rules for winding up and dissolution (Section 65): The Central Government may make rules for
the provisions in relation to winding up and dissolution of LLP.
Business transactions of partner with LLP (Section 66): A partner may lend money to and
transact other business with the LLP and has the same rights and obligations with respect to the
loan or other transactions as a person who is not a partner.
Example: Amit, Amol and Anand start with a LLP named Astra Communications LLP. Amol gives
a loan of Rs. 5,00,000 to the LLP in addition to his capital contribution. Amol’s right with respect
to the repayment of loan from the LLP will be similar to an outsider lending an amount to the
LLP. Amol is entitled to receive the repayment of Rs. 5,00,000 just as any other creditor/lender.
Application of the provisions of the Companies Act (Section 67):
(1) The Central Government may, by notification in the Official Gazette, direct that any of the
provisions of the Companies Act, 1956 specified in the notification—
• shall apply to any LLP; or
• shall apply to any LLP with such exception, modification and adaptation, as may be specified,
in the notification.
(2) A copy of every notification proposed to be issued under sub-section (1) shall be laid in draft
before each House of Parliament, while it is in session, for a total period of 30 days which may
be comprised in one session or in two or more successive sessions, and if, before the expiry of
the session immediately following the session or the successive sessions aforesaid, both Houses
agree in disapproving the issue of the notification or both Houses agree in making any
modification in the notification, the notification shall not be issued or, as the case may be, shall
be issued only in such modified form as may be agreed upon by both the Houses.
Electronic filing of documents (Section 68)

(1) Any document required to be filed, recorded or registered under this Act may be filed,
recorded or registered in such manner and subject to such conditions as may be prescribed.

(2) A copy of or an extract from any document electronically filed with or submitted to the
Registrar which is supplied or issued by the Registrar and certified through a fixing digital
signature as per the Information Technology Act, 2000 to be a true copy of or extract from such
document shall, in any proceedings, be admissible in evidence as of equal validity with the
original document.
(3) Any information supplied by the Registrar that is certified by the Registrar through a fixing
digital signature to be a true extract from any document filed with or submitted to the Registrar
shall, in any proceedings, be admissible as evidence and be presumed, unless evidence to the
contrary is adduced, to be a true extract from such document.
Payment of additional fee (Section 69): Any document or return required to be filed or
registered under this Act with the Registrar, if is not filed or registered in time provided therein,
may be filed or registered after that time upto a period of 300 days from the date within which
it should have been filed(i.e from the due date), on payment of additional fee of Rs. 100 for
every day of such delay in addition to any fee as is payable for filing of such document or return.
However, such document or return may, without prejudice to any other action or liability under
this Act, also be filed after such period of 300 days on payment of fee and additional fee
specified in this section.
Example: XYZ LLP has to file its Statement of Accounts and Solvency within 6 months from the
end of the Financial Year (i.e.) by 30th September of the relevant year. The LLP fails to file its
Statement of Accounts and Solvency within the due date and files it on 20th October (i.e.) after
a delay of 20 days. In this case, the LLP has to pay an additional fee of Rs. 2,000 (Rs. 100 per
day for 20 days) in addition to the fees payable for the filing of the form.
Differences with other forms of organisations

A. Distinction between LLP and Partnership Firm:
The points of distinction between a limited liability partnership and partnership firm are
tabulated as follows:
Sr. Basis LLP Partnership
Regulating Act The Limited Liability Partnership Act, The Indian Partnership Act, 1932.
1 2008.
Body It is a body corporate. It is not a body corporate.

2 corporate

3 Separate legal It is a legal entity separate from its It is a group of persons with no
entity members. separate legal entity.
4 Creation It is created by a legal process called It is created by an agreement

registration under the LLP Act, 2008. between the partners.
5 Registration Registration is mandatory. LLP can sue Registration is voluntary. Only the
and be sued in its own name. registered partnership firm can
sue the third parties.
6 Perpetual The death, insanity, retirement or The death, insanity retirement or

insolvency of the partner(s) does not insolvency of the partner(s) may
succession
affect its existence of LLP. Members may affect its existence. It has no
join or leave but its existence continues perpetual succession.
forever.
7 Name Name of the LLP to contain the word No guidelines. The partners can
limited liability partners (LLP) as suffix. have any name as per their
choice.
8 Liability Liability of each partner limited to the Liability of each partner is

extent to agreed contribution except in unlimited. It can be extended
case of wilful fraud. upto the personal assets of the
partners.
9 Mutual agency Each partner can bind the LLP by his own Each partner can bind the firm as
acts but not the other partners. well as other partners by his own
acts.
Designated At least two designated partners and There is no provision for such
10 partners atleast one of them shall be resident in partners under the Indian
India. Partnership Act, 1932.
Common seal It may have its common seal as its official There is no such concept in
11
signatures. partnership
12 Legal Only designated partners are responsible All partners are responsible for all
for all the compliances and penalties the compliances and penalties
compliances
under this Act. under the Act.

13 Annual filing of LLP is required to file: Partnership firm is not required to
documents file any annual document with the
(i) Annual statement of accounts
registrar of firms.
(ii) Statement of solvency
(iii) Annual return with the registration of
LLP every year.
14 Foreign Foreign nationals can become a partner Foreign nationals cannot become
in a LLP. a partner in a partnership firm.
partnership
15 Minor as Minor cannot be admitted to the benefits Minor can be admitted to the
partner of LLP. benefits of the partnership with
the prior consent of the existing
partners.
B. Distinction between LLP and Limited Liability Company (LLC)
Sr. Basis LLP Limited Liability Company
1 Regulating Act The LLP Act, 2008. The Companies Act, 2013.
2 Members/ The persons who contribute to LLP are The persons who invest the money
known as partners of the LLP. in the shares are known as
Partners
members of the company.
3 Internal The internal governance structure of a The internal governance structure

LLP is governed by agreement of a company is regulated by
governance
between the partners. statute (i.e., Companies Act, 2013).
structure
4 Name Name of the LLP to contain the word Name of the public company to
"Limited Liability partnership" or “LLP” contain the word “limited” and
as suffix. Private company to contain the
word “Private limited” as suffix.
5 Number of Minimum - 2 members Private company: Minimum - 2

members/ members Maximum - 200 members
Maximum - No such limit on the
partners members in the Act.

The members of the LLP can be Public company: Minimum - 7
individuals/ or body corporate members Maximum - No such limit
through the nominees. on the members.
Members can be organizations,
trusts, another business form or
individuals.
6 Liability of Liability of a partners is limited to the Liability of a member is limited to

members/ extent of agreed contribution except the amount unpaid on the shares
partners in case of wilful fraud. held by them.
7 Management The business of the company The affairs of the company are
managed by the partners including the managed by board of directors
designated partners authorized in the elected by the shareholders.
agreement.
8 Minimum Minimum 2 designated partners. Private Co. - 2 directors Public Co. -

number of 3 directors
directors/
designated
partners

The Companies Act, 2013
The Companies Act, 2013 was enacted to consolidate and amend the law relating to the
companies. The Companies Act, 2013 was preceded by the Companies Act, 1956. The Companies
Act, 2013 contains 470 sections and seven schedules. The entire Act has been divided into 29
chapters.
The Companies Act, 2013 aims to improve corporate governance, simplify regulations,
strengthen the interests of minority investors and for the first time legislates the role of whistle-
blowers. Thus, this enactment seeks to make our corporate regulations more contemporary.
Applicability of the Act

As per Section 1 of this Act, it is applicable to whole of India.
The provisions of the Act shall apply to -
• Companies incorporated under this Act or under any previous company law.
• Insurance companies (when the provisions of the Companies Act are inconsistent with
the provisions of the Insurance Act, 1938 or the IRDA Act, 1999 the provisions of these
Acts shall apply).
• Banking companies (when the provisions of the Companies Act are inconsistent with the
provisions of the Banking Regulation Act, 1949 the provisions of this Act shall apply).
• Companies engaged in the generation or supply of electricity (when the provisions of the
Companies Act are inconsistent with the provisions of the Electricity Act, 2003 the
provisions of this Act shall apply).
• Any other company governed by any Special Act for the time being in force.
• Such body corporate which are incorporated by any Act for time being in force, and as
the Central Government may by notification specify in this behalf.
Meaning and Features of a Company

Meaning:-
As per Section 2(20) of this Act, the term ‘Company’ means “A company incorporated under this
Act or under any previous company law.”
In the words of professor Haney “A company is an incorporated association, which is an artificial
person created by law, having a separate entity, with a perpetual succession and a common seal.”

Features of a Company
1. Separate Legal Entity: A company’s existence is distinct and separate from that of its
members. It can own property, have bank account, raise loans, incur liabilities and enter
into contracts. A company is capable of owning, disposing etc of property in its own name,
Although the capital and assets are contributed by the shareholders, the company
becomes the owner of its capital and assets.
Case Law : Lee V. Lee’s Air Farming Co. Ltd

Mr. Lee incorporated a company Lee’s Air Farming Co. Ltd. He was the Managing Director
and employed as Chief Pilot of the company. On day while performing his duty as a chief
pilot, he loses his life in an air crash. Mrs. Lee approaches the company in order to claim
compensation for her husbands death under The Workmen’s Compensation Act, 1922.
She was denied the compensation stating that Lee cannot be both employer and
employee at the same time.
The Privy Council allowed Mrs. Lee’s claim stating that though Mr. Lee was the controller
of the company, in the eyes of law both Lee and the company are different and therefore
Mrs. Lee is entitled to receive compensation.
2. Perpetual Succession: The existence of a company is not affected by the death or

insolvency of its members. The shareholders keep changing but that does not affect the
existence of the company.
Even on death of all the members of the company, it continues to exist. Its existence is
not affected by the death or insolvency of its members.
3. Limited Liability: The liability of a member depends upon the kind of company of which
he is a member.
a) Limited liability company – Liability limited to the extent of unpaid value on the share.
b) Company Limited by guarantee – Limited to the extent of amount guaranteed.
c) Unlimited Company – The liability of members is unlimited.
4. Artificial Legal Person: A company is an artificial person created by law and recognized
as a legal entity having distinct identity, legal personality, duties and rights.
A company can own property, have a bank account, raise loans, incur liabilities and enter
into contracts. It can sue others and can be sued in its own name.
As the company is an artificial person, it can act only through some human agency, (i.e)
directors. The directors can act as a company’s agency but are not the agents of the
members of the company. They can either on their own or through a common seal
authenticate the formal acts of the company.

5. Common Seal: Common seal is the official signature of a company, which is affixed by the
officers and employees of the company on its every document. It is not mandatory for a
company to have common seal.
In case a company does not have a common seal, the authorization shall be made by 2
directors, or a director and a Company Secretary, wherever the company has appointed
a Company Secretary.
6. Separate Property: A company can own a property in its own name, members are not
owners or co-owners of the company’s property and they do not have any insurable
interest in the property of the company.
Case Law : Macaura V. Northern Assurance Co. Limited
• M held almost all the shares in a company

• The timber belonging to the company was insured in the name of M
• The timber was destroyed by fire.
• The insurance claim was rejected since M has no insurable interest.
Corporate Veil Theory

The corporate veil theory is a legal concept which separates the identity of the company from
its members.
Hence, the members are shielded from the liabilities arising out of company’s actions. If the
company incurs any debts or contravenes any laws, the corporate veil concept implies that
members should not be liable for those errors.
Case Law: Salomon Vs. Salomon & Co Ltd
Facts of the case: Salomon, a sole proprietor manufacturing shoes transferred his business to a
company formed by him named Salomon & Co Ltd for appx.. 38000 Pounds, company discharged
consideration by using 10000 fully paid shares to Salomon, 1 share to each of his six family
members and 20,000 secured debentures to Salomon and the balance amount paid in cash.
After some years the company went into liquidation and Salomon as a secured debenture holder
claimed repayment of debentures prior to payment to other creditors. The unsecured creditors
argued that Salomon was the person managing the business before as well as after forming the
company also the same hands received profits before as well as after forming the company.
Conclusion: The house of Lords hailed that upon incorporation; a company gets legality of its
own and manage it. Even though the hands receiving the profits may be the same and the same
person manage the company. The company in the eyes of law is not an agent of the people who
own it or manage it therefore Salomon & Co. are separate person. Hence, Salomon being a
secured debenture holder is entitled to a repayment prior to other creditors.

Lifting of Corporate Veil/Piercing of Corporate Veil
Lifting of Corporate veil refers to disregarding the corporate personality of a company and
treating the company and treating the company same with its management. It means looking
behind the legal facade into the hands who control the company. Courts can under appropriate
circumstances lift the veil when there is a question of control involved.
The following are the cases where company law disregards the principle of corporate personality
or the principle that the company is a legal entity distinct and separate from its shareholders or
members:
1. To determine the character of the company [enemy or friend]: A company does not have
mind or conscience; therefore it cannot be a friend or a foe. It may be characterized as an
enemy company, if its affairs are under control of people of an enemy country. For this
purpose the court may determine the character of persons who are incharge of the affairs
of the company.
Case Law: Daimler Co Ltd. V. Continental Tyre & Rubber Co.
A company was formed in England for the purpose of selling tyres made by a German
Company. The German Company held the entire share capital of the English Company
and majority directors of the company were German residents.
During the First World Was the English Company commenced an action to recover trade
debt from other English Company. To which the other company refused to pay the
amount.
It was held that the corporate personality of the company be ignored and persons in
ultimate control of the company shall be considered and in this situation the persons
controlling the company were enemies and hence the amount is not payable.
2. To evade tax: The Courts may ignore the corporate entity of a company where it is used
for tax evasion.
Case Law: Dinshaw Maneckjee Petit
• An assessee was receiving huge dividend and interest income on certain investment.
• He formed 4 private companies and the whole investment were transferred to these
private companies. The interest and dividend received by the companies was within
the exemption limits of the Income Tax Act and they did not pay any tax.
• The income received by these companies was diverted to the assessee in the form
of pretended loans which were never paid back by him.
• The courts held that the only purpose for incorporating the company was to evade
tax. Therefore, income earned by these companies was considered as income of the
assessee.
3. To avoid legal obligation: Where the courts find that there is avoidance of welfare
legislation, it will be free to lift the corporate veil. Where it was found that the sole
purpose for the formation of the company was to use it as a device to reduce the amount
to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the
veil to look at the real transaction.
Case Law : The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar
vs. The Associated Rubber Industries Ltd., Bhavnagar and another)
4. Formation of subsidiaries to act as agent: A company may sometimes be regarded as an

agent or trustee of its members, or of any other company and may therefore be deemed
to have lost its individuality in favour of its principal. Here the principal will be held liable
for any acts of the company.
Case Law: Merchandise Transport Limited V. British Transport Commission
A transport company wanted to obtain licenses for its vehicles, but could not do so if
applied in its own name. It therefore formed a subsidiary company, and the application
for license was made in the name of subsidiary.
The vehicles were to be transferred by the subsidiary company. Held, the parent and
company were one commercial unit and the application was rejected.
5. Company formed for fraud/improper conduct or to defeat law: The legal personality of
a company may also be disregarded in the interest of justice where the machinery of
incorporation has been used for some fraudulent purpose like defrauding creditors or
defeating or circumventing law.
Case Law: Gilford Motor Co. Ltd V. Horne

An employee entered into a contract with his employer that he will not solicit the
customers of the employer after leaving the employment. After leaving the employment
he incorporates a company along with his wife and starts soliciting customers of the
employer.
The courts held that the purpose of formation of the company was to avoid a legal
obligation arising from a contract which was not permissible.
Therefore, the company was restrained from soliciting the customers of the employer.

Classes of Companies under the Act
Formation Liability Others
Chartered Statutory Registered Limited by Limited by Unlimited

Guarantee Shares Liability
On basis of On basis of On basis of Government Foreign Sectio

members control access to capital Company Company n8
Compa
ny
Listed Unlisted
Private Public
One
Company Company
Person Nidhi Dormant
Compa Company Company
ny
Holding and Associate

Subsidiary Co Company
1. Chartered Company: A chartered company is an association with investors

or shareholders and incorporated and granted rights by royal charter(king or queen).
Eg: East India Company etc.
2. Statutory Company: Statutory corporations are public enterprises brought into existence
by a Special Act of the Parliament.
Eg: Life Insurance Corporation, State Bank of India etc.
3. Company Limited by Shares: As per Sec 2(22), when the liability of member by the
memorandum is limited to the extent of unpaid value on shares. This unpaid amount can
be called up at anytime by the company.
It means that for meeting the debts of the company, the shareholder may be called upon
to contribute only to the extent of unpaid value on the share. His personal assets cannot
be used to meet the company’s debt.

4. Company Limited by Guarantee: As per Sec 2(21), when the liability of a member is
limited to the extent of amount guaranteed by him. Unlike a company limited by shares,
this company does not have shareholders a company limited by guarantee has one or
more members. The guaranteed amount can be called up only at the time of winding up.
Members cannot be called upon to contribute any amount beyond the agreed amount.
5. Unlimited Liability Company: As per Sec 2(92), a company where there is no limit on the
liability of each member. The unlimited liability exists only at the time of winding up. The
liability ceases when the member ceases to be a member of the company. Liability of each
member extends to amount of Company’s debt and liabilities.
6. One Person Company: As per Sec 2(62), it is a company formed with one person as its
member. Such companies are permitted to be formed by The Companies Act, 2013 to
encourage entrepreneurship and corporatization of business. It is formed as a Private
Company.
OPC differs from sole proprietary concern in an aspect that OPC is a separate legal entity
with a limited liability of the member whereas in the case of sole proprietary, the liability
of owner is not restricted and it extends to the owner’s entire assets constituting of
official and personal.
Name of
Nominee shall
Can be converted into Written Consent
be stated in
Private or Public of the Nominee
memorandum
Company anytime shall be obtained
after its incorporation
Nominee has
No Non-Banking
a right to
Financial Significant
withdraw his
Investment
Points consent
activities
No Member may
incorporation change the
or conversion nominee by
into Sec 8 Co. Natural person giving notice
Member and
Indian Citizen
Nominee in
Whether Resident* of
only one OPC
India or not

*Resident in India means person who has stayed in India for a period of not less than 120 days
during the immediately preceding financial year.
7. Private Company: As per Sec 2(68), Private Company means a company having a
minimum paid-up share capital as may be prescribed and its Articles of Association:
- Restricts transferability of shares
- Limits the number of members to 200
In calculation of number of members the following things must be considered:
a) Employees who are also members are not to be considered
b) Ex-employees are not to be considered provided they had acquired shares while
in employment.
c) Joint Holders are considered as one.
- Prohibits invitation to public to subscribe to securities of the company.
8. Small Company: As per Sec 2(85), it means a company, other than a public company-
- Paid up capital – not more than Rs. 2 crores and
- Turnover – not more than Rs. 20 Crores
Exception:
- Holding or Subsidiary Company
- Section 8 Company
- Company incorporated under Special Act
9. Public Company: As per Sec 2(71), public company is a company which is not a private
company. The shares are freely transferable and the minimum number of members are
seven there is no limit to the maximum number of members.
10. Holding and Subsidiary Company: As per Sec 2(46), a company is a holding company if
one or more are its subsidiaries.
As per Sec 2(87), Subsidiary company in relation to any other company means a company
in which the holding company
- controls the composition of board of directors or
- exercises or control more than half of the total voting power either on its own or
together with one or more of its subsidiary Companies.
A private company which is a subsidiary of a public company shall be deemed to be public
company for the purposes of this Act.

11. Associate Company: As per Sec 2(6), a company in which the other company has a
significant influence, but which is not a subsidiary company of the company having
significant influence.
“Significant Influence” means control of atleast 20% of the total voting power or control
of or participation in business decisions under an agreement.
12. Listed Company: As per Sec 2(52) it is a company which has any of its securities listed on
any recognized stock exchange.
Provided that such class of companies, which have listed or intend to list such class of
securities as may be prescribed in consultation with SEBI, shall not be considered as listed
companies.
13. Unlisted Company: It is a company other than a listed company.
14. Government Company: As per Sec 2(45), Government Company means any company in
which not less than 51% of the paid-up share capital is held by Central Govt, State Govt
or partly by central govt and partly by one or more state govt.
15. Foreign Company: As per Sec 2(42), It means any company or body corporate
incorporated outside India which has a place of business in India whether by itself or
through an agent, physically or through electronic mode and conducts business activities
in India.
16. Formation of companies with charitable objects etc. (Section 8 company): Section 8 of
the Companies Act, 2013 deals with the formation of companies which are formed to
promote the charitable objects of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment etc.
Such company shall apply its profits for the promotion of its objectives and shall not
distribute it to its members in the form of dividend.
Such company shall obtain a license from the Central Government.

The license can be revoked by CG if the company contravenes the conditions of this
section subject to which the license was issued or where the affairs of the company are
conducted fraudulently. CG must give a written notice before revocation of license and
give an opportunity of being heard.
On Revocation, CG may direct the company to –

- Convert its status and change its name
- Wind-up
- Amalgamate with any other company having similar objectives.

17. Dormant Company: Where a company is formed and registered under this Act for a
future project or to hold an asset or intellectual property and has no significant
accounting transaction, such a company or an inactive company may make an
application to the Registrar in such manner as may be prescribed for obtaining the status
of a dormant company.
‘Inactive company’ means—

(a) a company which has not been carrying on any business or operation; or
(b) a company which has not made any significant accounting transaction during the last
2 financial years; or
(c) a company which has not filed financial statements and annual returns during the last
2 financial years.
18. Nidhi Companies: Company which has been incorporated as a nidhi with the object of
cultivating the habit of thrift (cost cutting) and savings amongst its members, receiving
deposits from, and lending to, its members only, for their mutual benefit and which
complies with such rules as are prescribed by the Central Government for regulation of
such class of companies.
19. Public Financial Institutions: As per Sec 2(72), the following institutions are to be
regarded as public financial institutions:
(i) the Life Insurance Corporation of India, established under the Life Insurance
Corporation Act, 1956;
(ii) the Infrastructure Development Finance Company Limited,
(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002;
(iv) institutions notified by the Central Government under section 4A(2) of the
Companies Act, 1956 so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in consultation
with the Reserve Bank of India
Conditions for an institution to be notified as PFI
1) Established or constituted by or under any Central or State Act
2) At least 51% of the paid up share capital is held by the CG or by SG or partly by CG and
partly by one or more SG.

Mode of registration/Incorporation of Company
Promoters: The term “Promoter” under section 2(69) means a person—
(a) who has been named as such in a prospectus or is identified by the company in the
annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of
the company is accustomed to act.
Formation of company: Section 3 of the Companies Act, 2013 deals with the basic
requirement with respect to the constitution of the company.
In the case of a public company, any 7 or more persons can form a company for any lawful
purpose by subscribing their names to memorandum and complying with the requirements
of this Act in respect of registration.
In exactly the same way, 2 or more persons can form a private company and one person
where company to be formed is one person company.
Incorporation of a company:
Section 7 of the Companies Act, 2013 provides for the procedure to be followed for
incorporation of a company.
1. Filing of the documents and information with the registrar: For the registration of the
company following documents and information are required to be filed with the registrar
within whose jurisdiction the registered office of the company is proposed to be situated-
• the memorandum and articles of the company duly signed by all the subscribers
to the memorandum.
• a declaration by person who is engaged in the formation of the company (an
advocate, a chartered accountant, cost accountant or company secretary in
practice), and by a person named in the articles (director, manager or secretary
of the company), that all the requirements of this Act and the rules made
thereunder in respect of registration and matters precedent or incidental thereto
have been complied with.
• an declaration from each of the subscribers to the memorandum and from
persons named as the first directors, if any, in the articles stating that-
- He is not convicted of any offence in connection with the promotion,
formation or management of any company, or
- He has not been found guilty of any fraud or misfeasance or of any breach
of duty to any company under this Act or any previous company law during
the last five years,

- And that all the documents filed with the Registrar for registration of the
company contain information that is correct and complete and true to the
best of his knowledge and belief;
• the address for correspondence till its registered office is established;
• the particulars (names, including surnames or family names, residential address,
nationality) of every subscriber to the memorandum along with proof of identity,
and in the case of a subscriber being a body corporate, such particulars as may
be prescribed.
• the particulars (names, including surnames or family names, the Director
Identification Number, residential address, nationality) of the persons
mentioned in the articles as the subscribers to the Memorandum and such
other particulars including proof of identity as may be prescribed; and
• the particulars of the interests of the persons mentioned in the articles as the
first directors of the company in other _rms or bodies corporate along with their
consent to act as directors of the company in such form and manner as may be
prescribed.
2. Issue of certificate of incorporation on registration: The Registrar on the basis of

documents and information filed, shall register all the documents and information in the
register and issue a certificate of incorporation in the prescribed form to the effect that
the proposed company is incorporated under this Act.
3. Allotment of Corporate Identity Number (CIN): On and from the date mentioned in the
certificate of incorporation, the Registrar shall allot to the company a corporate identity
number, which shall be a distinct identity for the company and which shall also be
included in the certificate.
4. Maintenance of copies of all documents and information: The company shall maintain
and preserve at its registered office copies of all documents and information as originally
filed, till its dissolution under this Act.
5. Furnishing of false or incorrect information or suppression of material fact at the time

of incorporation (i.e. at the time of Incorporation): If any person furnishes any false or
incorrect particulars of any information or suppresses any material information, of which
he is aware in any of the documents filed with the Registrar in relation to the registration
of a company, he shall be liable for action for fraud under section 447.
6. Where, at any time after the incorporation of a company, it is proved that the company
has been got incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact or information in any of the documents

or declaration filed or made for incorporating such company, or by any fraudulent action,
the promoters, the persons named as the first directors of the company and the persons
making declaration under this section shall each be liable for action for fraud under
section 447.
7. Order of Tribunal: Where a company has been got incorporated by furnishing false or
incorrect information or representation or by suppressing any material fact or
information in any of the documents or declaration filed or made for incorporating such
company or by any fraudulent action, the Tribunal may, on an application made to it, on
being satisfied that the situation so warrants,—
a) pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the
interest of the company and its members and creditors; or
b) direct that liability of the members shall be unlimited; or
c) direct removal of the name of the company from the register of companies; or
d) pass an order for the winding up of the company; or
e) pass such other orders as it may deem fit:
Provided that before making any order,—

- the company shall be given a reasonable opportunity of being heard in the matter; and
- the Tribunal shall take into consideration the transactions entered into by the company,
including the obligations, if any, contracted or payment of any liability.
Simplified Proforma for Incorporating Company Electronically (SPICe)

Ministry of Corporate Affairs has taken various initiatives for ease of business. In a step towards
easy setting up of business, MCA has simplified the process of filing of forms for incorporation of
a company through Simplified Proforma for incorporating company electronically.
Effect of Registration: According to section 9, from the date of incorporation (mentioned in the
certificate of incorporation), the subscribers to the memorandum and all other persons, who may
from time to time become members of the company, shall be a body corporate by the name
contained in the memorandum. Such a registered company shall be capable of exercising all the
functions of an incorporated company under this Act and having perpetual succession with
power to acquire, hold and dispose of property, both movable and immovable, tangible and
intangible, to contract and to sue and be sued, by the said name.

Classification of Capital
The word capital means share capital, i.e., the capital or figure in terms of so many rupees divided
into shares of fixed amount. The proportion of the capital to which each member is entitled is his
share.
Nominal or Authorised or Registered Capital
Issued Capital
Subscribed Capital
Called-up Capital
Paid-up Capital
1. Authorised Share Capital: As per Section 2(8), Authorised or Nominal Capital means such
capital as is authorized by the memorandum of a company to be the maximum amount
of share capital of the company.
2. Issued Capital: As per Sec 2(50), Issued Capital means such capital as the company issues
from time to time for subscription. It is that part of the authorized capital which is offered
by the company for subscription.
3. Subscribed Capital: As per Sec 2(86), Subscribed capital is that part of capital which is
subscribed by the members of company.
4. Called-up Capital: As per Sec 2(15), Called-up capital is that part of the capital, which has
been called for payment, it is the total amount called up on the shares issued.
5. Paid-up Capital: It is the total amount paid or credited as paid up on shares issued, it is
equal to called-up capital less calls in arrears.
Shares
Section 2(84) of the Companies Act, 2013 defines the term ‘share’ which means a share in the
share capital of a company and includes stock.
According to section 44 of the Companies Act, 2013, the shares or debentures or other interests
of any member in a company shall be movable property transferable in the manner provided by
the articles of the company.
Section 45 provides, every share in a company having a share capital, shall be distinguished by its
distinctive number. This implies that every share shall be numbered.

Kinds of share capital
According to the provision the share capital of a company limited by shares shall be of 2 kinds –
Equity share capital – Equity share capital with reference to a company limited by shares, means
all share capital which is not preference share capital
It can be classified as-
Equity shares with Uniform voting rights; or
Equity shares with Differential voting rights
Preference Share Capital - with reference to any company limited by shares, means that part of
the issued share capital of the company which carries or would carry a preferential right with
respect to—
a. Payment of dividend, either as a fixed amount or an amount calculated as a fixed rate
b. Repayment, in case of winding up or repayment of capital of the amount of the share
capital paid up or deemed to have been paid up.
Memorandum of Association
The Memorandum of Association of company is in fact its charter; it defines its constitution and
the scope of the powers of the company with which it has been established under the Act. It is
the very foundation on which the whole edifice of the company is built.
It is a public document. Consequently, every person entering into a contract with the company is
presumed to have the knowledge of the conditions specified therein. The shareholders must
know the purpose for which his money can be used by the company and what risks he is taking
in making investments.
As per Section 4, Memorandum of a company shall be drawn up in such form as is given in
Tables A, B, C, D and E in Schedule I of the Companies Act, 2013.
Table A is a form for memorandum of association of a company limited by shares.
Table B is a form for memorandum of association of a company limited by guarantee and not
having a share capital.
Table C is a form for memorandum of association of a company limited by guarantee and having
a share capital.
Table D is a form for memorandum of association of an unlimited company.
Table E is a form for memorandum of association of an unlimited company and having share
capital.

Contents of Memorandum
Name Clause Registered Office Clause Object Clause Liability Clause
Capital Clause Association Clause
a) Name Clause: This clause shall contain the name of the company, the name of a public
company shall end with the word “Limited” and in case of a private company with the words
“Private Limited”. The name must not be similar or closely resemble the name of any other
company which is already in existence.
The name of one person company shall include the words “One Person Company” below its
name.
b) Registered Office Clause: Details of the state in which the registered office of the company
is situated.
c) Object Clause: The object with which the company is incorporated, and any matters
necessary for the furtherance of those objects
d) Liability Clause: Whether the liability of the members is limited or unlimited
e) Capital Clause: This clause states the amount of authorized share capital and also details
about the number of shares the capital is divided into along with the value of each share.
f) Subscription and Association Clause: Every subscriber to the memorandum shall take atleast
one share and shall write against his name the number of shares taken by him.
g) Nomination Clause: In case of One Person Company, the memorandum shall state the name
of a person, who in the event of death of the subscriber, shall become the member of the
company.
The memorandum must be printed, divided into paragraphs, numbered consecutively, and
signed by at least seven persons (two in the case of a private company and one in the case of One
Person Company) in the presence of at least one witness, who will attest the signatures.
It is to be noted that a company being a legal person can through its agent, subscribe to the
memorandum. However, a minor cannot be a signatory to the memorandum as he is not
competent to contract. The guardian of a minor, who subscribes to the memorandum on his
behalf, will be deemed to have subscribed in his personal capacity.
Doctrine of Ultra Vires

The meaning of the term ultra vires is simply “beyond (their) powers”. The legal phrase “ultra
vires” is applicable only to acts done in excess of the legal powers of the doers.

Case Law: Ashbury Railway Carriage and Iron Company Limited V. Riche
The object clause of an industrial company contained the following objects besides some other
objects:
(a) To make, sell or lend on hire, railway carriages and wagons.
(b) To carry on the business of mechanical engineers and general contractors.
(c) To purchase, lease, work and sell mine, minerals, land and buildings.
The company entered into a contract with Richie, for the financing of a construction of a railway line
in Belgium. The Court held that the word 'general contractors' had to be given a restricted meaning.
- Only such contracts could be covered in the term 'general contractors' as are in some way related or
connected with mechanical engineering.
- Therefore, the company could not finance the construction of a railway line by alleging that such a
business falls under the business of general contractors.
An act which is ultra vires the company being void, cannot be ratified by the shareholders of the
company. Sometimes, act which is ultra vires can be regularised by ratifying it subsequently
An ultra vires contract can never be made binding on the company. It cannot become
“Intravires” by reasons of estoppel, acquiescence, Iapse of time, delay or ratification.
Articles of Association
The articles of association of a company are its rules and regulations, which are framed to manage
its internal affairs. Just as the memorandum contains the fundamental conditions upon which
the company is allowed to be incorporated, so also the articles are the internal regulations of the
company
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of
association. The section lays the following law-
Contains regulations: The articles of a company shall contain the regulations for management of
the company.
Inclusion of matters: The articles shall also contain such matters, as are prescribed under the
rules. However, a company may also include such additional matters in its articles as may be
considered necessary for its management.

Contain provisions for entrenchment: The articles may contain provisions for entrenchment (to
protect something) to the effect that specified provisions of the articles may be altered only if
conditions or procedures as that are more restrictive than those applicable in the case of a special
resolution, are met or complied with.
The provision for entrenchment may be made –
(i)at the time of formation of the company; or
(ii)by an amendment to the articles, with the consent of all members, in case of a private
company
(iii)by an amendment to the articles, by passing a special resolution, in case of a public company
Notice to the registrar of the entrenchment provision: Where the articles contain provisions for
entrenchment, whether made on formation or by amendment, the company shall give notice to
the Registrar of such provisions in such form and manner as may be prescribed.
Forms of articles: The articles of a company shall be in respective forms specified in Tables, F, G,
H, I and J in Schedule I as may be applicable to such company.
Model articles: A company may adopt all or any of the regulations contained in the model articles
applicable to such company.
Company registered after the commencement of this Act: In case of any company, which is
registered after the commencement of this Act, in so far as the registered articles of such
company do not exclude or modify the regulations contained in the model articles applicable to
such company, those regulations shall, so far as applicable, be the regulations of that company
in the same manner and to the extent as if they were contained in the duly registered articles of
the company.
Doctrine of Constructive Notice

Section 399 of the Companies Act, 2013 provides that any person can inspect by electronic means
any document kept by the Registrar, or make a record of the same, or get a copy or extracts of
any document, including certificate of incorporation of any company, on payment of prescribed
fees.
It is, therefore, the duty of every person dealing with a company to inspect its documents and
make sure that his contract is in conformity with their provisions but whether a person reads
them or not, it will be presumed that he knows the contents of the documents. This kind of
presumed/implied notice is called constructive notice.

Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception to the
doctrine of constructive notice. The aforesaid doctrine of constructive notice does in no sense
mean that outsiders are deemed to have notice of the internal affairs of the company. For
instance, if an act is authorised by the articles or memorandum, an outsider is entitled to assume
that all the detailed formalities for doing that act have been observed.
Case Law: Royal British Bank v Turquand

The articles of a company stated that the directors could borrow money on behalf of the
company, if they are so authorised by a resolution passed by the shareholders in GM.
The directors borrowed money from Royal British Bank without obtaining any authorisation
from shareholders. R had lent the money to the company assuming that the shareholders had
authorised the directors to borrow money as per the requirement of the articles.
It was held that borrowing of money by the directors without any authorisation from the
shareholders amounted to a mere internal irregularity, and since R had no knowledge of such
internal irregularity, he would not be prejudiced by such internal irregularity.
Conclusion The benefit of doctrine of indoor, management can be availed only if the person
dealing with the company –
(i) has the knowledge of the memorandum and articles;
(ii) has no knowledge of internal irregularity,
This Doctrine is also known as Turquand’s Rule.

Exceptions to the doctrine of Indoor Management:
1. Actual or constructive knowledge of irregularity: Where the persons dealing with the
company have knowledge of an internal irregularity, obviously the presumption that
every internal proceeding has been conducted regularly shall stand rebutted, i.e., they
cannot assume that everything has been done regularly. Therefore, the benefit of
doctrine of indoor management shall not be available in such a case.
Case Law: Howard v Patent Ivory Manufacturing Company

The directors of a company could borrow upto £1,000 without the sanction of
members in GM.
The consent of the shareholders was required to borrow in excess of £1,000.
The directors themselves lent £3,500 to the company.
It was held that the directors had the notice of the internal irregularity and therefore
the company was liable to them only for £1,000.

2. Suspicion of Irregularity: If there are suspicious grounds surrounding a transaction, but
the person dealing with company fails to make reasonable inquiry, the benefit of doctrine
of indoor management will not be available.
- The doctrine in no way, rewards those who behave negligently. Where the person
dealing with the company is put upon an inquiry, for example, where the transaction is
unusual or not in the ordinary course of business, it is the duty of the outsider to make
the necessary enquiry.
Case Law: Anand Bihari Lal v Dinshaw & Company

An accountant of the company entered into a contract on behalf of the company with a
third parry to sell the property of the company.
It was held that the third party could not assume that the accountant was authorised by
the company to sell the property of the company.
Therefore, the third party could not enforce such a contract against the company even
though the third party had acted bonafide.
3. Forgery: The rule of indoor management does not extend to transactions involving
forgery. In case of forgery it is not that there is absence of free consent but there is no
consent at all. Since there is no consent at all there is no transaction. Consequently, it is
not that the title of person is defective but there is no title at all.
Case Law: Ruben v Great Fingall Consolidated Company

A share certificate was issued under the common seal of the company.
The secretary of the company had signed on the share certificate. However, the signatures
of two directors were also required on it, which were forged by the secretary.
The holder of the share certificate contended that he was not aware of the fact of forgery,
it was not possible for him to determine whether the signatures were genuine or forged
and therefore, the certificate issued to him should be held as valid.
The Court held that in case of forgery, there is not a defect in consent, but absence of
consent, and therefore the certificate issued by way of forgery is void. Thus, the certificate
was held to be invalid.

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Business Laws 1FIN by IndigoLearn 1

UNIT 1 – NATURE OF CONTRACTS

Some Important Terms

Contract = Agreement + Enforceability by law

Agreement = Promise (Accepted Proposal) + Consideration

Promise = Offer/Proposal + Acceptance

Business Laws 1FIN by IndigoLearn 2

3. Agreements to do an unlawful, immoral or illegal act, like smuggling or murdering a person,

Example: Agreements to bet i.e., wagering Agreements, Agreements in restraint of

Essentials of a Valid Contract

Business Laws 1FIN by IndigoLearn 3

Essentials as per Section 10

Case Law: State of Gujarat Vs. Ramanlal S & Co.

Case Law: Balfour Vs. Balfour

Business Laws 1FIN by IndigoLearn 4

Validity or Enforceability Formation Performance

Business Laws 1FIN by IndigoLearn 5

Difference between Void and Voidable Contract

# Void Contract Voidable Contract

Business Laws 1FIN by IndigoLearn 6

Difference between Void and Illegal Contract

# Void Contract Illegal Contract

On the basis of Formation

Business Laws 1FIN by IndigoLearn 7

On the basis of Performance

Offeror/Promisor Makes a proposal/offer to Offeree

Business Laws 1FIN by IndigoLearn 8

Case Law : Carlill v.

Case Law: Carlill v. Carbolic Smoke Ball Co.

Business Laws 1FIN by IndigoLearn 9

Essentials of a Valid Offer

Business Laws 1FIN by IndigoLearn 10

Case Law : Lalman Shukla Vs. Gauri Dutt

• It must be made with an intention of obtaining assent of the other party.

• It may be specific or general

• It may be express or implied

• Offer is Different from a mere statement of intention, an invitation to offer, a mere

Case Law: Harvey Vs. Facie

Business Laws 1FIN by IndigoLearn 11

• Statement of price is not an offer.

Eg: 1. Display of goods for sale in shop windows.

Rules regarding a valid acceptance

Business Laws 1FIN by IndigoLearn 12

Union of India vs. Bahulal

Case Law : Brogden vs. Metropolitan Railway Co.

Business Laws 1FIN by IndigoLearn 13

Communication of Offer and Acceptance

Communication of Offer: In terms of Section 4 of the Act, the communication of offer is

Business Laws 1FIN by IndigoLearn 14

Communication of special conditions:

Revocation of Offer and Acceptance

Business Laws 1FIN by IndigoLearn 15

Modes of Revocation of Offer

• Non-fulfilment of condition: Where the acceptor fails to fulfill a condition precedent to

• Non-acceptance of the offer according to the prescribed or usual mode

Business Laws 1FIN by IndigoLearn 16

Legal rules regarding consideration

Case Law: Durga Prasad Vs. Baldeo

Business Laws 1FIN by IndigoLearn 17

3. It may be Executed or executory:

5. It need not be adequate: It is not mandatory for the consideration to be equivalent to

8. It must not be unlawful, immoral or opposed to public policy: Consideration must be