Law of Contract – II

Part – A (4 X 10 = 40 Marks)

Answer any FOUR questions from the following:

1. Indemnity

Ans: Indemnity means security or protection against a loss or other financial burden.

The word indemnity means security or protection against a financial liability. It typically
occurs in the form of a contractual agreement made between parties in which one party
agrees to pay for losses or damages suffered by the other party.

Indemnity is a comprehensive form of insurance compensation for damages or loss. When

the term indemnity is used in the legal sense, it may also refer to an exemption from
liability for damages.

A typical example is an insurance contract, in which the insurer or the indemnitor agrees
to compensate the other (the insured or the indemnitee) for any damages or losses in
return for premiums paid by the insured to the insurer. With indemnity, the insurer
indemnifies the policyholder—that is, promises to make whole the individual or business
for any covered loss.

2. Contract of Indemnity

Ans: Contract of indemnity meaning is a special kind of contract. The term ‘indemnity’
literally means “security or protection against a loss” or compensation. According
to Section 124 of the Indian Contract Act, 1872 “A contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person, is called a contract of indemnity.”

Example: P contracts to indemnify Q against the consequences of any proceedings which

R may take against Q in respect of a certain sum of money.

The objective of entering into a contract of indemnity is to protect the promisee against
unanticipated losses.

A contract of indemnity has two parties.

1. The promisor or indemnifier

2. The promisee or the indemnified or indemnity-holder

The promisor or indemnifier: He is the person who promises to bear the loss.

The promisee or the indemnified or indemnity-holder: He is the person whose loss is

covered or who are compensated.

In the above-stated example,

 P is the indemnifier or promisor as he promises to bear the loss of Q.

 Q is the promisee or the indemnified or indemnity-holder as his loss is covered by P.

3. Rights of indemnity holder

Ans: Rights of Indemnity Holder

As per the section 125 the rights of indemnity holder are

1. Damages. In a contract of indemnity, the indemnity holder is entitled to recover

from the promise and indemnifier all damages for which he may be compelled to pay in
any suit as of any matter to which the promise the indemnity applies while acting within
the scope of his authority.

2. Costs. Any person with indemnity holder and indemnified or promise is entitled to
recover from promisor all costs which he may be compelled to pay in any suit in bringing
or defending it if he does not go against the order of the promisor and if he has acted in
absence of any contract as would have been prudent for him to do.

3. Sums. An indemnity holder is entitled to recover from indemnified all sums which he
has paid under the term of compromise of any suit and compromise was not against the
order of the promisor and the compromiser was not against the order of the promisor
and the compromise was such that it was to be done (prudent) in absence of any contract
of indemnity.

Explanation of Rights of Indemnity Holder

If any person has agreed to indemnity a person against a particular claim and debt,
demand and an action is brought on that demand the indemnity holder i.e., the defendant
have to give notice to the indemnifier to come and defend the action if he does not come
and refuses to do as he asked. Thus, he has to compromise on best term and can bring an
action under contract of indemnity.

4. Contract of Guaranty

Ans: Contract of Guarantee

Section 126 defines the Contract of Guarantee: – A contract of guarantee involves three
parties. It relates to the performance of contract on behalf of the third person
whereby fulfilling his obligation under the contract by the guarantor

The person who gives the guarantee is called the ‘’Surety’’; the person in respect of
whose default the guarantee is given is called the ‘’Principal Debtor’’, and the person to
whom the guarantee is given is called the “Creditor”. A guarantee may be either oral or
written.

Purpose of Contract of Guarantee

It enables a person to get a loan, or goods on credit or employment. Some person comes
forward and ensures the lender or the supplier or the employer that he may be trusted
and in case of any untoward incident, “I undertake to be responsible”.
In the old case of Birkmyr v Darnell the court said: Where a collateral guarantee arises
when two persons come to shop, one of them to buy, the other to give credit, thereby
promising the seller stating if he doesn’t pay I will’’. This is a collateral guarantee.

In English law, a guarantee is defined as ‘’a promise to pay for the debt, default or
failure of another’’. “Guarantees are a backup when the principal fails the guarantee act
as second pockets’’.

5. Continuing Guarantee

Ans: As per Section 129 of the Indian Contract Act, 1972, a Guarantee that extends to
a series and multitudes of transactions is known as a “Continuing Guarantee” in a
contract. These guarantees have a set time limit and time frame or are for a fixed
duration, maybe one month, one year, etc. Continuing Guarantee does not come to an end
after the discharge of a single promise or repayment of single debt or transaction. It is
in the hands of the Surety to make sure that the liability regarding time or amount can
be limited according to his wishes and interest. Under Continuing Liability, the Surety is
liable for unpaid and left balance at the end of the guarantee.

Continuing Guarantee is of two types, (i) Prospective (ii) Retrospective. The former one
is given for future debt(s) and the latter one is given for existing debt(s).

Nature of continuing guarantee contract

The vital aspect of a Continuing Guarantee is that it is applicable and pertains to a series
and multitudes of separate, and distinct transactions. Therefore, when a guarantee is
given for a whole consideration, it cannot be defined as a continuing guarantee. ‘

In the case of Nottingham Hide Co vs. Bottrill, it was stated that “the facts,
circumstances, and intention of each case has to be looked into for determining if it is a
case of continuing guarantee or not. If the contracts are entered into by
misrepresentation or fraud made by the creditor regarding material circumstances or by
concealment of material facts by the creditor, the contract will be considered invalid
and void.

Once the guarantor commits to his liability by paying the required debt to the creditor,
he steps into the shoes of the creditor and avails all the rights that the creditor had
over the principal debtor.” All transactions entered by the principal debtor until they are
revoked by that security shall be subject to a continuing guarantee. A guarantee for
future transactions can be revoked at any time by notification to the debtors. However,
for transactions entered before such cancellation of the guarantee the liability of a
guarantor shall not be reduced.

6. Surety

Ans: A surety is a person giving a guarantee in a contract of guarantee. A person who

takes responsibility to pay a sum of money, perform any duty for another person in case
that person fails to perform such work. Learn more about Discharge and Rights of
Surety here.

According to section 128 of Indian Contract Act, 1872, the liability of a surety is co-
extensive with that of principal debtors unless the contract provides. Liability of surety
is same as that of the principal debtor. A creditor can directly proceed against the
surety. A creditor can sue the surety directly without suing principal debtor.

7. Co-Sureties

Ans: When two or more persons give a guarantee for the same debt, they are called
as co-sureties. All of them are equally liable to the creditor for the payment of the debt
to the creditor.

1. All the sureties shall bear equally, the loss caused by the insolvency of the principal
debtor. If one of them bears the entire loss in the first instance he can claim
contribution from other co-sureties.

2. Where the co-sureties agreed to become liable in different sums, they should
contribute, according to English Law, proportionately.

Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and 40,000
respectively, as sureties for D’s liability. D’s indebtedness was Rs. 30,000. A, B and C
would contribute in the ratio of 1: 2: 4. But according to Indian Law they shall bear such
loss equally but not exceeding the sums which they have agreed to pay. So, A, B and C
will have to pay Rs. 10,000 each.

8. Del Credere Agent

Ans: A del-credere agent (DCA) is a selling agent who is engaged by a principal to assist
in supply of goods or services by contacting potential buyers on behalf of the principal.
The factor that differentiates a DCA from other agents is that the DCA guarantees the
payment to the supplier.

Del Credere Agency refers to the relationship between the agent and the seller wherein
the seller acts as the principal. The agent acts as the broker of the principal and
undertakes the guarantee of the credit, which is extended to the buyer, i.e., in case the
buyer makes any default in the payment of the money. The agent would be liable to the
extent of that amount to the seller.

The different important points related to the del credere agency are as follows:

 In the Del Credere agency, the agent becomes liable for the payment to the principal
only if the buyer defaults to make the payment. The same is not liable in case of any
other issues that might arise between the buyer and the seller. The issues where the
agent will not be liable include disputes between the buyer and the seller.

 For undertaking the additional risk by the agent in the form of the insurance
services, the seller has to make extra to the agent, i.e., the agent will receive the
 normal commission for the sales and the extra commission for undertaking the
insurance services. This extra payment is generally in the form of the
additional sales commission, which is known as the Del Credere commission.

 The nature of the Del Credere agency is such that it puts the agent in the agency in
the situation wherein he has the responsibility in connection with the seller and the
buyer and of product or service under consideration.

9. Sub-Agent

Ans: A sub-Agent is a person hired by and operating under the direction of the
original Agent in the agency's business, as defined under Section 191 of the Indian
Contract Act of 1872. A sub-agent is the agent of the original agent. He is a person
employed and acting under the control of the original agent in the business of agency.
The relation of the subagent to the original agent is as between themselves, that of
agent and principal. A sub-agent is bound by all the duties of an ordinary agent. Section
190 of the Act provides that an agent cannot lawfully employ another to perform acts
which he has expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a subagent may, or, from the nature of the agency, a sub-agent
must, be employed. The agent is responsible to the principal for the acts of the sub-
agent. The sub-agent is responsible for his acts to the agent, but not to the principal,
except in cases of fraud or wilful wrong.

10. Termination of Agency

Ans: Termination of agency is when the relationship between principle and agent
comes to an end. An agreed relationship between the principle and the agent by
agreement or law by a third party known as the agency in the contract. The agent deals
with third parties on behalf of the principal.

Termination of agency into two parts: 1. By the act of parties; and 2. By the operation of
law.

By the act of parties:

There are following manner in which by the act of parties the agency can be terminated:

Revocation by mutual agreement: The agency of contract can be terminated at any time
by mutual agreement between the principal and the agent.

For Example- A empowers B to let A’s house. Afterwards A lets it himself. This is an
implied revocation of B’s authority.

Revocation by the Agent: The Agent also can revoke the agency by serving notice to
the principle. As per section 206 of the Indian Contract Act 1872, the agent must give
proper notice of renunciation / revocation of his principal. Otherwise, he shall be liable
to make good for the loss to the principal for such notice.
By operation of law:

The following points are included in this:

By the completion of agency – After completion of agency work, an agency can be

terminated for which agency is created.

Example: Mahesh employed Sachin as his agent to sell his house in China when the house
was sold by Sachin, it automatically terminates the contract of agency between Mahesh
and Sachin.

By the end of time- The agency can also be terminated by the end of time. If the
agency is created for a specific period of time, then it expires after the time period is
over.

Example: Anandam employs to Anjana as a secretary for the period of 3 years at the end
of the 3 years. The contract of agency will come to an end after the specified period.

Death or insanity of principle or agent: Section 209 of the Indian Contract Act deals
with it. If there is a death of the principle or agent, the business or agency of the firm
may be terminated in this situation.

Insolvency of principle: To create an agency it is necessary to be competent but, if the

principal becomes insolvent or bankrupt, the agency may be terminated.

Destruction of subject matter – If this subject of agency is destroyed then the agency
is closed.

For example – any agency is made for sale of airplanes, if the airplane catches fire
before the sale, then, this agency can be terminated because airplane is the subject of
this contract.

Principal becomes a foreign enemy – If the principal becomes a foreign enemy, the
contract of agency terminates.

Example: Mr. T is employed in America and Mr Sachin who works as an agent for Mr. T in
China for business, due to war climate between the countries of principal and agent, the
contract of agency gets terminate.

Winding up of company or firm – A firm or company can be considered as a chief in an

agency contract. If the company or firm is dissolved, then the agency is terminated.

11. Pledge

Ans: Section 172 defines pledge as “The bailment of goods as security for payment of a
debt or performance of a promise is called pledge (also known as pawn).” The parties to
this contract are called ‘pawnor’ (pledger or bailor)) and ‘pawnee’ (pledgee or bailee).

Supreme Court in Lallan Prasad v. Rahmat Ali & Anr. 1967 SCR (2) 233 defined pledge as
“a pawn or a pledge is a bailment of personal property as a security for some debt or
engagement. A pawnor is one who being liable to an engagement gives to the person to
whom he is liable a thing to be held as security for payment of his debt or the fulfilment
of his liability.”

The two ingredients of a pawn or a pledge are: 1. that it is essential to the contract of
pawn that the property pledged should be actually or constructively delivered to the
pawnee and 2. a pawnee has only a special property in, the pledge but the general
property therein remains in the pawner and wholly reverts to him on discharge of the
debt. A pawn (pledge) therefore is a security, where, by contract a deposit of goods is
made as security for a debt. The right to property vests in the pledge only so far as is
necessary to secure the debt. In this sense a pawn or pledge is an intermediate between
a simple lien and a mortgage which wholly passes the property in the thing conveyed.

12. General lien

Ans: A general lien is the right to retain the property of another for a general
balance of account.

Bankers, factors, wharfingers, policy brokers and attorneys of law have a general lien
in respect of goods which come into their possession during the course of their
profession. For instance, a banker enjoys the right of a general lien on cash, cheques,
bills of exchange and securities deposited with him for any amounts due to him. For
instance, ‘A’ borrows ` 500/- from the bank without security and subsequently again
borrows another ` 1000/- but with security of say certain jewellery. In this illustration,
even where ‘A’ has returned ` 1000/- being the second loan, the banker can retain the
jewellery given as security to the second loan towards the first loan which is yet to be
repaid.

Under the right of general lien, the goods cannot be sold but can only be retained for
dues. The right of lien can be waived through a contract.

13. Particular lien

Ans: In contract the particular lien is the right to retain the particular goods bailed for
non-payment of charges/remuneration.

Particular lien: In accordance with the purpose of bailment if the bailee by his skill or
labour improves the goods bailed, he is entitled for remuneration for such services.
Towards such remuneration, the bailee can retain the goods bailed if the bailor refuses
to pay the remuneration. Such a right to retain the goods bailed is the right of
particular lien. He however does not have the right to sue.

Where the bailee delivers the goods without receiving his remuneration, he has a right
to sue the bailor. In such a case the particular lien may be waived. The particular lien is
also lost if the bailee does not complete the work within the time agreed.
14. Bailment

Ans: Bailment is basically a legal relationship borne out of a contract wherein the
physical possession of a property is transferred from one individual to another, subject
to certain rights and duties of both the parties.

Contracts of Bailment are a special class of contract. These are dealt from Section 148
to 181 of the Indian Contract Act, 1872. Bailment implies a sort of one person
temporarily goes into the possession of another. The circumstance in which this happens
are numerous. Delivering a cycle, watch or any other article for repair, delivering gold to
a goldsmith for making ornaments, delivering garments to a drycleaner, delivering goods
for carriage, etc. are all familiar situations which create the relationship of ‘Bailment’.

The person delivering the goods is called ‘Bailor’ and the person to whom they (goods) are
delivered is ‘Bailee’.

15. Cavet emptor

Ans: The Latin phrase ‘Caveat Emptor’ means let the buyer beware. The doctrine of
Caveat Emptor under the Sale of Goods Act talks about the onus of the buyer in
ascertaining the risks in a contract. However, this does not free the seller completely
from any responsibility.

If the buyer buys his goods after examining a sample, then the rule of Doctrine of
Caveat Emptor will not apply. If the rest of the goods do not resemble the sample, the
buyer cannot be held responsible. In this case, the seller will be the one responsible.

If the sale is made based on a description as well as a sample and the goods do not match
both, then the buyer is not held responsible. The rule of Caveat Emptor does not apply if
the seller deviates from informing the buyer about the quality or the fitness of
goods/products. There is an implied condition or warranty on the condition of the goods.

16. “Nemo det Quod Non-Habet”

Ans: The legal rule ‘Nemo det quod non-habet’ literally means ‘no one gives what he
doesn’t have’. It is equivalent to the civil rule Nemo plus iuris ad alium transferre potest
quam ipse habetwhich translates to ‘one cannot transfer to another more rights than he
has’. The rule is associated with the transfer of possession of a property in law.

It also has a jurisprudential aspect to it with regard to ownership and possession. For
instance, if A owns a car and he has a driver, the driver would only have the possession
of the car during the course of business, but he would not have the authority to transfer
the title of the car because he only has the title to possess the car during work hours.
The title to transfer the ownership is a greater title than he has and could only be
performed by the owner because his title is authoritative.

17. Auction sale

Ans: Auction is nothing but selling of goods or property in a public sale where
prospective buyers gather in a particular area to buy the goods or property. Auction
sales involve the auctioneer and bidder who bids higher than the other to buy the
property or goods.

An auction sale is a public sale. The goods are sold to all members of the public at large
who are assembled in one place for the auction. Such interested buyers are the bidders.

The price they are offering for the goods is the bid. And the goods will be sold to the
bidder with the highest bid.

The person carrying out the auction sale is the auctioneer. He is the agent of the seller.
So all the rules of the Law of Agency apply to him.

But if an auctioneer wishes to sell his own property as the principal he can do so. And he
need not disclose this fact, it is not a requirement under the law.

Rules of an Auction Sale

The rules for auction sale are laid in Section 64 of Sale of Goods Act are as under:

1] Goods Sold in Lots

In an auction sale, there can be many goods up for sale of many kinds. If some particular
goods are put up for sale in a lot, then each such lot will be considered a separate
subject of a separate contract of sale. So, each lot ill prima facie be the subject of its
own contract of sale.

2] Completion of Sale

The sale is complete when the auctioneer says it is complete. This can be done by actions
also – like the falling of the hammer, or any such customary action. Till the auctioneer
does not announce the completion of the sale the prospective buyers can keep bidding.

3] Seller may Reserve Right to Bid

The seller may reserve his right to bid. To do so he must expressly reserve such right to
bid. In this case, the seller on any person on his behalf can bid at the auction.

4] Sale Not Notified

If the seller has not notified of his right to bid, he may not do so under any
circumstances. Then neither the seller nor any person on his behalf can bid at the
auction. If done then it will be unlawful.

The auctioneer also cannot accept such bids from the seller or any other person on his
behalf. And any sale that contravenes this rule is to be treated as fraudulent by the
buyer.
5] Reserve Price

An auction sale may be subject to a reserve price or an upset price. This means the
auctioneer will not sell the goods for any price below the said reserve price.

6] Pretend Bidding

But if the seller or any other person appointed by him employs pretend bidding to raise
the price of the goods, the sale is voidable at the option of the buyer. That means the
buyer can choose to honour the contract or he can choose to void it.

7] No Credit

The auctioneer cannot sell the goods on credit as per his wishes. He cannot accept a bill
of exchange either unless the seller is expressly fine with it.

18. Unpaid seller

Unpaid seller is the person who sold the goods but has not received the full payment for
the same. Here the unpaid seller receives the half payment and half is remaining he is
also unpaid seller. Under the Sale of Goods Act, 1930, an unpaid seller is a seller who has
not been paid full price of the goods sold or if he has received a bill of exchange or
other negotiable instrument as conditional payment, the condition for the same has not
been fulfilled.

The rights against the buyer are-

A. Suit for the price

In a contract, when the goods or property which the buyer bought has been passed or
send to the buyer and after the property or goods passed buyer refuses or wrongfully
neglects to pay for the goods or property according to the terms and condition signed by
the seller and buyer then according to Section 55(1) of The Sales of Goods Act,1930 the
seller has the right to sue the buyer for the price of his/her goods or property.

In another case, when the due date of the payment is passed, and the goods hadn’t
delivered yet, then also according to Section 55(2), the seller has the right to sue the
buyer for the refusal on his/her part.

B. Suit for the damages

If the buyer refuses or not accepted the goods and payment of money, then according
to Section 56, the seller can sue the buyer for damages of non-acceptance of goods and
the payment of the money. According to the Indian Contract Act, Section 73 and 74
helps for calculating the quantum of damages. The supreme court, in the case of M.
Lachia Shetty V Coffee Board, where a dealer who bid at an auction of coffee had been
accepted, refused to carry out the contract. Consequently, coffee was reauctioned at
the next best bidding price, and the dealer who refused the bid have to give the
difference in the amount of loss to the board. This case explains the nature of the duty
of mitigation.
C. Suit for Interest

When the buyer and seller have a specific agreement with regards to the interest on the
price of the goods from the date on which the payment becomes due, then according to
Section 61, the seller can recover the interest from the buyer. And if there is no
contract between them, the seller can also charge the interest from the day he notifies
the buyer.

D. Repudiation of the contract before the due date

The rule of anticipatory breach of contract applies; if the buyer refuses or repudiates
the contract before the delivery date, the seller can sue him for the damages under
Section 60 and considered the contract as rescinded. According to this Section, if one
party repudiates before the due date, the other has two courses of action. Either he
may immediately accept the breach and bring the action of damages the contract is
rescinded. Damages will be assessed according to the prices then prevailing, or he can
wait for the date of delivery, and In the second case, the contract is open at risk. It will
be a benefit to both parties, maybe the party changes are mind and agree to perform,
and damages will be assessed according to prices on the day of delivery.

The rights against the goods are-

A. Right to Lien

If the buyer has not paid the price of the goods, then the seller of goods can exercise
his/her right and can retain the possession of goods as a bailee for the buyer under
Section 47. The seller can retain his possession in a different situation, like in case the
buyer is insolvent and when the terms of goods sold on credit are expired. In the case of
Grice V Richardson, the seller sells the parcels of tea. He delivered the part of the
three parcels of tea comprised in the sales, but the rest of the part has to deliver after
the full payment. This case shows the agreement to waive the lien, and the seller cannot
the remainder.

According to Section 49, the termination of a lien can take place when the seller loses
possession of the goods. The right to lien can be terminated when the buyer lawfully
obtains the possession of the goods or when there is any waiver of lien that can be
expressed or implied from the seller’s conduct.

B. Right of stoppage in transit

According to Section 50, It was stated that the unpaid seller has a right to stop the
delivery of goods while they are in transit and can retain them till he receives the full
price of the product. Unpaid seller, buyer insolvent, the property should have been
passed to the buyer, and the goods in property should be in the course of transit. These
four essential are required for the right of the unpaid seller to stooping the goods in
transit.
The right of stoppage transit can exercise by the seller wither by taking the actual
possession of the sold goods and by sending notice of claim to the carrier or other agent
or bailee in possession of the sold goods.

C. Rights of Resale

Every unpaid seller has this right to resell the goods only when the goods are perishable
in nature. In this, the unpaid seller can directly sell the goods to another buyer without
the notice to the actual buyer. And if the goods are non-perishable in nature, then the
seller needs to inform or send a notice to the actual buyer for reselling them. The goods
can be resale in the situation where the unpaid seller gives the notice to the buyer, and
the buyer still doesn’t pay for it. The seller can also resale the goods where the right of
resale is reserved or mentioned in the contract.

If in the contract it was clearly mentioned or specified that reselling can’t be done or
vice versa, then in this situation, the seller only resale the goods when the buyer
becomes insolvent or fails to pay the price of the buyer goods.

Mysore Sugar Co Ltd., Bangalore v. Manohar Metal Industries, In this case, the buyer
has made some default in taking the goods, and the seller gave him a notice that if the
buyer did not lift the goods within three days, the contract would be cancelled. But
after the notice also the buyer did not lift the goods, and the seller resale the goods
after three months. And because of the delay in the resale, the seller suffered a loss
because of the falling market. And if the proper resale had been done, then the seller
would have suffered no loss and therefore seller’s claim for compensation from the
buyer was rejected.

If the seller makes undue delay in making resale and suffers more loss than he would
have suffered if the resale had been made within a reasonable time, he would be entitled
to claim compensation equal to the difference between the contract price and the
market price on the date when the resale ought to have been made.

19. Finder of lost goods

Ans: As per Section 168 and 169 of Indian Contract Act, Rights of finders of lost goods
protect the interest of a finder in two ways. allows the finder retain the goods against
the owner until he receives compensation for trouble and expense. Further where the
owner has offered a specific reward for the return of the goods lost, the finder may sue
for reward and may retain the goods until he receives it.

Further as per Section 169, the finder can sell the goods in certain circumstances.
Where a thing which is commonly the subject of sale is lost, if the owner cannot be
found with reasonable diligence, or if he refuses, upon demand, to pay the lawful charges
of the finder, the finder may sell the goods in the following cases:

 When the thing is in danger of perishing or losing the greater part of its value, or
 When the lawful charges of the finder, in respect of the thing found amount to
two-thirds of its value.
20. Warranties

Ans: According to Section 12 (3) of the Sale of Goods Act 1930, a warranty is an
additional condition and a written guarantee which works as a collateral (surety) for the
main purpose of the contract. And the effect of the breach of the same is that the
victim cannot repudiate (reject) the whole contract but can claim for the damages.

Conditions and Warranties may be either expressed or implied. “Expressed” stipulation in

simple terms can be explained as when the terms of the contract expressly state them,
and on the other hand “implied” stipulation can be understood as those which are
presumed by law to be present in the contract.

21. Contract of Partnership

Ans: According to the Section 4 of the Indian Partnership Act, 1932, ‘Partnership is
the relation between persons who have agreed to share the profits of a business carried
on by all or any of them acting for all’.

A partnership consists of the following elements –

 Relation between the persons

 Agreement between the persons

 Sharing profits with one another

 Carrying a business

 Business is carried on by all or any of them acting for all i.e., the mutual agency

22. Partnership at will

Ans: As per Section 7 of Indian Partnership Act, where no provision is made by

contract between the partners for the duration of their partnership or for the
determination of their partnership, the partnership is “partnership at will”.

In other words, if there is no clause to establish a partnership at the expiry of such a

partnership, it is referred to as a partnership at will. Under Section 7 of The Indian
Partnership Act, 1932, two conditions have to be met for a partnership to be a
partnership at will and they are:

 There is no agreement on a fixed period for the existence of a partnership.

 No provision is made for establishing a partnership.

If a partnership has been established and continues to operate beyond the fixed period,
the partnership will become a partnership at will after the end of that term

23. Minor as partner

Ans: According to Section 30 of the Indian Partnership Act, 1932 a minor cannot be a
partner in a firm. However, if he opts for the consent of all the other partners, for the
time being, he is eligible to claim the benefits of the partnership. In order to enjoy such
benefits, there must be an agreement executed between his guardians and the partners.

In order to enjoy such benefits, there must be an agreement executed between his
guardians and the partners. The rules for the appointment of a minor in a partnership
are as follows: -

1. A minor can be appointed to the benefits of the Partnership when there is the
consent of all the existing partners.

2. It is pertinent to note that, there must be an existence of a partnership before a

minor is appointed. Thus, it is implicit that a minor cannot form a new partnership but
can be admitted to an existing partnership.

3. Moreover, there cannot be a partnership consisting of all minors.

24. Dissolution of Partnership

Ans: According to the Section 39 of Indian Partnership Act 1932, the dissolution of a
partnership between all the partners of a firm is called the “dissolution of the firm”.
Dissolution is a process by which a partnership firm comes to an end and all its partners
get free from the rights and liabilities that arose from the partnership.

Modes of Dissolution of Partnership Firm

Partnership firm may be dissolved by the following grounds-

Without the Order of Court

By Agreement {Sec 40}– According to Section 40 of the Indian Partnership Act, 1932,
partners can dissolve the partnership by agreement and with the consent of all partners.
Partners can also dissolve the partnership based on a contract that has already been
made.

Compulsory Dissolution {Sec 41}– An event can make it unlawful for the firm to carry on
its business. In such cases, it is compulsory for the firm to dissolve. However, if a firm
carries on more than one undertaking and one of them becomes illegal, then it is not
compulsory for the firm to dissolve. It can continue carrying out the legal undertakings.
Section 41 of the Indian Partnership Act, 1932, specifies this type of voluntary
dissolution.

Dissolution on happening of certain contingencies {Sec 42}– According to Section 42 of

the Indian Partnership Act, 1932, the happening of any of the following contingencies
can lead to the dissolution of the firm:

 Some firms are constituted for a fixed term. Such firms will dissolve on the expiry
of that term.

 Some firms are constituted to carry out one or more undertaking. Such firms are
dissolved when the undertaking is completed.
 Death of a partner.

 Insolvent partner.

Dissolution by notice of partners at will {Sec 43}–According to Section 43 of the

Indian Partnership Act, 1932, if the partnership is at will, then any partner can give
notice in writing to all other partners informing them about his intention to dissolve the
firm.

Dissolution by the Court

Sec 44

Insanity of partner: [SEC 44(a)]- Where a partner has become insane or unsound
mind.

Permanent incapacity: [SEC 44(b)]– Where a partner has been incapacitated from
performing his duties as being a partner.

Misconduct: [SEC 44(c)]– Where a partner is found of guilty misconduct.

Breach of Agreement- If a partner wilfully commits breach of agreement relating to

the management or authority of the affairs of the firm.

Transfer of Interest- Where a partner transfers the whole sum of interest in the firm
to a third party the other partner may sue for dissolution.

Business working at loss- If the firm is running at loss any partner may sue in the Court
of Law for dissolution of the firm.

Any other ground- The firm may be dissolved on any of justifiable ground that is
equitable.

25. Registration of firm

Ans: Under Section 58 of the Indian Partnership Act, 1932, a firm may be registered at
any time (not merely at the time of its formation but subsequently also) by filing an
application with the Registrar of Firms of the area in which any place of business of
the firm is situated or proposed to be situated.

Procedure of Registering a Partnership firm

Step 1: Selection of name

Choose a name that is very different, unique and easy to remember that will represent
the business. As discussed earlier in this article the business name of the firm has to
satisfy those conditions to be eligible to qualify as a proper business name. It is highly
recommended to check for existing trademark applications to avoid overlapping.
Step 2: Draft the Partnership Deed

The next important part of the registration process is preparing the partnership deed.
The partnership deed is a mother document of the partnership. Hence there is a need
for fool proof drafting.

Step 3: Notarize and Execute the Deed

Once the deed is ready it shall be reviewed by the partners and if necessary, by experts
to avoid any technical error. The final Deed shall be printed on a non-judicial stamp
paper with a value of 100/- or more depending upon the value of properties that are
present in the deed. The parties are thus requested to verify the state stamp duty act
of the respective state in which it is registered.

Step 4 : Application of PAN

The partnership firm is not a separate entity as a Joint Stock Company which is
separate from that of the owners or shareholders. However, still, the partnership firm
has to acquire a separate PAN for the purpose of compliance with the statute.

Acquiring of PAN can be done before or after the registration of the firm.

Step 5: Registration of the Partnership Deed

As per section 58 and Rule 3 of the Indian Partnership Act 1932, Form 1 has to be filled
by the partners.

Step 6: Receiving Certificate

Once the registrar is satisfied with the documents submitted, he shall intimate any
outstanding fees or stamp duty that has to be paid. The fees vary according to the area,
it is better to ask the registrar in advance for any such fees that have to be paid.

Once this process is over the certificate will be mailed to the business address.

26. Reconstitution of firm

Ans: Any changes in the constitution of the firm or change in relation of partners or
restructuring of the partnership firm can be defined as ‘reconstitution of a partnership
firm’. Reconstitution leads to changes in the firm which put an end to the pre-existing
agreement between the partners and results in the formation of a new agreement in its
place. Under the Indian Partnership Act, 1932, Sections 31 to section 35 broadly deal
with the Reconstitution of a partnership firm

Need for reconstitution in a partnership firm

Reconstitution of a partnership firm takes place whenever there is a change in the

profit-sharing ratio among the partners, admission of a new partner, retirement of a
partner and death or insolvency of a partner. This process of reconstitution can lead to
the following changes in an organisation: –

 Determination of sacrificing ratio and gaining ratio between continuing partners

  Accounting for goodwill

 Accounting treatment of reserves and accumulated profits

 Accounting for revaluation of assets and liabilities

 Adjustment of capitals

Example

A, B and C are partners of a firm sharing profits in the ratio of 2:2:1. Their capital
contributions are Rs.10000, Rs.10000 and Rs.5000 respectively. One day all the partners
decide that C should bring in an additional capital of Rs.5000. This makes the new capital
as Rs.10000 each which results in a change in the profit-sharing ratios to 1:1:1. The
arrangement can be called a reconstitution of a firm as a change in the structure can be
observed.

27. Delegation of Authority

Ans: DELEGATION OF AUTHORITY

Meaning of “delegatus non potest delegare”

An agent cannot delegate his powers or duties to another without the express authority
of the principal, except in certain cases. This is based on the maxim “delegatus non
potest delegare”, that is, “a delegate cannot further delegate.” An agent, being himself
the delegate of his principal, cannot pass on that delegated authority to someone else.

Exception to “delegatus non potest delegare”

However, there are certain exceptions to this rule and they are:

 Where the principal has expressly permitted delegation of such power.

 Where the principal has impliedly, by his conduct, allowed such delegation of
authority,

 Where by the ordinary custom of trade a subagent may be employed.

 Where the very nature of agency makes it necessary to appoint a subagent. For
example, a manager of a shop may employ sales assistant.

 Where unforeseen emergencies arise rendering appointment of the sub-agent

necessary.

Part – B (2 X 15 = 30 Marks)

1. Explain circumstances in which a surety be discharged of his liability? (Sept 2016)

Under what circumstances will a surety be discharged of his liability? (Aug 2021)

Ans: In a contract of guarantee, a surety undertakes to pay the amount to the creditor in
case the principal debtor is not able to pay the amount. The Indian Contract Act, 1872
through its different provisions ensures that it protects the interest of all the parties in a
 contract of guarantee, especially the interests of the surety. It may happen that initially
when the contract of guarantee had been entered into, the contract was not entirely based
on good faith. However, after entering into such a contract, our legal system makes it a
point that good faith is imposed on the creditor. It also ensures that there is no ambiguity
related to the rights and liabilities of the surety.

Discharge of surety

The Indian Contract Act, 1872 provides for the discharge of the liability of surety, in case
of certain given circumstances. A surety is said to discharge from his liability if his liability
to perform the promise, in case of a default by the principal debtor, comes to an end.

The situations under which a surety is discharged from his liability is listed as follows:
 Discharge by Revocation
1. Revocation of guarantee by giving notice (Section 130);
2. Revocation by death (Section 131).

 Discharge by the conduct of the parties

1. Variance in terms of the contract (Section 133);

2. Release or discharge of the principal debtor (Section 134);
3. Compounding by Creditor with the principal debtor (Section 135);
4. Creditors act/omission impairing surety’s eventual remedy (Section 139);
5. Loss of security (Section 141).

 Discharge by the invalidation of the contract

1. Guarantee obtained by misrepresentation (Section 142)

2. Guarantee obtained by concealment (Section 143
3. Failure of a co-surety to join a surety (Section 144).

Revocation of surety by giving notice

Section 130 of the Indian Contract Act, 1872 states that a continuing guarantee, i.e., a
guarantee for a series of transactions can be revoked if a notice is served to the creditor.
However, revocation in case of a specific guarantee is not possible if the contract entered
into has been already acted upon.

Case Law and Analysis

Case law, in this effect, is the case of Sita Ram Gupta v Punjab National Bank. The facts
of this case as identified were that the appellant revoked the guarantee given by him
before the amount was advanced to the principal debtor. However, there was a clause in the
contract of guarantee entered into, which provided that the guarantee is of continuing
nature and will not be cancelled or revoked. The court held that the appellant was himself
responsible for waiving off his own rights and hence, cannot revoke the contract.

Revocation by death
Section 131 of the Indian Contract Act, 1872 provides that in case of death of the surety,
the liability of the surety is discharged.
 Discharge by variance in terms of the contract
Section 133 of the Indian Contract Act, 1872 provides for the discharge of the liability of
the surety, in case of material alteration or variance in the terms of the contract.

Release or discharge of the principal debtor

Section 134 of the Indian Contract Act provides for the discharge of the liability of the
surety, in case the principal debtor is released from his liability to repay the amount The
section provides two situations which would result in the release of the principal debtor.
These are elucidated as follows:

 Existence of a contract or laws

In case, the liability of the principal debtor gets discharged, the surety who has the
secondary liability is also discharged from his liability.

However, a distinction must be made by the court in relation to the time when the surety is
discharged from his liability and when it is not. For instance, in the case where the amount
of the principal debtor gets reduced to the application of the debt relief act, the surety
will be liable only for the reduced amount. However, in case the principal debtor is
discharged from the liability in case of insolvency, the surety is not discharged.

 Act or omission
The second case is where there is an act or omission on part of the creditor that discharged
the liability of the principal debtor. In this case, the surety will be discharged. This can
happen when the creditor fails to perform his part of the promise which discharges the
liability of the debtor.

Compounding by Creditor with Principal Debtor

According to Section 135 of the Indian Contract Act, 1872, a surety can be discharged of
his liability if there is any composition or a new agreement between the creditor and the
principal debtor. Through analysing Section 135 of the Indian Contract Act, it can be
concluded that a surety can be discharged from his liability in case of three prevailing
circumstances. These are:

 Composition
Composition refers to variation in the original contract and adding something up which was
not present in the original contract. In case there is a composition in the contract between
the debtor and the creditor without surety’s consent, it would discharge his liability.

 Promise to give time

The surety is entitled to ask the principal debtor to pay off the debt when it is the time for
repayment. However, if there is a contract between the principal debtor and the creditor
whereby the creditor has agreed to give some more time to pay off the debt without
keeping the surety into consideration, the surety will be discharged.

However, Section 136 of the Indian Contract Act, 1872 provides that, if the creditor
enters into an agreement to give time with a third party, it does not discharge the surety
from his liability.
 Promise not to sue
If there is an explicit contract which provides that the creditor will not sue in the event of
default, it would result in the discharge of liability of the surety. However, mere
forbearance to sue will not discharge the liability as provided under Section 137.

If the surety has agreed to such conditions, he will not be discharged from the contract as
is evident from the phrase “unless the surety assents” in Section 135.

Creditor’s act/omission impairing surety’s eventual remedy

It is the duty of the creditor not to do any act which is inconsistent with the contract
which would result in the impairment of the remedy of the surety to recover the amount
from the principal debtor after repayment. This right of the surety to discharge his liability
is provided in Section 139 of the Indian Contract Act, 1872.

Loss of security
Section 141 of the Indian Contract Act, 1872 gives surety the right to claim all the security
which had been kept with the creditor after paying the amount to the creditor. If the
security is lost and the surety does not get the security for any reason, the surety can be
discharged from his liability.

This provision arises due to the Right of Subrogation with the surety, according to which
the surety is entitled to all the rights of the creditor and takes the position of the creditor
after paying the amount to the original creditor. Hence, the surety also has the right to the
security of exercising the right of subrogation.

Discharge by invalidation
A surety can be discharged of his liability if the contract of guarantee is invalidated. The
Indian Contract Act provides for three circumstances under which a contract of guarantee
can become invalidated. These are elucidated as follows:

 Guarantee by misrepresentation (Section 142)

Section 142 provides that if a contract of guarantee has been entered into owing to the
misrepresentation of a material fact which was known to the creditor, it would invalidate
the contract.

 Guarantee by concealment (Section 143)

According to Section 143, if a contract of guarantee is obtained due to concealment of a
material fact by a creditor, the contract would be invalid.

 Failure of a co-surety to join a surety (Section 144)

If the surety has put forth a condition that the creditor shall not act upon the contract in
the absence of another co-surety and this condition is not fulfilled, it would lead to
invalidation of contract.

Conclusion
The Indian Contract Act, 1872 provides for the discharge of the liability of surety in case
of certain given circumstances with the objective of securing the interests of the surety,
who guarantees payment of the debt in case of a default.
The situation under which the surety can be discharged from his liability can be categorised
into three different heads i.e. by revocation, the conduct of the parties and invalidation of
the contract.

2. When is a seller deemed to be an unpaid seller of goods and what are his rights
(Aug 2021)
Who is “unpaid seller”? what are his rights according to the Sale of Goods Act?
(Sept 2015)

Ans: According to the Sales of Goods Act,1930, Section 45 (1) says that the seller can be
considered an unpaid seller when the full price has not been paid. The seller has an
immediate right of action for the price and when Bills of Exchange or other negotiable
instruments have been received as conditional payment.

In certain cases, when a buyer refuses or fails to pay the requisite amount to the seller, the
seller becomes an unpaid seller and can exercise certain rights against the buyer. These
rights are considered as seller’s remedies in case there is a breach of contract by the
buyer. These remedies can be against:

1. Buyer
2. Goods

According to Section 45(1) of Sale of Goods Act, 1930, the seller is considered as an
unpaid seller when:

a. When the whole price has not been paid and the seller has an immediate right of
action for the price.

b. When Bills of Exchange or other negotiable instrument has been received as

conditional payment, and the pre-requisite condition has not been fulfilled by reason
of the dishonour of the instrument or otherwise. For instance, X sold some goods to
Y for Rs. 50 and received a cheque. On presentment, the cheque was dishonoured by
the bank. X is an unpaid seller.

Rights against buyer

1- Suit for the price
When any goods are passed on to the buyer and the buyer has wrongfully neglected or
refused to pay as per the terms and conditions of the contract, the seller may sue him as
per the Section 55 (1) because once the property has been passed the buyer is bound to
pay the price.

But in the case due date of payment has been passed and goods had not been delivered yet,
the seller can sue the buyer for the wrongful neglect or refusal on his part according
to clause 2 of Section 55.

In case the price is due in foreign currency the damages must be calculated at the rate of
exchange prevailing at the time when the price was due not on the judgement date.
2- Suit for damages
In case there is a wrongful refusal on the part of buyer for acceptance of goods and
payment of money, the seller can sue him for damages of non-acceptance as per Section 56.
For calculating the quantum of damages Section 73 and 74 of the Indian Contract
Act applies.

In case the goods have a ready market, the seller has to resell the goods and buyer have to
pay the losses if incurred. If the seller does not resell the goods the difference between
contract and market price at the day of breach is taken as a measure for damages. If the
difference between them is nil seller gets nominal value.

There is a duty of mitigation on the part of the seller, which means that injured has to make
reasonable efforts to minimise the loss from that breach. For instance, if the seller can
resale the goods, the difference in price in contract and resale price is given to the seller
but if the seller deliberately refuses to resale the goods and its market value reduces then
the buyer will not be liable for the exaggerated loss.

The nature of the duty of mitigation has been explained by the supreme court in case of M.
Lachia Shetty V Coffee Board, where, a dealer who bid at an auction of coffee had been
accepted, refused to carry out the contract, consequently, coffee was reauctioned at next
best bidding price and dealer who refused the bid have to give the difference in the amount
of loss to the board.

3- Suit for interest

As stated under Section 61, where there is a specific agreement between buyer and seller
with regards to interest on the price of goods from the date on which payment becomes
due, the seller may recover interest from a buyer. But if there were no such agreement the
seller may charge interest from the day he notifies the buyer.

If there is no contract to the contrary, the court of law may award interest to the seller at
such rate as it thinks fit on the amount of the price from the date on which amount is
payable.

4- Repudiation of the contract before the due date

According to Section 60, the rule of anticipatory breach contract applies, wherein, if buyer
repudiates the contract before the date of delivery the seller can consider the contract as
rescinded and can sue for damages of the breach.

According to this Section, if one party repudiates before due date other has two courses of
action. Either he may immediately accept the breach and bring the action of damages the
contract is rescinded and damages will be assessed according to the prices then prevailing
or he can wait for the date of delivery. In the second case, the contract is open at risk and
will be a benefit to both parties. May be the party changes is mind and agree to perform and
damages will be assessed according to prices on the day of delivery.

Rights against goods

a- Lien
Lien is a right which seller of goods can exercise when a buyer has not paid the price of
goods, under this right seller can retain the possession of goods as an agent or bailee for
the buyer. The seller can retain his possession as per Section 47 under the following
circumstances:
a. In case the buyer is insolvent.
b. When the term of goods sold on credit is expired.
c. Goods sold without any stipulation as to credit.

When the goods are sold on credit the right to lien is suspended during the term of credit
and lien exist only for the price of goods, not any additional charges.

According to Section 48 if the seller has delivered a part of unpaid goods he can exercise
his right of lien on rest.
Termination of lien takes place when the seller losses the possession of goods. As
per Section 49, under following circumstances right of lien is terminated-

a. Waiver of lien: The right of lien is an implied right attached by law in every contract
of sale, the seller has the autonomy to waive this right, it may be expressed or implied
from the conduct of the seller.
b. When buyer or agent lawfully obtains possession of goods: Once the buyer got the
possession of goods from the seller, all the rights of the seller in respect to goods are
ceased even if the price is not paid. The seller can recover the price as a normal debt
because the acceptance of possession gives absolute, unqualified and indefeasible right
of goods to the buyer. When the goods are given again to the seller for repair he
cannot access the right of lien.

c. When the seller delivers goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the
goods:When the seller has delivered goods to the carrier for transmission, his right of
lien is ceased but the right to stoppage in transit is still accessible by him. In case
seller regains possession of goods in transit by stoppage his right to lien is revived.

b- Stoppage
When the goods have been transferred to carrier or bailee for the purpose of transmission
to the buyer, who has become insolvent, the seller has the right to stop the goods in transit
in order to protect himself against the loss that may arise due to insolvency. As per Section
50, there are four essential requirements for stopping the goods in transit:

1. Unpaid seller.
2. Buyer insolvent.
3. Property should have passed to the buyer.
4. Property should be in course of transit.

The course of transit depends upon the capacity of middleman to hold the goods.

Section 5 lays down the rules and regulations related to commencement and end of the
transit, this Section is divided into seven sub-Sections which solve all the issues related to
commencement and end of transit:

1. Delivery to the buyer- Goods are considered to be in transit from the time when
they are delivered to the carrier or other bailee for the purpose of transmission to
 the buyer, till the goods are received by the buyer himself or his agent takes
delivery of them.

For example, in the case of Great Indian Peninsula v Hanmandas, the seller
consigned the goods with the GIP Ry Co for transportation to the buyer. On the
arrival at the destination, the company had delivered the goods to the buyer who
had loaded them on his cart, but the cart had not yet left the railway compound
when a telegram was received by the company to stop the goods. The company did
not do so and were sued by the seller in damages. It was held that the transit had
ended as soon as the goods were handed over to the buyer.

2. Interception by the buyer: When the buyer or the agent takes the delivery of the
goods from the carrier, the transit ends even before their arrival at the appointed
destination.

In case the carrier delivers the goods before the arrival of the buyer, although it is
wrongful and the carrier may be held liable for the damages but the transit ends
here.

3. Acknowledgement to the buyer: The transit is considered to come to an end when

the goods arrive at the appointed destination and the carrier acknowledges to the
buyer or his agent that he is now holding the goods on his behalf. It is immaterial if
the gods are still in the carrier or the buyer has indicated another destination. In
order to put an end to the original contract of carriage, a very clear
acknowledgement is required.

4. Rejection by the buyer: When the buyer rejects the goods and the carrier or
other bailee continues to possess them, the goods are held to be still in transit.
This will also include the case when the seller himself refuses to take back goods.

5. Delivery to ship charted by the buyer: It is a question of fact whether the

carrier is acting independently or as an agent of the buyer at the time when the
goods are delivered to a ship charted by buyer. As soon as the goods are loaded on
the ship, the transit ends if the carrier is acting as an agent of the buyer.

6. Wrongful refusal to delivery: When the carrier wrongfully denies delivering the
goods to the buyer or his agent the transit is at the end. It is obvious that goods
should have arrived at their destination because otherwise, the carrier has the
right to refuse to deliver them.

7. Part delivery: in the case when the goods have been delivered partly, the seller has
a right to stop the delivery of the rest of the goods unless the part delivery shows
an agreement to the possession of the whole. For instance, A sells to B 20kg of
wheat, 10kg has been transferred to B but rest 10kg is still in transit, in case B
fails to pay A has a right to stop the goods in transit.
c- Resale
Exercising the right of lien or stoppage does not rescind the agreement but reselling of
goods does and without this right, the other two rights of lien and stoppage would not be of
much usage because he can only retain goods under these right till the buyer pays back the
money.

The unpaid seller can exercise his right under following conditions and circumstances-

a. Seller before reselling the goods needs to send a notice to the buyer except in the
case of perishable goods, giving him last chance to pay the price and take back the
goods within a reasonable time. If the buyer does not pay the money back seller
has the right to resell the goods. If the seller fails to give notice of his intention
to resell, he cannot claim damages from the buyer and he has to give any profit.

b. If there is any loss in the resale of goods he can claim the loss from the buyer, on
the contrary, if there is profit buyer cannot claim it.

c. Seller gives rightful ownership to buyer after the resale it does not matter notice
of resale is given or not to defaulted buyer.

d. Sometimes the seller reserves exclusive right to resale the goods if the buyer
makes a default in payment, in such cases the buyer cannot ask for profit on resale
if no notice is served and seller has the exclusive right to resale.

3. What are the rights of surety against the principal, debtor, creditor and co
sureties (Dec 2020)
What is the nature of surety’s Authority State his rights against the principal,
debtor (Sept 2019)

Ans: Rights of Surety against Creditor, Principal Debtor, Co-Surety Rights of Surety
against Creditor:

1. Rights in Case of Fidelity Guarantee

In case of fidelity guarantee i.e., guarantee as to good behaviour, honesty, etc., of the
principal debtor, the surety can ask the employer to dispense with the services of the
employee if the latter is proved to be dishonest.

2. Before the Payment of the Debt Guaranteed

A surety may, after the debt has become due but before he is called upon to pay, require
the creditor to sue the principal debtor to recover the debt. But, in such cases, the surety
must undertake to indemnify the creditor for any risk, delay or expense resulting there
from.

3. Right to Claim Securities

After payment of the debt to the creditor or the performance of the promise of the
principal debtor, the surety can recover all the securities which the creditor had with him
either before or after the contract of guarantee was entered into. This right is available to
the surety whether or not he knows about the existence of such security. He is entitled to
all of them.
4. Right of Equities
After paying the amount due to the creditor, the surety is entitled to all equities of the
creditor that he had against the debtor as well as any other person with regard to the debt.

5. Right of Set-off
Sometimes, the principal debtor is entitled to certain counter claim or deductions from the
loan obtained from the creditor. In such cases, the surety is entitled to the benefit of such
counter claim or deductions, if the creditor files a suit against the surety.

Rights of Surety against the Principal Debtor

1. Right of Subrogation
After the payment of the debt to the creditor, the surety is subrogated to the rights of
the creditor i.e., he has the same rights as those of the creditors. Therefore, he can sue
the principal debtor to exercise those rights. Thus if the surety has performed his promise
towards the creditor, all the rights of the principal debtor against the creditor devolve
upon him.
2. Right of Indemnity
In every contract of guarantee, there is an implied promise by the principal debtor to
indemnify the surety i.e., to compensate the surety. Therefore, upon the payment of debt
of the principal debtor, the surety becomes entitled to recover from the principal debtor,
all the amount including interest plus costs rightly paid to the creditor under the guarantee.
The reason is that the surety is entitled to full indemnification.

3. Right to be Relieved Earlier

A surety can, even before making any payment, compel the debtor to relieve him from
liability by paying off the debt. But, before doing so, the debt should be ascertained.

Rights of Surety against Co-sureties

When two or more persons give a guarantee for the same debt, they are called as co-
sureties. All of them are equally liable to the creditor for the payment of the debt to the
creditor. The rights of one co-surety against the other co-sureties are as follows:

1. Right to Contribute Equally

If two or more persons are co-sureties for the same debt either jointly or severally, or
whether under the same or different contracts and whether with or without the knowledge
of each other, the co-sureties in the absence of any contract to the contrary, are liable as
between themselves, to pay each, an equal shares of the whole debt, or that part of it which
remains unpaid by the principal debtor.

Sometimes, one co-surety discharges the entire obligations. In such cases, he can obtain
equal contribution from the other co-sureties.

2. Liability of Co-sureties bound in Different Sums

If the co-sureties are bound in different sums, they are liable to pay equally but not more
than the maximum amount guaranteed by each one of them.
Example: A, B and C are sureties for D, enter into three several bonds, each in a different
penalty, such as A in the penalty of Rs.5,000, B in that of Rs.10,000, C in that of Rs.20,000,
 conditioned for D’s duly accounting to E. D failed to the extent of Rs.15,000, A, B and C are
each liable to pay Rs.5,000 each.

4. Discuss the rule an agent shall not delegate his authority (Dec 2020)
Explain the concept of “Delegation of Authority”. When an agent can delegate
his authority to someone. (Aug 2014)

Ans: When one party delegates some authority to another party whereby the latter
performs his actions in a more or less independent fashion, on behalf of the first party, the
relationship between them is called an agency. Agency can be express or implied. It is
important to know the law relating to agency because nearly all business transactions
worldwide are carried out through agency. All corporations, big or small, carry their work
out through agency. Therefore, laws relating to the agency are an important area of
Business Law. Relationships relating to principal and agent involve three main parties: The
Principal, the Agent, and a Third Party.

The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do
any act for another or to represent another in dealing with third persons.

According to Section 182, The person for whom such act is done, or who is so represented,
is called the “principal”. Therefore, the person who has delegated his authority will be the
principal.
Illustrations
 A, a businessman, delegates B to buy some goods on his behalf. Here, A is the principal and B
is the agent, and the person from whom the goods are bought is the ‘Third Person’.

 Joe appoints Mary to deal with his bank transactions. In this case, Joe is the Principal, Mary
is the Agent and the Bank is the Third Party.

Who can appoint an Agent?

According to Section 183, any person who has attained the age of majority and has a sound
mind can appoint an agent. In other words, any person capable of contracting can legally
appoint an agent. Minors and persons of unsound mind cannot appoint an agent.

Who may be an Agent?

In the same fashion, according to Section 184, the person who has attained the age of
majority and has a sound mind can become an agent. A sound mind and a mature age is a
necessity because an agent has to be answerable to the Principal.

Creation of Agency
An agency can be created by:
Direct (express) appointment– The standard form of creating an agency is by direct
appointment. When a person, in writing or speech appoints another person as his agent, an
agency is created between the two.

Implication– When an agent is not directly appointed but his appointment can be inferred
from the circumstances, an agency by implication is created.
Necessity– In a situation of necessity, one person can act on behalf of another to save the
person from any loss or damage, without expressly being appointed as an agent. This creates
an agency out of necessity.

Estoppel– An agency can also be created by estoppel. In a situation where one person
behaves in such a manner in front of a third person, as to make someone believe he is an
authorized agent on behalf of someone, an agency by estoppel is created.

Ratification– When an act of a person, who acted as another person’s agent (on his behalf)
without his knowledge is later ratified by that person, this creates an agency by ratification
between the two.
Types of Agents
1. Special Agent- Agent appointed to do a singular specific act.
2. General Agent- Agent appointed to do all acts relating to a specific job.
3. Sub-Agent-An agent appointed by an agent.
4. Co-Agent- Agents together appointed to do an act jointly.
5. Factor- An agent who is remunerated by a commission (one who looks like the
apparent owner of the things concerned)
6. Broker- An agent whose job is to create a contractual relationship between two
parties.
7. Auctioneer- An agent who acts a seller for the Principal in an auction.
8. Commission Agent- An appointed to buy and sell goods (make the best purchase) for
his Principal
9. Del Credere- An agent who acts as a salesperson, broker and guarantor for the
Principal. He guarantees the credit extended to the buyer.

Authority of an Agent
Authority of an agent can be both express or implied.

Express authority
According to Section 187, the authority is said to be express when it is given by words
spoken or written.

Implied authority
According to Section 187, authority is said to be implied when it is to be inferred from the
facts and circumstances of the case. In carrying out the work of the Principal, the agent can
take any legal action. That is, the agent can do any lawful thing necessary to carry out the
work of the Principal.

Implied authority is of four main types

1. Incidental authority- doing something that is incidental to the due performance of
express authority
2. Usual authority- doing that which is usually done by persons occupying the same
position
3. Customary authority- doing something according to the pre-established customs of a
place where the agent acts
4. Circumstantial authority- doing something according to the circumstances of the case
Illustration
 Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by a person named John.
John takes care of the deals regarding the shop and buys goods from a person named Ram,
with Ali’s knowledge. In this case, John has implied authority from Ali to buy these goods.

Case law of Chairman L.I.C v. Rajiv Kumar Bhaskar

In this case, as per the salary saving scheme of L.I.C, the employer was supposed to deduct
the premium from the employee’s salary and deposit it with L.I.C. Upon the death of the
employee, it was found by his heirs that the employer has defaulted in doing so, causing the
policy to lapse. A clause in the acceptance letter was referred to, in which the employer had
said that he would act as the agent of the employee and not as that of L.I.C. It was held
that the employer was acting as the agent of the company, thereby making the company
(L.I.C) responsible as a Principal due to the fault of the Agent (the employer).

Agency between Husband and Wife

Generally, there exists no agency between a husband and wife, except in cases where it has
expressly or impliedly been sanctioned that either of them would do certain acts or
transactions as the agent of the other. That is, a relationship of agency can come into
existence between the two through contract, appointment, or ratification. A husband is
responsible for necessaries to his wife when they are living apart due to the husband’s fault.
This results in an agency of necessity where the wife can use her husband’s credit for what
is necessary for her to live. But in cases where they are separated because of the wife’s
own whims or faults, for no just reason, the husband is not liable for the wife’s necessaries.

Sub-Agent
Who is a sub-agent?
An agent may sometimes delegate the duty that has been delegated to him by the Principal
to somebody else. Ordinarily, an agent cannot delegate the duty he is supposed to perform
himself to another person (delegatus non potest delegare- discussed below), except in
particular circumstances where he must, out of necessity, do so. Section 191 of the Indian
Contract Act, 1872 defines a sub-agent to be a person employed by and acting under the
control of the original agent in the business of the agency.

Delegatus non potest delegare

An agent cannot in ordinary circumstances delegate the duty that was delegated to him. The
principle is based upon the idea that when a Principal appoints an agent, he does so by
placing his confidence and trust in the agent and might not have similar trust in the work of
another person.

5. Define “condition” and “warranty”. Distinguish between condition and warranty

(Dec 2020)
What are the implied conditions and warranties in a Contract of Sale of Goods
(Sept 2018), (Oct 2012)

Ans: The central concept of condition and warranty with respect to the subject matter of
the contract of sale, i.e. goods is explained in section 12 of the Sale of Goods Act, 1930 as a
‘stipulation’ in the contract of sale which may be a condition or warranty.
Deliverable State
Section 20 and 21 of the Sale of Goods Act 1930 elaborate on the concept of ‘Specific
goods in a deliverable state’ and ‘Specific goods to be put into a deliverable state’
respectively.

‘Deliverable state’ refers to the condition of the goods such that the buyer under the
contract is bound to accept the goods delivered to him by the seller according to the
contract. ‘Where there is an unconditional contract for the sale of specific goods in a
deliverable state, the property in the goods passes to the buyer when the contract is made,
and it is immaterial whether the time of payment of the price or the time of delivery of the
goods, or both, is postponed whereas for the ascertained goods that are not in their
deliverable state at the time of formation of the contract, and the seller needs to do
something in order to put the good in a deliverable state, the possession of the good in
deliverable state passes to the buyer as soon as he receives the notice of the same.

Condition
‘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.

A condition is referred to as, an essential element attached to the subject matter of an

agreement which is mentioned by the buyer to the seller and is either expressed or implied
while entering into the contract. The buyer can refuse to accept the goods delivered by the
seller, in case of non-compliance with the condition mentioned by the seller in the contract.

The condition may be expres or implied.

If while entering into a contract, the buyer mentions (in words or writing) that the goods
are to be delivered to him before a given date, the date is taken as a condition to the
contract since the buyer expressed it. Whereas, if a buyer contracts to buy a red-coloured
saree for her ‘wedding’ which is to be held on a date mentioned to the seller, then the time
is the implied condition for the contract. Even if the buyer doesn’t mention the date of
delivery (but has mentioned the date of the wedding or occasion), it is implied on the part of
the seller that the garment is to be delivered before the mentioned date of the wedding. In
this case, the seller is bound to deliver the garment before the date of the wedding as the
delivery of the garment after the said date of the wedding is of no use to the buyer and the
buyer can refuse to accept the same since the condition to the contract is not fulfilled.

Warranty
‘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.

A warranty is referred to as extra information given with respect to the desired good or its
condition. The warranty is of secondary importance to the contract for its fulfilment. Non-
compliance of the seller to the warranty of the contract does not render the contract
repudiated and hence, the buyer cannot refuse to buy the good but can only claim
compensation from the buyer.
 CONDITION
A condition is of primary importance.
Breach of condition leads to termination of
the contract.
The injured party can refuse to accept the
goods as well as claim damages in case of
breach of condition.
The injured party can refuse to accept goods
not fulfilling the condition of the contract.
A condition can be treated as a warranty on
the wish of the buyer.
Defined in Section 12(2) of the Sale of Goods
Act, 1930.
WARRANTY
A condition is of secondary importance.
In case of a breach of warranty, the
injured party is liable to be
compensated.
The Injured party can only claim
damages in case of breach of warranty.
The Injured party cannot refuse to
accept the goods not fulfilling the
warranty.
A warranty cannot be treated as a
condition.
Defined in Section 12(3) of the Sale of
Goods Act, 1930.

Implied Conditions and Warranties under the Sale of Goods Act

Section 14-17 of the Sale of Goods Act, 1930 deal with the implied conditions and
warranties attached to the subject matter for the sale of a good which may or may not be
mentioned in the contract.

Implied Condition
Condition as to Title [Section 14(a)]
Section 14(a) of the Sale of Goods Act 1930 explains the implied condition as to title as ‘in
the case of a sale, he has a right to sell the goods and that, in the case of an agreement to
sell, he will have a right to sell the goods at the time when the property is to pass’.

This means that the seller has the right to sell a good only if he is the true owner and holds
the title of the goods or is an agent of the title holder. When a good is sold the implied
condition for the good is its title, i.e. the ownership of the good. If the seller does not own
the title of the said good himself and sells it to the buyer, it is a breach of condition. In
such a situation the buyer can return the goods to the seller and claim his money back or
refuse to accept the good before delivery or whenever he learns about the false title of the
seller.

CASE LAW: Rowland v Divall, 192210 – The plaintiff had purchased a car from the
defendant and was compelled to return it to the true owner after having used it for a while.
The plaintiff then sued the defendant for the purchase money, since the defendant didn’t
receive the consideration as per the condition of the title of ownership.

Sale by Description (Section 15)

Section 15 of the Sale of Goods Act, 1930 explains that when a buyer intends to buy goods
by description, the goods must correspond with the description given by the buyer at the
time of formation of the contract, failure in which the buyer can refuse to accept the
goods.
Sale by Sample (Section 17)
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 as well as Description (Section 15)

When the sale of goods is by a sample as well as a description the bulk of the goods should
correspond with both, i.e. description and sample provided to the seller in the contract and
not only sample or description.

Condition as to Quality or Fitness (Section 16)

The doctrine of Caveat Emptor is applicable in the case of sale/purchase of goods, which
means ‘Buyer Beware’. The maxim means that the buyer must take care of the quality and
fitness of the goods he intends to buy and cannot blame the seller for his wrong choice.
However, section 16 of the Sale of Goods Act 1930 provides a few conditions which are
considered as an implied condition in terms of quality and fitness of the good:

 When the buyer specifies the purpose for the purchase of the good to the seller, he
relied on the sound judgment and expertise of the seller for the purchase there is an
implied condition that the goods shall comply with the description of the purpose of
purchase.

 When the goods are bought on a description from a person who sells goods of that
description (even if he doesn’t manufacture the good), there is an implied condition
that the goods shall correspond with the description. However, in case of an easily
observable defect that is missed by the buyer while examining the good is not
considered as an implied condition.

Implied Warranty
Enjoy Possession of the Goods [Section 14(b)]
Section 14(b) of the Act mentions ‘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.

Goods are free from any charge or encumbrance in favour of any third party [Section
14(c)]
Any charge or encumbrance pending in favour of the third party which was not declared to
the buyer while entering into a contract shall be considered as a breach of warranty, and
the buyer is be entitled to compensation and claim damages from the seller for the same.
 6. Explain the Nature of a contract of sale of goods and bring out clearly the
distinction between a sale and an agreement to sell. (Sept 2019)
Define “Contract of Sale” and “Agreement of Sell” and distinguish between
them. (Sept 2015)
Define “Contract of Sale of Goods” and distinguish the Contract of Sale from
the Agreement to Sell. (Sept 2013)

Ans: A ‘Contract of Sale‘ is a type of contract whereby one party (seller) either transfers
the ownership of goods or agrees to transfer it for money to the other party (buyer). A
contract of sale can be a sale or an agreement to sell. In a contract of sale, when there is an
actual sale of goods, it is known as Sale whereas if there is an intention to sell the goods at
a certain time in future or some conditions are satisfied, it is called an Agreement to sell.
Both sale and agreement to sell are types of contract, wherein the former is an executed
contract whereas the latter represents an executory contract. Many law students get
confused amidst these two terms, but these are not one and the same. Here, in the article
given below, we’ve explained the difference between sale and agreement to sell, check it
out.

BASIS FOR
SALE
COMPARISON
Meaning When in a contract of sale,
the exchange of goods for
money consideration takes
place immediately, it is known
as Sale.
Nature Absolute
Type of Contract Executed Contract
Transfer of risk Yes
Title In sale, the title of goods
transfers to the buyer with
the transfer of goods.
Right to sell Buyer
Consequences of Responsibility of buyer
subsequent loss or
damage to the goods
Tax VAT is charged at the time of
sale.
Suit for breach of The buyer can claim damages
contract by the seller from the seller and
proprietary remedy from the
party to whom the goods are
sold.
AGREEMENT TO SELL
When in a contract of sale the
parties to contract agree to
exchange the goods for a price at
a future specified date is known as
an Agreement to Sell.
Conditional
Executory Contract
No
In an agreement to sell, the title
of goods remains with the seller as
there is no transfer of goods.
Seller
Responsibility of seller
No tax is levied.
Here the buyer has the right to
claim damages only.

Definition of Sale
A sale is a type of contract in which the seller transfers the ownership of goods to the
buyer for a money consideration. Here the relationship amidst the seller and buyer is of
creditor and debtor. It is the result of an agreement to sell when the conditions are
fulfilled and the specified time is over.

The following are the essential conditions regarding Sale:

1. There must be at least two parties; one is the buyer, and other is the seller.
2. The subject matter of the sale is the goods.
3. Payment should be made in the country’s legal currency.
4. The goods should pass from seller to buyer.
5. All the necessary conditions of a valid contract should be present like free consent,
consideration, a lawful object, capacity of parties, etc.

If the goods are being sold and the property is transferred to the buyer, but the seller is
not paid. Then, the seller can go to the court and file a suit against the buyer for the
damages and the price too. On the other hand, if the goods are not delivered to the buyer
then he can also sue the seller for damages.

Definition of Agreement to Sell

An agreement to sell is also a contract of sale of goods, in which the seller agrees to
transfer goods to the buyer for a price at a later date or after the fulfilment of a
condition.

When there is a willingness of the both the parties to constitute a sale i.e. the buyer agrees
to buy, and the seller is ready to sell the goods for monetary value. In an agreement to sell
the performance of the contract is done at a future date, i.e. when the time elapses or when
the necessary conditions are satisfied. After the contract is executed, it becomes a valid
sale. All the necessary conditions required at the time of sale should exist in the case of an
agreement to sell too.

If the seller rescinds the contract, then the buyer can claim damages for the breach of
contract. On the other hand, the unpaid seller can also sue the buyer for damages.

The following are the major differences between sale and agreement to sell:
1. When the vendor sells goods to the customer for a price, and the transfer of goods
from the vendor to the customer takes place at the same time, then it is known as
Sale. When the seller agrees to sell the goods to the buyer at a future specified
date or after the necessary conditions are fulfilled then it is known as Agreement to
sell.
2. The nature of sale is absolute while an agreement to sell is conditional.
3. A contract of sale is an example of Executed Contract whereas the Agreement to
Sell is an example of Executory Contract.
4. Risk and rewards are transferred with the transfer of goods to the buyer in Sale. On
the other hand, risk and rewards are not transferred as the goods are still in
possession of the seller.
5. If the goods are lost or damaged subsequently, then in the case of sale it is the
liability of the buyer, but if we talk about an agreement to sell, it is the liability of
the seller.
6. Tax is imposed at the time of sale, not at the time of agreement to sell.
 7. In the case of a sale, the right to sell the goods is in the hands of the buyer.
Conversely, in agreement to sell, the seller has the right to sell the goods.

7. Define “Bailment”. What are the essentials of Bailment. (Aug 2019)

What is bailment? What are the Essential features of Bailment with suitable
examples? (Sept 2018)

Ans: The word ‘bailment’, is derived from ‘bailler’, a French word which means ‘to deliver’.
Bailment has been defined under the Section 148 of the Indian Contract Act, 1872,
according to which Bailment involves the delivery of goods from one person to another for a
specific purpose and upon a contract, when the purpose is fulfilled, the good has to be
returned or dealt with on the direction of the person who has delivered the goods.

There are generally two parties to the contract of Bailment. The person who is the owner
and delivers the good is called ‘bailor’ while the person to whom the goods are delivered is
called ‘bailee’.

Essential Features
Delivery of Possession
There must be a delivery of goods, which means, delivery of possession of the goods by the
bailer to the bailee to fulfill the purpose of bailment. Possession refers to exercising
control over the good and excluding any other person to do the same.

Section 149 of the Indian Contract Act, 1872 talks about the same. The delivery of
possession can either be actual or constructive. It means that either the good can directly
be put in the actual physical possession of the bailee or put the bailee in a position of power
over such goods that can be physically possessed later, if possible. In constructive delivery,
the bailor gives the bailee means of accessing the custody of the good and not its actual
delivery.

For example, C has a rare coin locked safe deposit box. As the delivery of a safe deposit
box is impossible, when C, bailor, gives the key of the deposit box for the bailment of the
coin to A, bailee, it would be considered as constructive delivery.

It is important to note that mere custody of goods is not equivalent to the possession of
goods. In Reaves v. Capper, it was held that a servant can be in the custody of the goods
because of the nature of his job but that does not mean he is in possession of the goods.
For example, a servant holding his master’s umbrella is not a bailee.

Delivery upon Contract

There must be a contract between the bailor and the bailee for such transfer or good and
its return. If there is no contract, there cannot be bailment. Moreover, the contract can
either be expressed or implied.

Exception: If the good is lost, the finder of good will be seen as the bailee even if there
was no contract of Bailment or delivery of goods under a contract. A finder of goods is a
person who found a lost good belonging to someone else and keeps it under his possession
until the owner of the good is found. This leads to an involuntary form of Bailment contract
between them. The finder has all rights and duties that of a bailee.
Delivery must be for some purpose
It is essential that there must be a purpose for which the delivery of the goods takes place.
If after the completion of the purpose of bailment the good is not accounted for, then
bailment cannot arise. This is an important feature as it separates it from other relations
like agency, etc..

Return of goods
After the completion of the purpose, the good must be delivered to the bailor or dealt with
as per his instructions. If he/she is not bound to return the good then there is no bailment.
Even if there is an agreement to return an equivalent and not the same good, it will not
amount to bailment.

For example, a tailor receives a saree for stitching as he is the bailee. After the saree has
been stitched, the tailor is supposed to return it to the bailor.

Moreover, it is necessary for the bailee to follow the instruction given by the bailor for the
purpose of the return of the good if any.

In Secy of state v. Sheo Singh Rai, a man, for the purpose of cancelling and consolidating
nine government promissory notes into a single note of Rs. 48000, went to a Treasury
Officer. Later, the notes were misappropriated by a servant at the treasury and the man
filed a suit against the State to hold it responsible as a bailee. He failed as there is no
Bailment without delivery of good and a promise to return the same and the government was
not bound to return the same notes or deal with them in accordance with the wishes of the
man.

8. Define “Contract of Indemnity”. In what aspects Indian Law differs from English
Law on Contract of Indemnity? Explain. (Sept 2018)

Ans: Contract of indemnity is defined under Section 124 of the Indian Contract Act, 1872.
Similar to other contracts, the conditions provided under section 10 of the Indian Contract
Act, 1872 must be fulfilled.

In simple words, the meaning of contract of indemnity is when two parties enter into a legal
relationship where one party promises another party to compensate him if any loss incurred
by the promisor himself or by any other third party.

Example: Mr. A enters into a contract with Mr. B that if Mr. C is not able to pay the loan
that you give to Mr. C then Mr. A will be liable to pay the loan amount. The contract between
Mr. A and Mr. B is a contract of indemnity.

In this case, Mr. A promises to indemnify Mr. B to pay the loan, so Mr. A is indemnifier, Mr.
B is creditor and Mr. C is indemnity holder. This example helps us to understand that the
contract of indemnity takes place between the principal debtor (indemnity holder) and
surety (indemnifier).

Origin and growth of contract of indemnity under English law

The principle of contract of indemnity originated under English law in the landmark
judgment of Adamson v/s Jarvis.
 Adamson v/s Jarvis
Facts
In this case, Adamson was plaintiff and Jarvis was defendant. The plaintiff by profession
was an auctioneer to whom Jarvis, who was not the real owner of the cattle, gave the cattle
and this was sold at an auction. The plaintiff followed the respective instructions which was
given by Jarvis and sold the cattle. The real owner of the cattle sued Adamson for
conversion, and he was successful in it and Adamson had to pay the damages for the same,
subsequently Adamson sued Jarvis to be indemnified for the loss that he incurred to pay
the damages to the owner.
Held
The court held that the plaintiff followed the instructions of the defendant, so this is
presumed that anything went wrong as per the instructions, so the defendant will be liable
to pay the damages so at the end Jarvis had to pay the damages to Adamson.
After reading this case I analyzed that there is a promise to save the person from the loss
but the party has to follow all the instructions of the other party that is indemnified in
order to claim indemnity. After this case, the law further changed by the case Dugdale vs.
Lowering. This is the case it was shown that the promise may be expressed and implied.

 Dugdale vs. Lowering

Facts
In this case, the K.P CO and defendant were claimed for certain trucks which were in the
possession of the plaintiff. The communication was held between the plaintiff and
defendant in which the plaintiff’s concern for asking indemnity if they delivered the trucks
to the defendant. The defendant without giving an answer and told him that sent all the
trucks back to him. The K. P Co brought a lawsuit against the plaintiff for the conversion,
and the plaintiff has to pay the damages. Subsequently, the plaintiff sued the defendant for
indemnity.
Held
In this case, the court held that the plaintiff is entitled to recover indemnity because there
is no intention of the plaintiff to send the trucks without indemnity. So, in this case, there
is an implied promise which is agreed by the defendant when he told that sent all the trucks
back to him, then it is automatically presumed that he agreed for the indemnity.
After studying this case the new provision regarding the contract of indemnity it has come
that the implied promise is also enforced.

Provisions under English law and its enforceability

Basically, contract of indemnity is a wider concept in English law as compared to Indian law,
because in English law all the matters are looked upon which are related not only because of
the acts of some individual but also arises from some event or accident in case of fire or act
of God.

In order to define the contract of indemnity under English it is very important to relate
with the legal maxim called “you must be damnified before you can claim for indemnified”
which means if promisor is not incur any loss then he will not claim indemnity, this shows
that injury is the most essential element for claiming indemnity under English law.
 The general rule of the contract of indemnity under English law is as follows:
a. Indemnifier will compensate indemnity holder only when indemnity holder
incurs any loss.
b. If the indemnity holder follows the instructions of the indemnifier.
c. If the indemnity holder incurs any cost during suit proceeding or pays any
amount in compromise.

These rules prove that without injury indemnity holders cannot claim indemnity. But these
provisions were creating a problem in those conditions when the indemnifier is not able to
pay the claim, so courts of equity in order to give some relief and removed the principle that
in order to get indemnity first you incurred some loss. Then indemnifier is liable for
indemnity for the promise. But now the situation has changed and now indemnifiers are liable
also when the actual loss has not happened.

In another landmark judgment of Re Law Guarantee and Accidental case, the court was of
the view that the contract of indemnity should not only be limited to reimburse the person
for any loss of the money. A contract of indemnity seeks to ensure that the indemnity
holder stands in the same position as he was before the loss had occurred. The indemnity
shall, therefore, lose its significance if the indemnity holder is called to pay the loss and
thereafter reimburse the amount from the indemnifier.

There are following provisions of the contract to indemnity under Indian law.

Origin and growth of contract of indemnity under Indian law

In India, the contract of indemnity originated in the case Osman Jamal & Sons Ltd v/s Gopal
Purshotam. These are the facts of the case:
 Osman Jamal & Sons Ltd v/s Gopal Purshotam
Facts
In this case, the plaintiff is a company which is working as a commission agent for a
defendant firm. The defendant firm was engaged in buying and selling of Hessian and
Gummies, where the defendant firm promised with the plaintiff firm that in case of any loss
the defendant firm will be indemnified. The plaintiff firm bought Hessian from Maliram
Ramjets, but the defendant company is not able to make payment and take delivery of
Hessians. So Maliram Ramjets sold the same to other people at a lower price. Maliram
Ramjets sued the plaintiff for the loss, but the plaintiff company was winding up and asked
the defendant to indemnified for the same. But the defendant refused to pay the damages
and claimed that because of the plaintiff he was not able to do the payment.
Held
The court held that the defendant is liable to indemnify the plaintiff because he promised
for the same.

As we discussed above there is the case of an express contract of indemnity which was
introduced in the year1929, after this a new case was introduced in the year1938, which was
the case of an implied contract of indemnity, Secretary of State vs. Bank of India Ltd.

 Secretary of State vs. Bank of India Ltd

Fact
In this case, an agent was in possession of a government promissory note which was
endorsed by the agent to the bank with forged endorsement. The agent presented the
 promissory note to the bank with the malafide intention but the bank within good faith uses
that promissory note for a redeveloped and issued from” public debt office. In the
meantime, the real owner of the promissory note sued the secretary of state for the
conversion of the promissory note. Subsequently, the secretary of state sued the bank on
the basis of implied indemnity.
Held
The court held that when a person does any act on the request of any third person and such
act violates the right of the third person then the person who commits an act entitled to
claim indemnity from that person who is requested to do that act.

This was the case where we saw the implied contract of indemnity. The law was further
amended where the original rule under English law was that if the indemnity holder suffers
any kind of loss then he will be able to claim indemnity from the indemnifier. But this
principle was also changed in England which was discussed above with the reference of some
cases. Exactly in India Justice Chagla explained the process of transformation in the
landmark judgment of Gajanan Moreshwar vs. Moreshwar Madan Mantri.
 Gajanan Moreshwar vs. Moreshwar Madan Mantri
Facts
In this case, Gajanan Mores was having land in Bombay but at a lease for a long period.
Gajanan Moreshwar was transferred to Moreshwar Madan Mantri but for a limited period. M
Madan started construction over the plot and ordered some material from K D Mohandass,
when K D Mohandass asked for the payment of the material, M Madan refused to pay the
amount and requested G Moreshwar to prepare a mortgage deed in favour of K D
Mohandass. The interest rate was decided and G Moreshwar put a charge over his
possession. According to the deed, a date was decided for the return of the principal
amount. But M Madan decides that he will pay the principal amount along with the interest in
order to release from a mortgage deed, and decides a particular date for the same. On the
predefined date M Madan did not pay anything to K D Mohandas, and G Mores war had to
pay some amount of interest to K D Mohandas. After many requests, M Madan did not pay
anything, so G Moreshwar decided to sue M Madan for the same.
Held
In this matter, the court held that if indemnity holder has raised any responsibility and the
nature of that responsibility is absolute then indemnity holder can ask the indemnifier to
fulfil that responsibility or pay the amount. It is not necessary that a promise should pay
the loss incurred.
Case analysis
According to my understanding, the court took the correct decision because here the
indemnifier is willing to compensate the indemnity holder if any responsibility arises so the
indemnifier should pay the debt directly. Because if the indemnity holder does some act
which leads to arise the liability so he should pay the same because indemnifiers promise the
indemnity holder to restore him in the original situation.

Provisions of a contract of indemnity under Indian law

Contract of indemnity under Indian law is a narrow concept because the matters in which
human beings are involved which is prescribed under Section 124 of the Indian Contract Act
1872. Indian law only covers expressed contracts of indemnity.
The essentials of contract of indemnity are as follows:
1. There are two parties, indemnity holder and indemnifier. Indemnifier is that
person who promises to pay compensation whereas indemnity holder is that
person whose loss is to be compensated.
2. There should be a contract to compensate the person for the loss incurred by
indemnifier or any other person, as we discussed above the origin and growth of
contract of indemnity under English law, so we also discussed the same under
Indian law.

There are many rights which are given to indemnity holders which is defined under
section 125 of the Indian Contract Act, 1872.
1. Right to recover damages.
2. Right to recover costs.
3. Right to recover some money under the compromise.

Rights of indemnifier
As we talk about the rights of indemnifiers are not given under contract of indemnity but
they have similar rights as the same as given in guarantee.
The major difference between the two is as follows-

English law India law

In England, all the matters are looked upon In Indian law, only those matters are
whether they are related to human beings or concerned where the human agencies are
any event or accident. involved.

National Law School of India Review

In this article, the author talks about indemnity under English as well as Indian law.
Basically, the contract of indemnity is based upon the ideology of command law principles, in
this article, they talk about the changes which are held in a commission report (13 reports)
regarding implied indemnity. The main purpose of the contract of indemnity is to reimburse
the person so that he comes back to his original position. In my opinion indemnifier should
not be liable for the act which is caused naturally or without the interference of human
beings because these acts are not in the hands of indemnifier because this is beyond the
control of the human beings so, in this context, I support provisions of India, I also analyzed
that the principles of Indian contract act are not self-exhaustive there are situations
where we referred to common law principles are taken into consideration which is not
contradictory to our laws

9. Discuss the Duties and Rights of Bailor and Bailee with suitable Case Laws. (Oct
2017) Define Bailment and enumerate the rights and duties of bailee (June
2018)
What are the Rights of Bailor against Bailee when the later mixes his own goods
with those of others. (Aug 2013)
Discuss the Rights and Duties of Bailee. (Aug 2012)
Ans: The word ‘bailment’, is derived from ‘bailler’, a French word which means ‘to deliver’.
Bailment has been defined under the Section 148 of the Indian Contract Act, 1872,
according to which Bailment involves the delivery of goods from one person to another for a
specific purpose and upon a contract, when the purpose is fulfilled, the good has to be
returned or dealt with on the direction of the person who has delivered the goods.

There are generally two parties to the contract of Bailment. The person who is the owner
and delivers the good is called ‘bailor’ while the person to whom the goods are delivered is
called ‘bailee’.

Duties/Rights of Bailor and bailee

Duties of Bailor
Disclose known faults
It does not matter whether the goods are gratuitously or non-gratuitously bailed, the bailor
has a duty to disclose all the known faults about that good that is being bailed to the bailee.
Failing to do so would make the bailor liable to indemnify the bailee for all the damages
caused to him directly from this fault. However, it is important to note that in the case of
non-gratuitous bailment, the bailor is responsible even for those faults from which he/she is
not aware.
Examples:
i. A lends his bike to B. A is aware of the fact that the bike’s brakes are not working
properly and fails to inform the same to B. B met with an accident and is severely
injured. A is liable to pay B for the damages sustained.
ii. Raj hires a racing car from Shyam to participate in a racing competition. During the
race, the car caught fire. Raj was unable to extinguish it as the fire-fighting
equipment was out of order, due to which he sustained injuries. Therefore, Shyam is
responsible to pay Raj even if he was not aware of the fact that fire-fighting
equipment was out of order.

Bear expenses of bailment

In case of Non-Gratuitous Bailment
Bailor is expected to bear all the extraordinary expenses but the bailee is bound to bear all
the ordinary and reasonable expenses of the bailment.
Example: A leaves his dog with B, a professional dog trainer, for a week as he is going out of
town. B is being paid for the same so A is not required to bear the ordinary expenses.
However, the dog suffered from high fever and B had to call a doctor. A has to repay all the
medical expenses born by B.

In case of Gratuitous Bailment

The bailor is required to pay all the necessary expenses incurred by the bailee for the
purpose of bailment for the delivered goods.
Example: A lends his dog to B, a close friend, for a week as he is going out of town. A is not
paying anything to B to take care of his dog so he needs to pay him for all the ordinary
expenses born by B to feed the dog for a week. However, if the dog gets sick and suffers
from high fever, A has to pay B for all the additional medical expenses incurred by him.

Indemnify Bailee
According to Section 159, in case of gratuitous bailment, the bailor can terminate bailment
at any time even if the bailment was for a specific time or purpose. However, the bailor is
required to indemnify the bailee if the losses incurred by him due to the premature
termination exceed the benefits he derived out of the bailment.
Example: A lends his car to B, a friend for a week as B has to go out of town for a family
gathering. As B has not paid any charges for bailment, he fills 30 litres of petrol in the car
for the drive. Suddenly after 4 days, A calls B to give his car back. So, B can demand from A
value of petrol remaining in the car after 4 days.

Indemnify the bailee when he suffers due to the title of bailor to the goods being
defective
According to Section 164, the bailor has to indemnify the bailee if even after knowing that
he is not entitled to the good and makes bailment due to which, the bailee suffers losses.
Example: A lends his car to B, a customer for a week as B has to go out of town for a family
gathering. B has already paid an advance of Rs 5000 to A. However, after 4 days, the police
seized the car from B as it was stolen and belonged to C. B had to arrange a new car for the
same purpose and has to pay a higher rent. B can claim from the amount he has already paid
and also the higher rent he had to pay for the new car.

Receive back the goods

After the expiration of the term of the bailment or when the purpose is fulfilled, the bailor
has a duty to receive the goods back from the bailee. However, if the bailor refuses to do
the same, he will be entitled to pay the bailee compensation for the necessary expenses of
custody and care.
Example: A bailed his dog to B for one week at the daily charge of Rs. 100. A visited B to
receive his dog after 25 days. He has to pay the additional charges for 18 pays. However, if
this had been a gratuitous bailment, A would have been required to pay the ordinary and
extraordinary expenses for 18 extra days.

Duties of the Bailee

Take Reasonable Care of the Goods Bailed
As per Section 151, irrespective of the fact that the bailment is gratuitous or non-
gratuitous, the bailee has a duty to take reasonable care of the goods bailed similar to a
man of ordinary prudence would. However, according to Section 152, if even after
reasonable care the goods are damaged or destroyed, the bailee is not liable for the loss of
the bailed goods.
Example: A bailed his dog to B for a week at a daily charge of Rs. 100. As A came to B to
reserve the dog after a week, he finds out the dog was stolen from B. If it is proved by B
that he took reasonable care of the dog but still the dog was stolen, then he will not be held
responsible, but, if however, A proves that B didn’t take reasonable care, say left the dog
unchained, B would be responsible for the same.

No Unauthorized use of goods

As per the Section 154, if due to the fact that the bailee uses the good bailed in a manner
inconsistent with the terms of the contract then he will be held liable in case there is any
damage to the good, even if he was not negligent or the damage resulted from an
unforeseeable accident.
Example: A lends his car to B for him to drive only. B allows C, her cousin to drive the car. C
rides the car with care but still ends up in an accident, damaging the car. B is liable to
compensate A for the damages caused to the car.
Not mix goods bailed with own goods
The bailee must not mix the bailed goods with his own goods and must keep them separately.
If however, he mixes the bailed goods with his own then:
i. According to Section 155, if mixed with the consent of the bailor, both of them will
have a proportionate interest in the mixture produced.
ii. As per Section 156, if mixed without the consent of the bailor, and if it can be
mixed/divided, the bailor has to bear all the expenses for the same and damages
caused due to the mixture.
iii. According to Section 157, if mixed without the consent of the bailor, and if the
mixture is beyond separation, the bailee is required to compensate the bailor for the
loss of the goods.

Return any Accretion to the goods

In the absence of any contract for the same, any profit which may have accrued from the
goods bailed, the same must be delivered to the bailor.
Example: A bailed his cow to B for a week. The cow gave birth to a calf during this period.
The bailee must deliver the calf along with the cow to A at the time of delivery.

Return the goods

After the time for which the good has bailed is expired, or the purpose has been fulfilled,
the bailee must return it to the bailor as per his direction.

Rights of the Bailor

Enforcement of rights
The bailer, by suit, can enforce all the liabilities or duties of the bailee.

Avoidance of Contract
According to Section 153, if the bailee does anything which is inconsistent with the terms
of bailment, then, the bailor can terminate the bailment.
Example: A bailed his horse to B for his own riding only. B allowed C to ride the horse,
violating the terms of bailment. A can terminate bailment.

Return of goods lent gratuitously

In case the goods are lent gratuitously, the bailor has the right to demand their return
whenever he sees fit, even though they were lent for a specific period of time or purpose.
However, he needs to indemnify the bailee in case the losses exceed the benefit derived
from the use of such a good due to premature termination of bailment.

Compensation from a wrong-doer

If the bailee is wrongfully deprived by any third party of the use or possession of goods
bailed and does them any injury, the bailor or the bailee has the right to bring a suit against
the third person for the injury.

Rights of the Bailee

Delivery of goods to bailor without title
According to Section 166, if the bailor has no title to the goods bailed, then the bailee, in
good faith, can deliver them back to the bailor according to his directions, if any, the bailee
will not be responsible for such delivery.
Can apply to a court to stop delivery
According to Section 167, if there is a situation in which a third person claims the goods
bailed to the bailee, then the bailee can stop the delivery of such goods to the bailor by
applying to the court and decide the title of the goods.

Right against trespass

According to Section 180, if the bailee is deprived of the use of the goods bailed by any
third party, the bailee has the right to bring an action against the third party.

Bailee’s lien
When the bailee is not paid charges with respect to the goods bailed he has the right to
retain the goods. This right is referred to as ‘particular lien’.

10. What are the essential characters of Contract of Guaranty? Distinguish

between Indemnity and Guaranty. (June 2016). (Oct 2012)
What is “Contract of Guaranty”? what are its characters? Distinguish between
Contract of Guaranty and Contract of Indemnity. (Aug 2013)

Ans: Section 126 of the Indian contract act defines a contract of guarantee as a
contract to perform the promise or discharge the liability of the defaulting party in case he
fails to fulfil his promise.
Thus here we can infer that there the 3 parties to the contract

Principal Debtor – The one who borrows or is liable to pay and on whose default the
guarantee is given

Creditor – The party who has given something of value to borrow and stands to receive the
payment for such a thing and to whom the guarantee is given

Surety/Guarantor – The person who gives the guarantee to pay in case of default of the
principal debtor
Also, we can understand that a contract of guarantee is a secondary contract that emerges
from a primary contract between the creditor and the principal debtor.

Illustration
Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav promises
that in case Pallav fails to repay the loan, then she will repay the same. In this case of a
contract of guarantee, Ankita is the Creditor, Pallav the principal debtor and Srishti is the
Surety.
A contract of guarantee may either be oral or written. It may be express or implied from
the conduct of parties.

Essentials characters of a Contract of Guarantee

1) Must be made with the agreement of all three parties
All the three parties to the contract i.e., the principal debtor, the creditor, and the surety
must agree to make such a contract with the agreement of each other. Here it is important
to note that the surety takes his responsibility to be liable for the debt of the principal
debtor only on the request of the principal debtor. Hence communication either express or
implied by the principal debtor to the surety is necessary. The communication of the surety
with the creditor to enter into a contract of guarantee without the knowledge of the
principal debtor will not constitute a contract of guarantee.

Illustration
Sam lends money to Akash. Sam is the creditor and Akash is the principal debtor. Sam
approaches Raghav to act as the surety without any information to Akash. Raghav agrees.
This is not valid.

2) Consideration
According to section 127 of the act, anything is done or any promise made for the benefit
of the principal debtor is sufficient consideration to the surety for giving the guarantee.
The consideration must be a fresh consideration given by the creditor and not a past
consideration. It is not necessary that the guarantor must receive any consideration and
sometimes even tolerance on the part of the creditor in case of default is also enough
consideration.
In State Bank of India v Premco Saw Mill(1983), the State Bank gave notice to the
debtor-defendant and also threatened legal action against her, but her husband agreed to
become surety and undertook to pay the liability and also executed a promissory note in
favour of the State Bank and the Bank refrained from threatened action. It was held that
such patience and acceptance on the bank’s part constituted good consideration for the
surety.

3) Liability
In a contract of guarantee, the liability of a surety is secondary. This means that since the
primary contract was between the creditor and principal debtor, the liability to fulfil the
terms of the contract lies primarily with the principal debtor. It is only on the default of
the principal debtor that the surety is liable to repay.

4) Presupposes the existence of a Debt

The main function of a contract of guarantee is to secure the payment of the debt taken by
the principal debtor. If no such debt exists then there is nothing left for the surety to
secure. Hence in cases when the debt is time-barred or void, no liability of the surety
arises. The House of Lords in the Scottish case of Swan vs. Bank of Scotland (1836) held
that if there is no principal debt, no valid guarantee can exist.

5) Must contain all the essentials of a valid contract

Since a contract of guarantee is a type of contract, all the essentials of a valid contract will
apply in contracts of guarantee as well. Thus, all the essential requirements of a valid
contract such as free consent, valid consideration offer, and acceptance, intention to create
a legal relationship etc are required to be fulfilled.

6) No Concealment of Facts
The creditor should disclose to the surety the facts that are likely to affect the surety’s
liability. The guarantee obtained by the concealment of such facts is invalid. Thus, the
guarantee is invalid if the creditor obtains it by the concealment of material facts.

7) No Misrepresentation
The guarantee should not be obtained by misrepresenting the facts to the surety. Though
the contract of guarantee is not a contract of Uberrima fides i.e., of absolute good faith,
and thus, does not require complete disclosure of all the material facts by the principal
debtor or creditor to the surety before he enters into a contract. But the facts, that are
likely to affect the extent of surety’s responsibility, must be truly represented
Kinds of guarantee
Contracts of guarantees may be classified into two types: Specific guarantee and continuing
guarantee. When a guarantee is given in respect of a single debt or specific transaction and
is to come to an end when the guaranteed debt is paid or the promise is duly performed, it is
called a specific or simple guarantee. However, a guarantee which extends to a series of
transactions is called a continuing guarantee (Section129). The surety’s liability, in this
case, would continue till all the transactions are completed or till the guarantor revokes the
guarantee as to the future transactions.

Illustrations
a. S is a bookseller who supplies a set of books to P, under the contract that if P does
not pay for the books, his friend K would make the payment. This is a contract of
specific guarantee and K’s liability would come to an end, the moment the price of
the books is paid to S.
b. On M’s recommendation S, a wealthy landlord employs P as his estate manager. It
was the duty of P to collect rent every month from the tenants of S and remit the
same to S before the 15th of each month. M, guarantee this arrangement and
promises to make good any default made by P. This is a contract of continuing
guarantee.

The terms, Indemnity and Guarantee are almost used synonymously by laymen and at times,
also mistaken in the Commercial sphere. It is very crucial to understand the crux and broad
differences between the Contract of Indemnity and Contract of Guarantee to carry out our
dealings with and borrowings from banks, and claims of protection from Business losses. The
terms are examined in the context of India with respect to the content in Indian Contract
Act, 1872.

Concept of Indemnity
Longman’s Dictionary outlines indemnity as protection against loss, especially in the form of
a promise to pay, or payment for loss of money, goods etc. Likewise, Chambers Dictionary
defines indemnity as a security against, or compensation for loss, etc.

Section 124 of the Indian Contract Act, 1872 discusses the contract of indemnity as “A
contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself or by conduct of any other person.”

Following inferences may be derived from this definition:

1. A contract of Indemnity is a contract between an “indemnifier” and “indemnified”,
i.e., a party promising to compensate in case of loss a party in whose favour the
promise is made respectively.
2. The loss referred to must be caused exclusively by conduct of human agency. In
other words, it does not cover any loss caused by an ‘Act of God’ or a natural
disaster.
3. Human agency simply refers to the promisor or any other person.
 4. This distinguishes indemnity from insurance. Insurance intends to restore the
position of a person as before the loss occurred, where the loss may be caused by
human or non-human interventions (e.g., lightning, earthquake, tsunami, etc.). Another
difference is that while an indemnifier takes the risk voluntarily in contract,
insurance plans demand payment of a premium.
5. Contract of indemnity is a contingent contract as it is conditional upon the future
conduct of a person, which is likely bring loss. However, in the Indian framework, the
indemnified can claim the indemnity well before any actual damage occurs, that is, it
can be brought before the breach.

A Comparative Chart of Other Key Differences Between the Contract of Indemnity and
Contract of Guarantee
Basis of Differentiation Indemnity Guarantee
The objective of a guarantee
The objective of an
is to ascertain that the
Indemnity is to compensate
transactions would be
and secure a party against
honoured by the debtor. It
Objective future losses, penalties or
acts as a backup by the
lawsuit expenses. It tends to
surety in case the debtor
shift the burden of damages
falters in re-payment of
upon the indemnifier.
debt.
A contracts to indemnify B
against the consequences of A guarantees to B the
any proceedings which C may payment of a loan of Rs.
Illustration take against B in respect of a 2,00,000/- (with interest)
certain sum of 200 rupees. taken by C if C defaults on
This is a contract of payment.
indemnity.
It involves two parties, viz., It involves three parties,
Number of Parties the indemnified and viz., the surety, principal
indemnifier. debtor and creditor.
It involves three contracts in
Number of Contracts It involves a single contract.
total.
The surety can recover all
Remedies for Breach of All the loss can be claimed by the payments made along
Contract the indemnified. with interest from the
principal debtor.
The liability of the The liability of the surety is
Liability
indemnifier is primary. secondary.
The surety after paying on
The loss in case of the
behalf of the principal
considered situation falls
debtor, steps into the shoes
Recovery of Reimbursement upon the shoulders of the
of the creditor. Thus, he is
indemnifier and he cannot
eligible to recover the
recover the amount.
amount so paid.
 11. Explain the Doctrine of “Caveat Emptor” and state exception to it. (Sept
2015), (Aug 2014)

Ans: The rule of caveat emptor which means “let the buyer beware” has been overridden by
the rule of caveat venditor. Such change was required because of changing conditions of
modern trade and commerce. The phrase caveat emptor is not used by the judges very often
nowadays. This doctrine is based on the principle that when a buyer is satisfied as to the
product’s suitability, then he is left with no subsequent right to reject such product. The
caveat emptor rule originated many years ago in common law and over the times has
undergone major changes. The exceptions of the doctrine started expanding with time as it
was being given a concrete shape.

Statement Of Caveat emptor

The principle of Caveat emptor is explained in Section 16 of the Sale of Goods Act
1930 which states that there is no implied condition or warranty as to quality or fitness for
any particular purpose of goods supplied.”

The History of Caveat emptor

In the 19th century, the attitude of common law towards the buyer can be understood by
the maxim Caveat emptor which means let the buyer beware. This maxim explains that a
purchaser must carefully examine and judge what is best for him. The purchaser should not
take the risk of the condition and quality of the object which he needs to buy, he must
protect himself by a warranty. The philosophy behind the rule of Caveat emptor basically
was that buyer shall apply his own skill and judgment before buying. It is based on the
fundamental principle that when a buyer is satisfied with the suitability of the product for
his use, no subsequent right will be left with him to reject the same. When the rule of
caveat emptor originated, it was quite rigid and there was no scope for any subsequent
change in the rule. In English Sale of Goods Act, 1893, it is highly noticeable and evident
that the seller’s duties as to requirements of disclosure when a product is sold was minimal.
There was no duty upon the seller to provide information and proper examination of the
goods by the buyer was considered over and above any other duty. The Concepts which could
be used to shift the burden as to quality and fitness on the seller such as ‘fitness of goods’
and ‘merchantability’, were not encouraged. Another strong statement which was present
in Section 11(1)(c) in the said Act, which mandated that the buyer could not reject the
goods on any ground in cases where there was sale of ‘specific’ goods. Thus, it is highly
noticeable that the law was bent towards the seller and in those times, one could not even
find a corresponding rule which would put the burden on the seller.

Exceptions To The Rule Of Caveat emptor (Section 16 of The Sale of Goods Act,
1930)
Fitness for buyers purpose [Section 16(1)]
Section 16(1) of the said Act provides that in situations where the seller is aware either
expressly or by necessary implication of the purpose for which a buyer needs to purchase a
specific product, further, the goods are of such description which the seller supply in his
ordinary course of business and by relying upon the judgment and skill of the seller, the
buyer purchases that product, then the goods should be in accordance with the purpose. In
other words, this section explains the circumstances where the seller has an obligation to
supply the goods to the buyer as per the purpose for which he intends to buy the goods.
Requirements of Section 16(1) are as follows:-
 The buyer should explain the particular purpose for which he is making the purchase to
the seller.
 The buyer should rely on the seller’s skill and judgment while making a purchase.
 The goods must be of a description which the seller in his ordinary course of business
supply.

In Shital Kumar Saini v. Satvir Singh, a compressor was purchased by the petitioner with
one year warranty. The defect in the product appeared within three months. The petitioner
sought a replacement. The seller replaced it but did not provide any further warranty. The
State Commission stated that an implied warranty was guaranteed under section 16 of the
Sale of Goods Act, 1930 and allowed it to be rejected.

Sale under Trade Name [Proviso to S. 16(1)]

In some cases, a buyer purchases goods not by relying on the skill and judgment of the
seller but by relying on the product’s trade name. In such cases, it would be unfair that the
seller is burdened with the responsibility of quality. The proviso to Section 16 deals with
such cases. It provides that:
“Provided that, there is no implied condition as to fitness for any particular purpose in the
case of a contract for the sale of a specified product under its patent or other trade
names.

Merchantable quality [Section 16(2)]

The second most important exception to the rule of Caveat emptor is incorporated
by Section 16(2) of the Act. The Section imposes a duty upon the dealer to deliver the
goods of merchantable quality.
Section 16(2) states that there is an implied condition that when goods are purchased by
description from a seller who deals in the goods of that description, the goods shall be of
merchantable quality.

Meaning of Merchantable Quality: It implies that when the goods are purchased for
resale, the goods must be capable enough of passing in the market under the name by which
they are sold.

Merchantable quality depends on the following two factors:-

Marketability- Merchantability does not mean that the goods are saleable just because the
goods look all right, but they shall be marketable at their full value. “Merchantability does
not mean that the goods are saleable even if it has defects which makes it unfit for its
proper use but is not noticeable on ordinary examination.

Reasonable fitness for general purposes- “Merchantable quality” means, that if goods are
purchased for self-use, they must be fit for the purpose for which they are generally used.
Example: A person bought a hot-water bottle which is generally used for the application of
heat. The bottle burst to scald the person’s wife. The seller was held to be liable.

Examination by buyer [Proviso to S. 16(2)]

The proviso to S. 16(2) provides that “if upon examination of the goods to be purchased, the
defects ought to have been revealed, then no implied condition as regards to the defect will
exist.” The requirement provided in the proviso would be considered as satisfied fully when
the buyer was given full opportunity to examine the goods and the argument that the buyer
did not use that opportunity will not make any difference, an existence of opportunity is
sufficient in such cases.

Conditions implied by trade usage [Sec. 16(3)]

Section 16(3) gives statutory force to the conditions implied by the usage of a particular
trade. It states:
“An implied condition or warranty as to the quality or fitness for any particular purpose may
be annexed by the usage of trade.”
In the case of Peter Darlington Partners Ltd v Gosho Co Ltd, a contract for the sale of
canary seeds was subjected to the custom of trade and held that if there exist any
impurities in the seeds the buyer will get a rebate on the price but he would not reject the
goods. However, a custom which is unreasonable will not affect the parties’ contract.

12. What is “Contract of Guaranty”? discuss the law relating to Rights and
liabilities of Surety? (Aug 2014)
Define the “Contract of Guaranty”? and discuss the extent of the liabilities of
Surety? (Sept 2013)
Define “Contract of Guaranty”? discuss Rights of Surety? (Jul 2012)

Ans: Section 126 of the Indian contract act defines a contract of guarantee as a contract
to perform the promise or discharge the liability of the defaulting party in case he fails to
fulfil his promise.
Thus here we can infer that there the 3 parties to the contract

Principal Debtor – The one who borrows or is liable to pay and on whose default the
guarantee is given

Creditor – The party who has given something of value to borrow and stands to receive the
payment for such a thing and to whom the guarantee is given

Surety/Guarantor – The person who gives the guarantee to pay in case of default of the
principal debtor

Also, we can understand that a contract of guarantee is a secondary contract that emerges
from a primary contract between the creditor and the principal debtor.

In a contract of guarantee, the liability of a surety is secondary. This means that since the
primary contract was between the creditor and principal debtor, the liability to fulfill the
terms of the contract lies primarily with the principal debtor. It is only on the default of
the principal debtor that the surety is liable to repay.

Rights of a Surety
After making a payment and discharging the liability of the principal debtor, the surety gets
various rights. These rights can be studied under three heads:
(i) rights against the, principal debtors.
(ii) rights against the creditor, and
(iii) rights against the co-sureties.
(i) Rights against the Principal Debtor
1) The right of surety on payment of debt or the Right of subrogation(Section 140)
The right of subrogation means that since the surety had given a guarantee to the creditor
and the creditor after getting the payment is out of the scene, the surety will now deal with
the debtor as if he is a creditor. Hence the surety has the right to recover the amount
which he has paid to the creditor which may include the principal amount, costs and the
interest.

2) The right of Indemnity(Section 145)

In every contract of guarantee, there is an implied promise by the principal debtor to
indemnify the surety, and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee. This is because the surety has
suffered a loss due to the non-fulfilment of promise by the principal debtor and therefore
the surety has a right to be compensated by the debtor

Illustration
Luthra and co has taken a loan from Khaitan and co where Amarchand acts as security on
behalf of Luthra. Khaitan demands payment from Amarchand and on his refusal sues him for
the amount, Amarchand defends the suit having reasonable grounds for doing so, but he is
compelled to pay the amount of the debt with costs. He can recover from Luthra the amount
paid by him for costs, as well as the principal debt.

(ii) Rights against the Creditor

1) Right to securities given by the principal debtor(section 141)
On the default of payment by the principal debtor, when the surety pays off the debt of
the principal debtor he becomes entitled to claim all the securities which were given by the
principal debtor to the creditor. The Surety has the right to all securities whether received
before or after the creation of the guarantee and it is also immaterial whether the surety
has knowledge of those securities or not.

Illustration
On the guarantee of Priya, Anita lent rs 100000 to Sita. This debt is also secured by
security for the debt which is the lease of Sita’s house. Sita defaults in paying the debt and
Priya has to pay the debt. On paying off Sita’s liabilities Priya is entitled to receive the
lease deed in her favor.

2) Right to set off

When the creditor sues the surety for the payment of principal debtor’s liabilities, the
surety can claim set off, or counterclaim if any, which the principal debtor had against the
creditor.

(iii) Rights against the Co-sureties

1) Release of one co-surety does not discharge others (Section 138)
When the repayment of debt of the principal debtor is guaranteed by more than one person
they are called Co-sureties and they are liable to contribute as agreed towards the payment
of guaranteed debt. The release by the creditor of one of the co-sureties does not
discharge the others, nor does it free the released surety from his responsibility to the
other sureties. Thus when the payment of a debt or performance of duty is guaranteed by
co-sureties and the principal debtor has defaulted in fulfilling his obligation and thus the
creditor compels only one or more of the co-sureties to perform the whole contract, the co-
surety sureties performing the contract are entitled to claim contribution from the
remaining co-sureties.

2) Co-sureties to contribute equally (Section 146)

According to Section 146, in the absence of any contract to the contrary, the co-sureties
are liable to contribute equally. This principle will apply even when the liability of co-sureties
is joint or several, and whether under the same or different contracts, and whether with or
without the knowledge of each other.

Illustration
A, B, C, and D are co-sureties for a debt of Rs. 2,0000 lent by Z to R. R defaults in repaying
the loan. A, B, C, and D are liable to contribute Rs. 5000 each.
3) Liability of co-sureties bound in different sums(Section 147)
When the co-sureties have agreed to guarantee different sums, they have to contribute
equally subject to the maximum of the amount guaranteed by each one.

Illustration
A, B and C, sureties for D, enter into three separate bonds, each in a different penalty, A
for Rs. 10,000, B for Rs. 20,000 and C for Rs. 40,000. D makes default to the extent of Rs.
30,000. A B and C are liable to pay Rs. 10,000 each. Suppose this default was to the extent
of Rs. 40,000. Then A would be liable for Rs. 10,000 and B and C Rs. 15,000 each.
Discharge of Surety from Liability

Under any of the following circumstances a surety is discharged from his liability:
i) by the revocation of the contract of guarantee,
ii) by the conduct of the creditor, or
iii) by the invalidation of the contract of guarantee
We have already discussed above the first circumstance in which how a surety can be
discharged i.e by Revocation of the Contract of Guarantee. This includes by giving notice or
death or the surety.

(ii) Conduct of the Creditor

1) Variance in terms of the contract(Section 133)
When a contract of guarantee has been materially altered through an agreement between
the creditor and principal debtor, the surety is discharged from his liability. This is because
a surety is liable only for what he has undertaken in the guarantee and any alteration made
without the surety’s consent will discharge the surety as to transactions subsequent to the
variation.

Illustration
A becomes surety to C for B’s conduct as a manager in C’s bank. Afterward, B and C
contract, without A’ s consent, that B’ s salary shall be raised, and that he shall become
liable for one-fourth of the losses on overdrafts. B allows a customer to over-draw, and the
bank loses a sum of money. A is discharged from his suretyship by the variance made
without his consent and is not liable to make good this loss.
2) Release or discharge of the principal debtor(Section 134)
A surety is discharged if the creditor makes a contract with the principal debtor by which
the principal debtor is released, or by any act or omission of the creditor, which results in
the discharge of the principal debtor.

Illustration
A supplies goods to B on the guarantee of C. Afterwards B becomes unable to pay and
contracts with A to assign some property to A in consideration of his releasing him from his
demands on the goods supplied. Here, B is released from his debt, and C is also discharged
from his suretyship. But, where the principal debtor is discharged of his debt by operation
of law, say, on insolvency, this will not operate as a discharge of the surety.

3) Arrangement between principal debtor and creditor

According to section 135 when the creditor, without the consent of the surety, makes an
arrangement with the principal debtor for composition, or promise to give him time to, or
not to sue him, the surety will be discharged. However, when the contract to allow more
time to the principal debtor is made between the creditor and a third party, and not with
the principal debtor, the surety is not discharged (Section 136).

Illustration
C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B,
contracts with M to give time to B, A is not discharged.

4) Loss of security(Section 141)

If the creditor parts with or loses any security given to him at the time of the guarantee,
without the consent of the surety, the surety is discharged from liability to the extent of
the value of the security.

Illustration
A, as surety for B, makes a bond jointly with 3 to C to secure a loan from C to B. Later on, C
obtains from B further security for the same debt. Subsequently, C gives up further
security. A is not discharged.

(iii) By Invalidation of the Contract

A contract of guarantee, like any other contract, may be avoided if it becomes void or
voidable at the option of the surety. A surety may be discharged from liability in the
following cases:
1) Guarantee obtained by misrepresentation(Section 142)
When a misrepresentation is made by the creditor or with his knowledge or consent, relating
to a material fact in the contract of guarantee, the contract is invalid
2) Guarantee obtained by concealment(Section 143)
When a guarantee is obtained by the creditor by means of keeping silence regarding some
material part of circumstances relating to the contracts, the contract is invalid
3) Failure of co-surety to join a surety(Section 144)
When a contract of guarantee provides that a creditor shall not act on it until another
person has joined in it as a co-surety, the guarantee is not valid if that other person does
not join.
Extent of a surety’s liability
In the absence of a contract to the contrary, the liability of a surety is co-extensive with
that of the liability of the principal debtor. It means that the surety is liable to the same
extent to which the principal debtor is liable.
Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. On the due date,
the bill is dishonored by C. A is liable, not only for the amount of the bill but also for any
interest and charges which may have become due on it.

13. What is Contract of Partnership? And discuss the law relating to nature
and formation of partnership. (Aug 2014)
Define “Contract of Partnership” and discuss the important elements for
formation of partnership.

Ans: Partnership comes into being only as a result of an agreement between the parties,
general principles of law of contracts and agency are also relevant to partnership insofar as
they are not inconsistent with the express provisions of Partnership Act 1932. Basic
requirements of contract, i.e., legally enforceable agreement, mutual consent, competency of
parties, free consent, lawful object, consideration, etc., do apply to partnership contract.

A partnership is simply an association of persons who have agreed to carry on a joint

business and share the profits thereof.

Essential features of a Partnership

The following features are essential to the formation of a partnership.
1. Association of more than one person
2. Result of an agreement
3. Agreement to carry on some business
4. Sharing of profits
5. Mutual agency

1. Association of more than one person

It is one of the most basic elements of a valid partnership. To form a partnership there
should be at least two persons. A partnership cannot survive if the number of partners gets
reduced to one for whatever reasons — death, insolvency, lunacy, etc,. This is so because,
one cannot be one’s own partner.

Ideal size of a Partnership:

Although the Partnership Act is silent over the maximum number of partners in a firm,
there is a ceiling on the number of partners in a firm.
 If a firm is engaged in financial services, the max number of partners should not exceed
10.
 If a firm is engaged in some other business, the max number of partners may be up to
20.

If the number of partners exceeds this statutory limit, the partnership is rendered
an illegal association.
In order to enter into a partnership, the persons must be competent to contract. It is,
however, immaterial whether the persons so entered into a partnership contract are natural
or artificial. A company may, if so authorized by its charter (Memorandum of Association),
become a partner in a firm, as it is a person in legal terms though artificial one. There could
be a partnership even between two or more companies. But a partnership firm not being a
person in legal terms, cannot enter into partnership.

2. Result of an Agreement
Partnership is formed as a result of an agreement between two parties. It does not arise
out of status or inheritance as in the case of Hindu Undivided Family (HUF). It even does
not arise by operation of law as in the case of co-ownership or Joint Stock Company. Thus,
creation of an agreement [whether express (written or oral) or implied] between two or
more people is the very foundation of partnership. Besides, the contract must contain all
essential elements of a valid contract.

3. Agreement to carry on some business

Another essential element of a partnership is that it is formed for the purpose of carrying
on some (but lawful) business. An association or society formed primarily to carry on some
charitable, religious, or social works cannot be regarded as partnership. Even a co-
ownership does not amount to partnership.

The term ‘business‘ includes every trade, occupation, and profession. Thus, business is used
in its widest sense as it does not refer merely to trade or industry but also includes
occupations and professions such as chartered accountancy, legal practice, placement
services, etc.
However, it is not necessary that the business should consist of a protracted (i.e., long
lasting) and permanent undertaking. An agreement to carry on a business at a future time
may not be considered as partnership until the actual time has arrived.

4. Sharing the profits

Sharing the profits of business amongst all the partners is the core of partnership. There
will be no partnership where only one of the partners is entitled to the whole of the profits
of the business. Sharing of loss is also an essential feature of partnership. However, all
the partners may not concur to share losses. It depends on the terms of the agreement.
Thus, one can become a partner on the understanding that he will not share the losses.

The partners are entitled to share equally in the profits earned and the loss sustained in a
business. The ratio in which the profits and losses will be shared need not be equal. Partners
may mutually agree to share profits in any way they like among themselves.

Mere Sharing of profit alone is not partnership:

Merely sharing of profits does not necessarily entitle someone to be treated as partner. For
instance, a manager, who besides his fixed salary gets a share in the profits of a firm’s
business, can only claim to be an employee of the firm and not a partner.

Sharing of profits not a conclusive test The division of profits amongst the partners is an
essential condition to sustain a partnership. But merely sharing profits does not
automatically make someone a partner.

Although sharing of profits is a prima facie evidence of the existence of partnership, it is

not the indisputable test of the same. It is also true that there can be no partnership
without sharing of profits of the business, but sharing of profits alone does not constitute
partnership. A person may have a share in the partnership profits, but still may not be a
partner. The following examples may drive home the point.

Sharing of profits does not make one a partner

Example 1: A and B who jointly own a house, let it out on a rent of INR 5,000 per month.
They share the rental income equally. Yet A and B cannot be regarded as partners. They
are simply co-owners of the property.

Example 2: X and Y buy 100 bales of cotton, which they agree to sell for their joint
account, each party sharing profits equally. Here X and F are partners in respect of such
an account.

5. Mutual Agency
Mutual agency is the conclusive test of a partnership. Business of the firm may be carried
on by all or any of the partners acting for all. This means that a partner is both an agent and
a principal in a partnership firm. He is an agent because he can bind other partners, who are
his principals, by his acts and he is again a principal, who in turn is bound by the acts of
other partners. Thus, the partner who conducts the business of the firm not only acts for
himself but for the other partners as well.

The true test, to determine whether a person is a partner or not, is to see interalia,
whether the relationship of principal and agent exists between the parties. In fact
existence of the element of agency is the foundation of partnership which is regarded as an
extension of the general law of agency.

It is, however, not necessary that all partners should actively participate in business. The
partners may authorize any one or more amongst themselves to manage the business of the
firm. Under such an arrangement, the remaining partners will be bound by their acts,
subject to the understanding that such acts relate to carrying on the business of the firm
and have been carried out in the name of the firm. Also, participation in management by all
partners is not compulsory.

14. Explain the Rights and Duties of Seller and Buyer before and after sale.
(Sept 2014)

Ans: Seller’s duties before the Sale

1. DISCLOSURE OF MATERIAL DEFECTS: The seller must disclose all the material
defects over the property. The seller is bound to disclose all latent material facts
but not the latent fact. The latent material fact is that which can’t be discovered by
doing a reasonable investigation and the latent defect is that which is obvious and a
buyer can discover by doing a reasonable investigation. In the case of latent defects,
the principle of caveat emptor (buyer be aware) implies. If the seller fails to inform
the buyer about the latent defect, it leads to misrepresentation, and the buyer has
the right to repudiate the contract of sale.

2. PRODUCTION OF TITLE DEEDS: The seller is bound to produce title deeds on the
demand of the buyer for examination and his(buyer’s) satisfaction. The seller is
bound to arrange for all the documents, required for review, that are in his
possession or power. If the seller fails to produce documents, the buyer has the
 right to get his money back, which he paid in advance, and has the right to repudiate
the contract.

3. ANSWER RELEVANT QUESTIONS AS TO TITLE: The seller must satisfy the

buyer with all the questions related to title deeds. There is a chance that the buyer
will not meet with the title deed and have some questions related to the property
regarding the title of ownership, rent, etc. the seller is bound to give all the answers
associated with the title. Still, if the buyer didn’t ask any questions, the seller must
inform the buyer.

4. DUTY TO EXECUTE CONVEYANCE: The seller must execute conveyance, i.e.

transfer the ownership. The sale deed will be completed with the seller’s signature or
thumb impression on the sale deed. Once the buyer makes the payment, the seller is
required to execute the conveyance.

5. CARE OF PROPERTY AND TITLE-DEEDS: After the execution of the contract of

sale, the seller must take care of the property and the title deed as the property’s
owner until it is delivered to the buyer. The seller acts as a trustee of the buyer
between the execution of conveyance and the property’s delivery.

6. PAYMENT OF OUTGOINGS: The seller must clear all the outgoing payments over
the property. Before the sale, the seller has to pay all the government taxes,
revenues, and rent over the property. The buyer is not bound to pay any outgoings
due before the sale of the property. The seller is bound to pay these outgoings up to
the date of the sale.

7. Seller’s duties after Sale

i. GIVING POSSESSION OF PROPERTY: The seller is bound to give possession of
the property after the sale. After execution of title deeds, the seller has to deliver
the possession to the buyer or any person authorised by the buyer.

ii. DELIVERY OF TITLE DEEDS: After completing the sale, the seller has to transfer
title deeds to the buyer, who thereafter, becomes the rightful owner of the
property and title deeds are no use to the seller. The seller is bound to transfer all
other documents related to the property and is required by the buyer.

However, the proviso to Section 55(3) provides that:

a. Where the seller retains that part of the property with him which is of greatest
value and, such property is included in the documents, the seller is entitled to retain
all the documents with him.
b. Where the whole of such property is sold to several buyers the person who
purchases the largest part of the property would be entitled to retain all the
documents.
c. Seller’s right before Sale
d. Before completing the sale, the seller has all rights over the property since he still
remains the owner of the property and has the right to get rents, profits, and other
benefits over the property. But after the transfer of ownership, this right belongs
to the buyer, and the seller has no right to get all these benefits.
Seller’s after before Sale
1. SELLER’S LIEN OR CHARGE: After completion of the sale, if the consideration or
any part of it remains unpaid, the seller acquires a lien or charge on the property.
The completion of the sale does not depend on the payment of price but on the
delivery of possession. Therefore, the only way to get an unpaid price is by creating a
charge over the property.

2. INTEREST ON UNPAID PRICE: Seller also has a right to get interested on the
unpaid price. If the buyer is already in possession of the property, the seller is
entitled to claim interest on the unpaid amount from the date on which such
possession was delivered, and not from the date of transfer of ownership. The seller
has a right not only to get his unpaid price but also to an interest in it.

3. TRANSFER OF SELLER’s CHARGE: The charge created in favour of the seller is an

unsecured money debt, and therefore is an actionable claim. The actionable claim is
transferable in nature and therefore, so is the charge. The charge created in favour
of the seller can also be transferred to a third person and it can be transferred
through a registered instrument.

BUYER’S DUTIES BEFORE SALE

1. DUTY OF DISCLOSURE: The buyer must disclose all the material facts to the
seller before the execution of the sale, as may increase the value of the property,
and of which the seller is unaware. Where the buyer is aware of any material fact
that increases the value of the property, he/she is bound to inform the seller of the
same. In case the buyer is aware that the seller has absolute rights over the
property, but fails to inform the seller, the same would amount to fraud on the part
of the buyer.

2. PAYMENT OF PRICE: After completion of the sale, the buyer is bound to pay the
full amount to the seller, but he/she is not bound to make the whole payment before
the execution of the sale. Before the sale, the buyer must pay part of the number of
promises to make full payment when implementing the sale.

BUYER’S DUTIES AFTER SALE

1. TO BEAR THE LOSS TO PROPERTY: This is the buyer’s duty to bear the
property’s loss after the sale because after becoming the property owner, the seller
is not liable to pay for any loss over the property. The buyer can’t blame the seller
for any loss unless it is proved that the loss did occur because of the seller’s fault.
And in case of fire, if the seller has insurance over the property, the buyer is liable
to restore the amount of insurance the seller has paid.

2. TO PAY OUTGOINGS: After transfer of ownership, the buyer is the owner of the
property and entitled to pay all the taxes, rents, and revenues over the property.
The seller is not liable for paying any taxes after the transfer of ownership. The
buyer must pay all the liabilities over the property due after the sale.
BUYER’S RIGHT BEFORE SALE
BUYER’S CHARGE: This right occurs when the sale doesn’t execute means the seller
refuses to sell, and the buyer already paid some amount in advance. This situation creates
buyers’ charges, and the buyer is entitled to get his money back with interest on it, and
interest will be paid from the date of transfer of money from the date of delivery of
possession. But if due to the fault of the buyer sale doesn’t execute, then the buyer doesn’t
have a charge on it and can’t claim his money back.

Buyer’s right after Sale

According to Section 55 (6) (a) of the Act, the buyer is entitled to get all the rights over
the property inclusive of all rents, profits, and also any other benefits over the property.
The buyer becomes the property owner after completion of the sale or, in other words,
after the transfer of ownership, and he/she is entitled to all the benefits from the date of
transfer of ownership.

15. Discuss the Rights and Duties of Partners. (Sept 2014)

Explain the Definition of Partnership and discuss the Rights and Duties of Partners
(Aug 2013)

Ans: : Partnership comes into being only as a result of an agreement between the parties,
general principles of law of contracts and agency are also relevant to partnership insofar as
they are not inconsistent with the express provisions of Partnership Act 1932. Basic
requirements of contract, i.e., legally enforceable agreement, mutual consent, competency of
parties, free consent, lawful object, consideration, etc., do apply to partnership contract.

A partnership is simply an association of persons who have agreed to carry on a joint

business and share the profits thereof.

Duties of Partners
All the duties of partners emerge from the second principle i.e. the relation of partners to
one another is of utmost good faith.
Following are the duties of partners:
1. Duty to act in good faith
2. Duty not to compete
3. Duty to be diligent
4. Duty to indemnify for fraud
5. Duty to render true accounts
6. Duty to properly use the property of the firm
7. Duty not to earn personal profits
Duty to act in good faith
 Section 9 of the act provides that it is the duty of partners to act for the greatest
common advantage of the firm. Therefore, the partner should work to secure
maximum profits for the firm. A partner should not secure secret profits at the
expense of the firm.
 The duty continues to exist even after the partnership has ceased to exist. The
partners owe the duty to legal representatives of the partner as well as the former
partner.
Duty not to compete
 Section 16(b) of the act provides that if the partner makes a profit by engaging in a
business which is similar to or competing with the firm, then the partner should
account for such profits.
 However, a partner can carry on any business which is outside the scope of the
business of the firm.
 The duty can be altered by the partnership deed. The partners may enter into an
agreement which allows a partner to carry the business competing with the business
or can restrict the partner from carrying any business other than that of the
firm. Section 11 provides that such an agreement will be valid and cannot be
considered as a restraint in trade.
 If a person breaches such agreement and carries on a personal business which not
competing to the business of the firm then such a partner will not be liable to
account for the profits, but his co-partners can apply for dissolution of the
partnership.
Duty to be Diligent
 Section 12(b) provides that a partner is bound to diligently attend his duties. Section
13(f) states that a person should indemnify the firm for any loss caused to the firm
because of his wilful neglect
 A partner cannot be made liable for mere errors of judgment or acts done in good faith.
 An action for indemnity under this head can be brought only by the firm or partners on
behalf of the firm. A partner cannot bring an action for indemnity in his personal
capacity.
Duty to indemnify for fraud
 Section 10 of the Indian Partnership Act, 1932, provides that if a loss is caused to the
business of the firm because of the act of the partner then he shall indemnify his co-
partners for such loss.
 The purpose of this section is to induce partners to deal fairly and honestly with the
customers.

Illustration: A, B, C, and D entered into a partnership for the banking business. A

committed fraud of ₹30,000 against one of the customers. As a result, all the co-partners
i.e. B, C, and D were held liable. Here, A is bound to indemnify the firm for the loss caused
to the firm because of fraud committed by him.
The liability to indemnify for fraud cannot be excluded by entering into an agreement to the
contrary. Because entering into any such agreement is opposed to public policy.

Duty to render true accounts

 Section 9 of the Act, provides that the partners are bound to disclose and provide full
information about the things that affect the firm to any partner or his legal
representatives. This means that a partner should not conceal things from other co-
partners in relation to the business of the firm.
 Every partner has the right to access the accounts of the firm.

Duty to properly use the property of the firm

 Section 15 of the act, provides that property of the firm should be held and used by the
firm only for the business of the firm.
 A partner cannot make use of the property for his personal purpose and if does so, then
he will be accountable to all the co-partners. He could be made liable for the losses
caused because of any such use.
 This duty can be avoided by entering into an agreement to the contrary.

Duty to account for personal profits

 Section 16 of the Partnership Act, provides that:
 If a partner makes the use of the property of the firm and earns profit out of it,
then he should account for the property. This duty arises because of the fiduciary
relationship between the partners.
 Illustration: A, B, and C were partners in a firm. Goods were supplied to a person D.
D paid some extra commission to A, for using his influence to deliver the goods to D.
Here, A has the duty towards the co-partners to account for the commission.
 If a partner enters into a business which is competing with the business of the firm
then the partner should account for the profit earned from any such business.
 Illustration: A, B, and C were partners in the business of sale of bottles. B started
to carry on the same business and started to influence the customers to buy the
bottle from him rather than the firm. Here, B has a duty to account for the profits
earned from the business.
 However, a competing business can be carried out after the dissolution of the
partnership. The firm has the right to put reasonable restrictions on carrying the
competing business by the ex-partners such as, any reasonable time for which the
ex-partners can’t carry the competing business or the geographical limits where he
can’t carry the business.
 This is not a compulsory duty and thus, can be avoided by entering into an agreement
to the contrary

Rights of Partners
Mutual Rights of the partners generally depend upon the provisions of the agreement. But
subject to their agreement, the law confers following rights on partners:
1. Right to take part in the conduct of the business
2. Right to be consulted
3. Right to access and inspect books
4. Right to indemnity
5. Right to share profits
6. Right to Interest
7. Right to remuneration

Right to take part in the conduct of the business

 Section 12(a) of the act, provides that every partner has a right to take part in the
conduct to the business of the firm.
 This right can be curtailed by the provisions of the agreement. Thus, allowing only a few
partners to actively participate in the functioning of the business.
 This right should be used by the partners for promoting the business of the firm and not
for damaging the business.
Right to be consulted
 Section 12(c) provides for resolving disputes relating to the ordinary course of
business between the partners by the majority. It states that every partner shall
have the right to express an opinion before the matter is decided.
 If for example, there is a difference in opinion among the partners for introducing
the son of one of the partners for the purpose of learning business then the majority
decision will prevail.
 However, if the dispute is related to the Fundamental matter of the business i.e. the
nature of the business then the consent of every partner is required.
 For Example: If a minor is to be included as a beneficiary in a partnership then the
consent of all the partners is required.

Right to access, inspect and copy books

 Section 12(d) of the act, provides the right to partners to access, inspect and copy
account books.
 A partner can exercise this right by himself or by his agent but none of them is
authorised to use the gained information against the interest of the firm.
 Example: If a dormant partner wants to sell his shares to a co-partner and appoints an
expert to inspect the account and his share in the firm then, co-partners can not object
to same.
 For raising an objection the co-partners should provide reasonable grounds such as
protection of trade.

Right to be Indemnified
 Section 13(e) provides the right to be indemnified to the partners. This section
provides the right to indemnity under two circumstances:
 A partner is entitled to recover for any expenses incurred by him in the ordinary and
proper conduct of the business.
 Illustration: There was a partnership between A, B, C, and D. The firm has incurred a
debt of ₹2,00,000 from the bank. A paid the debt in the name of the firm. In this
case, B is entitled to be indemnified from his co-partners.
 When a partner has incurred expenses in an emergency in order to protect the firm
from loss; provided that the partner must have acted in a reasonable manner.
 The right to be Indemnified is not lost with the dissolution of the firm. Settlement
of accounts is also not important to indemnify the partner.
 The rationale behind this right is that the burden of expenses of helping partnership
should not be borne by a single partner.

Right to share profits

 Section 13(b) of the Indian Partnership Act, provides that the partners are entitled
to share the profits and losses equally.
 Right to share profits is not affected by the fact that the partners have
contributed unequally in the firm, possess different skills, have laboured unequally in
the firm.
 The right to share profits equally can be altered by the partners by entering into an
agreement to the contrary. Thus, the partners can fix the share of profits or agree
to be paid by way of salary rather than profits.
Right to Interest
 Interest on Capital: Section 13(c) provides that a partner is generally not entitled
to claim on the capital. But if there is an express agreement between partners that
allows interest on capital then, such an interest will be paid only out of the profits of
the firm. Interest is not provided to the partner on capital except when there is an
express agreement or a usage to the effect, because a partner is deemed to be an
adventurer rather than the creditor.
 Interest on Advances: Section 13(d) states that a partner is entitled to the interest
of six percent per annum for the advances made by him to the firm beyond the
capital he had agreed to subscribe.
 Illustration: A person X, invests ₹50,000 in a partnership firm and provides ₹60,000
to the firm as advance. In this case, X will receive interest from the profits of the
firm for ₹50,000 which he had invested in the firm and will get 6% interest on the
advances made by him to the firm.
 It must be noted that the interest in capital ceases after the dissolution of the firm,
but the interest on advances exist until it is paid. Thus, the dissolution of a firm has
no impact on the Interest on Advances.

Right to remuneration
 Section 13(a) provides that no partner in a firm is entitled to claim remuneration for
taking part in the conduct of business. However, the remuneration can be provided to
certain partners along with the share in profits if they have entered into an
agreement to that effect or when such remuneration is payable under the continued
usage of the firm.
 For Example, there is a firm consisting of Active and Dormant partners. In such a
case, the partners can form an agreement entitling the active partners to receive a
particular sum as remuneration.

What is Partnership Property?

It becomes important to determine the property of the firm as opposed to the personal
property of partners. For example, when the partnership is dissolved then the debts are
first paid out of the property of the firm. Again, the partnership property should be used
only for the business purpose and not for personal purposes.

Concept and Nature of Partnership Property

A partnership is not a legal person and is, therefore, incapable of holding any personal
property. Partnership property is nothing but the joint property of all the partners,
however, none of the partners can personally claim the property. Thus, when one of the
partners brings his personal property for the purpose of the partnership, he loses his
personal rights over it. He will only get the share of profits which may be agreed by the
partners.

What constitutes the Partnership Property?

Generally, it is an agreement between the partners which specifies what shall constitute a
partnership property.
Section 14 of the Act, provides what shall constitute the partnership property. It must be
noted that this is subject to the agreement, and the partners can explicitly mention in the
contract that what will be the partnership property. Hence, Section 14 will apply only in the
cases when there was no agreement between the partners stating that what would be the
partnership property.

The property originally brought in

The property of the firm includes all property, rights, and interests which were originally
brought into the stock of the firm by the partners at the commencement of the business.

Goodwill of the firm

Goodwill of the firm is treated as the property of the firm. Goodwill is nothing but
the reputation of the firm. When a partner buys the firm then he is entitled to the
goodwill as well. say, for example, there were two partners in a firm, A and B, B sold his
partnership shares to A, A will be entitled to the goodwill of the firm as well i.e. B cannot
use the name of the firm when he opens the business and cannot represent himself as a
partner of the firm.
If a person dies or retires, then he or his legal representatives will be entitled to claim for
the goodwill. This is because the goodwill of the firm is the result of his joint efforts along
with other partners.

Property subsequently acquired

When a property is subsequently brought for the purposes of the firm or in the ordinary
course of the business, then it would constitute the property of the firm. Any property
bought by the firm’s money will be the property of the firm,
Partner’s property in the firm’s use
Sometimes, the personal property of the partner may be used in a firm. If such property
constitutes the property of the firm or not will depend upon the agreement of the
partnership and intention of the partners.
The mere use of a partner’s personal property does not mean that it is the firm’s property
and the owner of the property does not lose his rights over that property.

Conversion of the joint into separate property

Where the property is bought by the partner from the partnership money but for the sole
benefit of the partner, then, in that case, a partner will become the debtor of the firm and
the property would be the partner would be the sole owner of any such property bought by
him.

Change in the firm

When a partnership is created for a fixed period or for a particular adventure then such a
partnership automatically comes to an end after the expiry of such period or adventure.
However, sometimes the partners continue the partnership beyond the expired
term. Section 17 of the Act provides that such a change in the firm will not affect the
mutual rights and duties of the partners unless the agreement alters it. The change in the
firm can be understood under three broad heads:

Change in Constitution
When there is a change in the constitution of the firm i.e. if a partner retires or a new
partner is added, the mutual rights and duties will remain the same as they were before the
change.
After the expiry of the term
When the partnership is for a fixed term but the partners carry it on beyond such term
then such partnership will become the partnership at will and the mutual rights and duties
remain the same.
When additional undertakings are carried out
Where the partnership was formed to carry out the specific adventures but carries out
other adventures or undertakings, then the partnership becomes the partnership at will and
the rights and duties are not affected by any such change.

16. Define “Agency”. Explain the law relating to “Termination of Agency”.

(Aug 2013)
Explain the various modes by which an Agency may be Terminated. (Jul 2012)
Ans: An Agency Agreement is defined on the basis of a legal relationship between the
Principal and the Agent, whereby the agent is allowed to operate on his behalf under some
cases by the Principal and to pay for the service. This suggests that the principal has
control over the agent. An Agency Agreement is considered an Agency Contract and it
defines the roles for the principal that the Agent needs to do. As in India, the law relating
to the Agency and most other jurisdictions is characterised as a relationship in which one
party, namely an agent, has the right to act on behalf of another person, namely the
principal, in order to maintain legal relations between the latter and third parties.

Termination of the agency agreement

1. A clear instance of the termination either voluntarily or on occurrence of an incident
shall be duly mentioned in the agreement.
2. Compensation on death of the agent and the nominee to receive such payment
3. The confidentiality of the services and liability of the same post termination should
be duly mentioned
4. Liability of the agent post termination of the agreement for the acts conducted
during the agreement.

Restricted Activities
1. The agent will not perform any kind of those activities that are restricted by the
Principal
2. The agent will undertake any liability on behalf of the principal unless strictly
restricted for the same.
3. In the case of any dispute between the parties, the agent will not undertake any legal
proceeding against the party other than the consent provided by the Principal
4. The agent will not transfer any kind of benefits under this agreement to anyone
other than the principal

Modes of termination of agency

According to Section 201 of the Indian Contract Act, 1872, Termination of agency
takes place in the following circumstances:
1. By revocation of authority by the principal.
2. By renunciation of his authority by the agent.
3. On the performance of the contract of the agency.
4. On the death of either principal or agent.
 5. By insanity of either principal or agent.
6. With the expiration of the time period fixed for the contract of the agency.
7. By an agreement made between the principal and his agent.
8. With the insolvency of principal or agent (in few cases).
9. When the principal and his agent is an incorporated company, by its dissolution
10. With the destruction of the subject matter. (section 56)

An agency arrangement is a form of general contract. As such, except where the agency is
irrevocable, an agency can terminate in the same way as a contract is discharged. Only the
act or consent of the parties to the agency or the enforcement of the law may terminate
the relationship between the principal and the agent. “In the absence of anything to prove
its termination, an agency, when proven to have existed, will be presumed to have continued,
unless such a length of time has elapsed as destroys the presumption.” When an entity is
dissolved, the obligation of the agent to work on behalf of the principal comes to an end. A
government law or instrument may stipulate the timeline for the termination of an entity.
In such a case, if the instrument states in clear and unambiguous terms that after the
expiry of the time stated in the instrument, an agency shall terminate without intervention
on the part of the principal or administrator, the agency shall, in effect, terminate. If the
parties maintain their partnership as principal and agent after the expiry of the duration
given for in the contract, a substantiated assumption is posed that their relationship is
regulated by the original contract and that the contract is extended for a similar term. For
example, where the parties entered into a contract for a year and proceeded to behave
after one year under the contractual conditions, the court would conclude that the parties
genuinely wanted to hold the contract alive for a period of time.

On the other hand, if no reasonable deadline has been set by the parties for the expiration
of the contract, the contract is assumed to have been terminated after a reasonable period
of time. “The nature of the act specifically authorised, the formality of the authorisation,
the likelihood of changes in the purposes of the principal and other factors shall determine
what constitutes a reasonable period of time during which the authority continues.” In
comparison, the burden of proving an agency’s termination or revocation lies with the agency.
“Parol evidence cannot be accepted in order to add another term to an agreement even if
there is nothing in the writing relating to the specific provision to which the parol evidence
is addressed.” Therefore, when deciding the length of an agency contract where the written
contract is treated as combined, or unambiguous, or both, courts would not admit parol
proof. An agency that lasts for a fair amount of time can be terminated by one party only
after giving the other party ample warning.

Case laws
R. Sayani v. Bright Bros (P) Ltd, AIR 1980 Mad 162
Where an organisation has been formed for a defined amount of time, liability for its
premature termination will have to be compensated if the termination did not have
appropriate justification. There was no fair warning given for the premature decision of the
department. The agent received Rs. 4000 a month. The court was of the opinion that there
should have been at least three months’ warning. Correspondingly, a reward of Rs. 12,000
was allowed.
Sukhdev v. Commr of Endowments, (1998) 1 BC 403 (AP)
Through the expiry of the name, an agency comes to an automatic end. Where a gas pump
was to be regulated by the agency for a certain time, it was held that the agent was
obligated to vacate the premises at the end of the period. There was no extension provision,
nor was there an actual renewal clause.

Effect of termination of agent’s authority

Sometimes former agents continue to act on their ex-principal’s’ behalf even though the
agency has ended. Once an agency terminates by any of the means just described, the
agent’s actual authority (expressed and implied) ends as well. Nonetheless, such “ex-agents”
may retain apparent authority to bind their former principals.

Third parties who are unaware of the termination can fairly feel that there is still authority
for an ex-agent. The obvious authority of an agent also remains after termination to protect
third parties who rely on such a fair appearance of authority. Thus, even if the organisation
has stopped, a former agent might be able to tie the principal under his obvious jurisdiction.

Notice to third parties

Apparent authority ceases only after an effective notice of termination is issued by a third
party, that is to say, when it is no longer fair for a third party to assume that the agent has
legitimate authority. Such notification can provide any ground for termination by operation
of law (such as modified circumstances).

The obvious authority of an agent will continue even after the death or lack of ability of the
principal. After the principal’s death or lack of capacity, an agent can act with apparent
authority because the basis of apparent authority is the manifestation of a principal to
third parties combined with the rational assumption of a third party that the agent acts
with real authority They should fairly assume that the agent is approved because third
parties have not seen that the principal has died or lost capacity. The rule that the death of
the principal should not immediately terminate the obvious authority is in keeping with the
interest of shielding third parties who are acting without notice of the death or lack of
ability of the principal.

Prudent principals may, however, want to alert third parties themselves in order to defend
themselves from unintended liability. The kind of notice needed varies with the third party
in question.

Actual notice is mandatory for third parties who have recently worked with the agent or
who have started to work with the agent. This can be done by—
1. a direct personal comment to the third party; or a direct personal statement
to the third party;
2. letter sent privately to a third party, to his place of business.

Constructive notification for the other parties These other parties are generally aware of
the firm, but have not entered into any business with the agent. Constructive notice would
usually be obtained by announcing the closure of the agency in a general circulation
newspaper at the location where the agency’s business was routinely done. If no sufficient
publication occurs, disclosure is fairly likely to notify third parties through some means,
such as posting a note in public locations or on a website.
Claim for damages
The principal can also seek damages/losses incurred due to the agent’s acts/non-acts, aside
from the revocation of the agency. It is therefore well known that the person who has
broken the contract and has shown the characteristics of abandoning or renouncing the
duties under the contract through his actions would not be able to seek damages from the
other side.

In this case, the single sale agent, having displayed uncooperative attitude and actions and
practically sabotaging the principal’s enterprise, regardless of his specific duties under both
the arrangement and the Contract Act, would have no excuse to go before the court and
demand damages or compensation-on the contrary, the principal would be well justified in
seeking damages and costs/compensation. In view of the ‘necessity doctrine,’ it would be
justified and fair to dispense with notification prior to six months, otherwise waiting for six
months and playing in the hands of an untrustworthy agent would only experience the utter
annihilation of the company of the principal.

Compensation on termination of the agency agreement

A compensation shall be provided to the agent only if he adheres to the principles laid down
in the agreement and it is pertinent to note here that compensation shall be provided only if
the agent agrees to such clause. In Indian Law and in English law (read along with common
law), there is no maximum limit to which a compensation shall be appended to the agent.

The English courts originally took the opinion that liability for breach of contract had to be
limited to the equivalent of damages. Now, the compensation may differ based on the well
being of the principal. Let’s say for an example- It is clear that in the case of a principal in a
strong financial and commercial role who clearly needs to restructure his business, for
instance by adjusting the target market, the valuation of the agency business and therefore
the rewards will be substantial. Similarly, if the work of the agent is not good but the deal
would not authorise the principal to cancel the violation contract, termination will allow the
agent to assert the benefit of the company of the client.

There has not been any substantial changes in the compensation provided to the agents
while the termination, but there has been a brighter outlook at the rights of the agents to
provide compensation while terminating the agreement. As discussed earlier, it is upon the
parties to decide the compensation and more importantly, the amount to be discussed along
with the mode of termination and their set of compensation.

17. Explain different methods by which partnership can be dissolved. (June

2018)
What are the various modes for Dissolution of Partnership Firm? Jul 2012)

Ans: Dissolution of a Partnership

Before the dissolution of the partnership, let us understand the difference between the
‘dissolution of the partnership’ and the ‘dissolution of the partnership firm’. Dissolution of
partnership means the end of the partnership business and dissolution of partnership firm
means the end of partnership business along with the firm.
The dissolution of a partnership firm means termination of every contractual relationship
between the partners and that all the operations which are being performed in a company
are suspended and all the assets and liabilities are settled and disposed off.

Now the question arises when the partnership is going to be dissolved? There can be
different reasons for the dissolution of a partnership as when a new partner is added or
when a partner is dead or leaves the partnership, etc and the remaining partners can
continue their business. And when there is a change in the partners so the prior partnership
comes to an end and the new partnership takes place with the liability and assets of the old
one.
The partnership may be dissolved due to the following reasons:
1. Due to the death of the partner.
2. Due to the admission of a new partner.
3. Due to the retirement of a partner.
4. Due to the bankruptcy of a partner.
5. Due to the expiry of the partnership period, if the partnership is for a particular
period.
Modes of Dissolution
There are some modes by which a partnership can be dissolved and those are:
1. By an act of partners: when a partner agrees to dissolve a partnership at a particular
time. Partners can come into an agreement regarding a particular time period maybe
five years. In which partners can end the agreement at the end of the five years.
Sometimes partners can dissolve it in the middle of the time period under specific
conditions.
2. By operation of law: a partnership is the consequence of an agreement which is
governed by law. Therefore if any unlawful activity is performed so it will be
dissolved. You can make a valid partnership for illegal work.
3. By the court’s decree: a partnership can be dissolved by the court and the court will
only allow under these conditions:
a. If the partner is incapable to work;
b. If the partner is mentally unstable;
c. If the partner misbehaves which creates a bad impact on the partnership;
d. If there is a breach of the agreement by a partner.

Statement of dissolution: dissolution can be done by filing the statement to the state’s
secretary. The form must contain the information regarding the partnership name, date and
reason of dissolution.

Statutory provisions regarding the Dissolution

There are certain provisions which are mentioned in the Indian Partnership Act regarding
the dissolution are:
Section 4 defines the meaning of partnership.
Section 6 defines the modes of the existence of the partnership.
Section 45 defines the liabilities of the partner after the dissolution of a partnership.
Section 46 defines the rights of the partner regarding the business after dissolution.
Section 48 defines the modes of the settlement of the account of partners after
dissolution.
Rights after Dissolution
Section 46 of the Indian Partnership Act, 1932 deals with the rights of partners after
dissolution. After the dissolution of the partnership, partners have certain rights regarding
the same:
1. Right to an equitable lien: on the dissolution of the firm, every partner is entitled to
certain rights like the right to have the property of the firm used in payments of
debts and liabilities and rights to have surplus distributed among all the partners.
2. Right to return of premium: at the time of the partnership, partners pay an amount in
the form of premium when the partnership dissolves. Partners get that premium
according to the agreement.
3. Rights where partnership contract is revoked for fraud or for other reasons: if a
partner agrees to join a firm by fraud or by misrepresentation by the other
partners, or if he finds so he has the right to put an end to the partnership
agreement.
4. Right to restrain the use of the firm’s name or property: after the dissolution of the
partnership, the partner has a right to stop other partners from using the same
name of the firm.
5. The right to earn personal profit by using the firm’s name: if on the dissolution, the
partner has a right to use the name of the firm as he buys goodwill of the firm and
can earn profit from it.

Liabilities after Dissolution

Section 45 of the Indian Partnership Act, 1932 deals with the liability for acts of partners
done after the dissolution. Liabilities are:
 The partners continue to be liable to the third party until the public notice of
the dissolution is given, it will not be applied to the partner who is dead or the
partner who is insolvent or to the sleeping partner or to the retired partner.
 After the dissolution of the partnership, the partner is liable to pay his debt and to
wind up the affairs regarding the partnership.
 After the dissolution, partners are liable to share the profit which they have
decided in agreement or accordingly.
Case Laws
Narendra Bahadur Singh vs Chief Inspector Of Stamps, U.P. (1971)
In this case, the partnership was dissolved and with that, the third party (Narendra
Bahadur Singh) was given with all the assets (stocks) liabilities including all the debts as per
the account and he was entitled to use the old name of the firm and can carry out the
business with all profit and losses.
The other three parties were not entitled to any profit, losses or any other liability. The
capital, profit, and loss of the other 3 people has agreed to receive and Narendra Bahadur
Singh has agreed to pay the mentioned amount.
As to settle the amount securely, he hypothecated and charged certain property but it was
said by the court that the property of the firm is vested to all partners equally as you are
not the only owner of the firm and the settlement will be done according to the mode of
settlement under Section 48 of Indian Partnership Act.
 18. Explain the rules relating to the passing of the property in the goods
under the sale of goods act. (June 2018)
Examine the rules relating to transfer of ownership in sale of goods. When does
the ownership of unascertained goods pass to the buyer? (Sept 2016)
Ans: There are numerous concepts dealt under Sale of Goods Act(SOGA), 1930, most
important of which is passing or transfer of the property. The literal meaning of passing of
property is the transfer of the ownership on an agreed price. The ownership is transferred
only when the proprietary of the property rights are transferred from the seller to the
buyer. Point to be noted is that the transfer of ownership is distinct from that of
possession of goods where the latter means that the goods are subject only to custody or
physical control. Under SOGA, 1930 the term property is not a special property but a
general property in goods.

Transfer of ownership is the essence of the contract of sale. Therefore, it is important to

understand important aspects pertaining to the passing of property and its legalities.

Goods under transfer of property

There are usually 2 types of goods dealt under transfer of property in SOGA-

Specific goods: specific goods are goods that are identified at the time of making a
contract and one can easily identify the exact piece to be delivered. For example- A
contracts with B for the sale of a jacket bearing a distinct number.

Unascertained goods: unascertained goods are goods that are not identified at the time of
making the contract. it is difficult to separate the exact goods for which the sale of the
contract was made. For example- A contracts with B for the sale of a sack of grains out of
many sacks lying in the storage. With no uniqueness of the sacks, one cannot identify the
exact sack which was to be delivered.

Essentials of transfer of property

First and the most important essential for the transfer of property under SOGA is that the
ownership of the property which is to be transferred must be of ascertained goods.

It is not possible to transfer unascertained goods. For the transfer of such good, they have
to be converted to ascertained good.

The second essential is that property is transferred only when it is intended to transfer.

Significance of transfer of ownership of property

During the contract of sales, the precise time at which the ownership gets transferred
from seller to buyer is of great importance and cannot be ignored.

Significance of transfer of ownership can be discussed under following heads-

Risk prima-facie passes with the property- the risk with the property remains with the
seller only till the time the property is with him. As soon as the ownership is transferred,
the risk also gets transferred from the seller to the buyer.

One special case with this is the delay in the transfer of goods. If the delivery is delayed
due to the fault of the seller or buyer, the party responsible for the delay is responsible
for any loss which is incurred due to delay.
Action against the third party- if the property which is to be transferred gets destroyed
due to any act of the third party then the buyer has the right to sue the third party.

If the ownership is still with the seller, the buyer has no right to sue.

Suit for the price- whosoever holds the ownership of the good would be held responsible in
case of any mishappening. If the buyer becomes the owner of the good, the seller can file a
suit for price in case of default.

Insolvency of buyer or seller- taking a case where either the buyer or the seller becomes
insolvent. In this scenario, whether or not the property will be passed to the official
assignee and right to decide goes to the party becoming insolvent.

Rules determining the passing of the ownership from the buyer to the seller under SOGA,
1930

Ascertained good- Section 20 to 22 of SOGA, 1930, lays down a certain set of rules which
are to be followed while passing of the ascertained property.

Passing of the property at the time of the contract- if the goods are in the deliverable
state then the property of goods passes to the buyer irrespective of payment or the time
of the delivery is postponed.

Passing of the property after the date of the contract

Goods not in deliverable state-it is mentioned in section 21 of SOGA, when there are cases
that property of the goods to be transferred is not in the deliverable state, then, in that
case, it is important to make the goods in the deliverable state first and by that time a
notice must be served to the buyer.

When the price of the good is to be determined by the weight of the goods- this provision is
contained under section 22 of SOGA, 1930, that if the goods are in the deliverable state
but by any chance, the seller has to weigh the goods to calculate the amount, the transfer
will not be done till the calculation is complete and buyer has the notice regarding this.

Unascertained goods- under section 23 of SOGA, 1930, we can see the rules for the
transfer of property for ascertained goods.

For the transfer of unascertained good there are two prerequisites need to be fulfilled:

1. The goods must be converted to ascertained property- the seller needs to identify
the goods and keep them aside so as to avoid ambiguity. The exactly selected goods
are to be transferred to the buyer. This is a unilateral act where the seller makes
the decision.
2. Goods must be appropriated to the contract- appropriation is where the goods are
set aside with the consent of both buyer and seller. This is a bilateral act where
both take a mutual decision.

Goods sent on approval or sale or return- goods can be transferred from buyer to the seller
on ‘approval’ or ‘sale or return’ basis. Section 24 of SOGA, 1930, defines the transfer of
property of goods on approval provided following conditions are fulfilled:
 The buyer must accept the good or any act of approval must take place.
  The buyer shall hold the good beyond the specified period of time, without making
any note, if the time is not mentioned.
In Kirkham Vs. Attenborough, a jeweler delivered some jewelry to W on sale or return
basis. W pledged the jewelry with A. When W failed to pay the price, the jeweler wanted
to recover the goods from A. It was held that the jeweler cannot recover the goods from A
because by pledging the goods W has accepted the goods, the ownership gets transferred.
Some reflection on “property” and “title” in the Sale of Goods Act; The Cambridge law
journal, Vol. 56, No. 3, pp. 571-598