CONTRACT-II

UNIT –I

CONTRACT OF INDEMNITY

Meaning: In the old English law, Indemnity was defined as a promise to save a person harmless
from the consequences of an act. Such a promise can be express or implied from the circumstances
of the case. This view was illustrated in the case of Adamson vs Jarvis 1872. In this case, the
plaintiff, an auctioneer, sold certain goods upon the instructions of a person. It turned out that the
goods did not belong to the person and the true owner held the auctioneer liable for the goods. The
auctioneer, in turn, sued the defendant for indemnity for the loss suffered by him by acting on his
instructions. It was held that since the auctioneer acted on the instructions of the defendant, he was
entitled to assume that if, what he did was wrongful, he would be indemnified by the defendant.

This gave a very broad scope to the meaning of Indemnity and it included promise of indemnity
due to loss caused by any cause whatsoever. Thus, any type of insurance except life insurance was
a contract of Indemnity. However, Indian contract Act 1872 makes the scope narrower by defining
the contract of indemnity as follows:

Section 124 - 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 a "contract of
Indemnity".

Illustration - A contracts to indemnify B against the consequences of any proceedings which C

may take against B in respect of a certain sum of Rs 200. This is a contract of indemnity

This definition provides the following essential elements -

I. There must be a loss.

II. The loss must be caused either by the promisor or by any other person.
III. Indemnifier is liable only for the loss.

Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss
occurs.

Rights of the indemnity holder

Section 125, defines the rights of an indemnity holder. These are as follows -

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor

1. Right of recovering Damages

All damages that he is compelled to pay in a suit in respect of any matter to which the
promise of indemnity applies.
2. Right of recovering Costs
All costs that he is compelled to pay in any such suit if, in bringing or defending it, he did
not contravene the orders of the promisor and has acted as it would have been prudent for
him to act in the absence of the contract of indemnity, or if the promisor authorized him in
bringing or defending the suit.
3. Right of recovering Sums
All sums which he may have paid under the terms of a compromise in any such suite, if
the compromise was not contrary to the orders of the promisor and was one which would
have been prudent for the promisee to make in the absence of the contract of indemnity, or
if the promisor authorized him to compromise the suit.

As per this section, the rights of the indemnity holder are not absolute or unfettered. He must act
within the authority given to him by the promisor and must not contravene the orders of the
promisor. Further, he must act with normal intelligence, caution, and care with which he would
act if there were no contract of indemnity.

At the same time, if he has followed all the conditions of the contract, he is entitled to the benefits.
This was held in the case of United Commercial Bank vs Bank of India AIR 1981. In this case,
Supreme Court held that the courts should not grant injunctions restraining the performance of
contractual obligations arising out of a letter of credit or bank guarantee if the terms of the
conditions have been fulfilled. It held that such LoCs or bank guarantees impose on the banker an
absolute obligation to pay.

In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997, Calcutta HC held that
the indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the
 surveyor. Any settlement at lesser value is arbitrary and unfair and violates art 14 of the
constitution.

Commencement of liability

In general, as per the definition given in section 124, it looks like an indemnity holder cannot hold
the indemnifier liable until he has suffered an actual loss. This is a great disadvantage to the
indemnity holder in cases where the loss is imminent and he is not in the position to bear the loss.
In the case of Gajanan Moreshwar vs Moreshwar Madan, AIR 1942, Bombay high court
observed that the contract of indemnity held very little value if the indemnity holder could not
enforce his indemnity until he actually paid the loss. If a suit was filed against him, he had to wait
till the judgment and pay the damages upfront before suing the indemnifier. He may not be able to
pay the judgment and could not sue the indemnifier. Thus, it was held that if his liability has
become absolute, he was entitled to get the indemnifier to pay the amount.

CONTRACT OF GUARANTEE
Meaning: Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as contract
of guarantee is a contract to perform the promise or discharge the liability, of a third person in case
of his default. The Section further provides that the person who gives the guarantee is called the
“surety”, the person in respect of whose default the guarantee is given is called “principal debtor”,
and the person to whom the guarantee is given is called the “creditor”. For example, A takes a
loan from a bank. A promise to the bank to repay the loan. B also makes a promises to the bank
saying that if A does not repay the loan “then I will pay.” In this case, A is the principal debtor,
who undertakes to repay the loan; B is the surety, whose liability is secondary because he promises
to perform the same duty in case there is default on the part of A. The bank in whose favour the
promise has been made is the creditor.

Main features of Contract of Guarantee

 Gurantee not to be
Gurantee not to be
obtained by
oral or in writing obtained by
concealment of
misrepresentation
matterial facts

Tripartite consent of the

Agreement parties

1. The Contract may be either oral or in writing

According to Section 126, a guarantee may be either oral or written. On this point, the position in
India is different from that in England. According to English law, for a valid contract of guarantee, it
is necessary that it should be in writing and signed by the party to be charged therewith.

2. Consent of the surety should not have been obtained by misrepresentation.

The creditor should not obtain guarantee by any misrepresentation of any material facts concerning
the transaction. If the guarantee has been obtained that way, the guarantee is invalid. The position is
explained by sections 142.
“142. Guarantee obtained by misrepresentation invalids. - Any guarantee which has been obtained
by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a
material part of the transaction, is invalid.”

3. Consent of the surety should not have been obtained by misrepresentation or

concealment Any guarantee which the creditor has obtained by means of keeping silence as
to material circumstances is invalid. Sec (143)
Examples
• A engages B as clerk to collect money for him. B fails to account for some of his receipts
and A in consequences calls upon him to furnish security for his duly accounting. C gives
 his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct.
B afterwards makes default. The guarantee is invalid.
• A guarantee to C payment for iron to be supplied by him to B to the amount of 2,000 tons.
B and C have privately agreed that B should pay five rupees per ton beyond the market
price, such excess to be applied in liquidation of an old debt. This agreement is concealed
from A. A is not liable as a surety.”

4. Tripartite Agreement
A contract of guarantee is a tripartite agreement between the principal debtor, creditor and surety.
There are three contracts as under
• Contract between creditor and principal debtor
• Contract between surety and principal debtor
• Contract between surety and the creditor

5. Consent of the parties

There must be consent of all the three parties.

Continuing Guarantee
As per section 129, a guarantee which extends to a series of transactions is called a continuing
guarantee.

Illustrations -
1. A, in consideration that B will employ C for the collection of rents of B's zamindari, promises
B to be responsible to the amount of 5000/- for due collection and payment by C of those rents.
This is a continuing guarantee.

2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time to
time to the amount of Rs 100. Afterwards, B supplies C tea for the amount of 200/- and C fails to
pay. A's guarantee is a continuing guarantee and so A is liable for Rs 100.

3. A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the period of one
month. B delivers 5 sacks to C and C pays for it. Later on B delivers 4 more sacks but C fails to
pay. A's guarantee is not a continuing guarantee and so he is not liable to pay for the 4 sacks.

Thus, it can be seen that a continuing guarantee is given to allow multiple transactions without
having to create a new guarantee for each transaction. In the case of Nottingham Hide Co vs
Bottrill 1873, it was held 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.

Revocation of Continuing Guarantee

1. As per section 130, a continuing guarantee can be revoked at any time by the surety by notice
to the creditor.
Once the guarantee is revoked, the surety is not liable for any future transaction however he is
liable for all the transactions that happened before the notice was given.

Illustrations -
1. A promises to pay B for all groceries bought by C for a period of 12 months if C fails to
pay. In the next three months, C buys 2000/- worth of groceries. After 3 months, A revokes the
guarantee by giving a notice to B. C further purchases 1000 Rs of groceries. C fails to pay. A is
not liable for 1000/- rs of purchase that was made after the notice but he is liable for 2000/- of
purchase made before the notice.

2. A guarantees to B, to the amount of 10000 Rs, that C shall pay for the bills that B may draw
upon him. B draws upon C and C accepts the bill. Now, A revokes the guarantee. C fails to pay
the bill upon its maturity. A is liable for the amount upto 10000Rs.

As per section 131, the death of the surety acts as a revocation of a continuing guarantee with
regards to future transactions, if there is no contract to the contrary.

It is important to note that there must not be any contract that keeps the guarantee alive even
after the death. In the case of Durga Priya vs Durga Pada AIR 1928, Cal HC held that in each
case the contract of guarantee between the parties must be looked into to determine whether the
contract has been revoked due to the death of the surety or not. If there is a provision that says
death does not cause the revocation then the constract of guarantee must be held to continue even
after the death of the surety.

Liability of Surety
According to Section 128, “The liability of the surety is coextensive with that of the principal
debtor, unless it is otherwise provided by the contract.” The provision that the surety’s liability is
coextensive with that of the principal debtor means that his liability is exactly the same as that of
the principal debtor. It means that on a default having been made by the principal debtor, the
creditor can recover from the surety all what he could have recovered from the principal debtor.
 For instance, the principal debtor makes a default in the payment of a debt of Rs. 10,000/-. The
creditor may recover from the surety the sum of Rs. 10,000/- plus interest becoming due thereon
as well as the amount spent by him in recovering that amount. This may be further explained by
the following example. A guaranteed to B the payment of a bill of exchange by C, the acceptor.
The bill is dishonored by C, the acceptor, is liable not only for the amount of the bill but also for
any interest and charges which may have become due on it. If the principal debtor’s liability is
reduced, e.g., after the creditor has recovered a part of the sum due from him out of his property,
the liability of the surety is also reduced accordingly. (Narayan Singh v. Chattarsingh)
Nature and extent
It has been held that if the principal debtor’s liability is scaled down in an amended decree or
otherwise extinguished in whole or in part by a statute, the liability of the surety would also portent
be reduced or extinguished. In this case, the liability of an agriculturist, who was the principal debtor,
was Act, 1957. It was held that the effect of scaling down the principal debtor’s liability was that the
surety’s liability had also been reduced accordingly. The surety’s liability was considered to be
reduced for another reason also, and that was that if the surety is made liable for the full amount, he
in his turn will become entitled to recover the same from the principal debtor, and this will eventually
negative the benefit conferred upon the agriculturist principal debtor under the statute. If the principal
debtor’s liability is affected by illegality, so is also that if the surety. Therefore, where the liability of
the principal is held to be not enforcement on the ground of the contract being illegal, there is no
question of surety being made liable. If the principal debtor happens to be minor and the agreement
made by him is void, the surety too cannot be made liable in respect of the same because the liability
of the surety is coextensive with that of the principal debtor. It has been held in an English case, that
the guarantees of the loan or an overdraft to an infant are void, because the loan to the infant itself is
void.

Discharge of surety from liability

When the liability of surety, which he had undertaken under a contract of guarantee, is extinguished
or comes to an end, he is said to be discharged from liability. The modes of discharge of a surety, as
recognized by the Indian Contract Act, are as under:

1. By Revocation
 By Revocation

By Notice Sec.(130)

By Death of Surety
By Novation Sec.(62)
Sec.(131)

a. By Notice (Section 130)

According to Section 130:“A continuing guarantee may at any time be revoked by the surety, as
to future transactions, by notice to the creditor.” This Section permits revocation of guarantee by
the surety:
• When it is a continuing guarantee, and
• As regards future transactions, only.
This can be done by a notice by the surety to the creditor in that regard. Once notice revoking
guarantee is issued, the liability of the surety would fasten only up to that date and not thereafter.
The following illustrations make it clear that when the surety gives a notice of revocation, his liability
continues to exist for the transactions already made, but is revoked as regards future transactions, i.e.,
the transactions made subsequent to the notice.
A, in consideration of B’s discounting at A’s request, bill of exchange for C guarantees to B, for
twelve months, the due payment of all such bills to the extent of 5,000 rupees . be discounted bill for
C to the extent of 2000 Rupees. Afterwards, at the end of three months, A revokes the guarantee. This
revocation discharges C from all liability to B for any subsequent discount. But A is liable to B for
the 2,000 rupees, on default of C. (Sita Ram Gupta v/s Punjab National Bank)

b. By Surety’s death (Section 131)

According to Section 131 “The death of a surety operates, in the absence of any contract to the
contrary, as a revocation of a continuing guarantee, so far as regards future transactions.”

c. By Novation ( Section 133)

A contract of guarantee is said to be discharged by novation when a fresh contract is entered into
either between the same parties or between others parties, the consideration being the mutual
discharge of the old contract. The original contract of gurantee comes to an endand the surety under
original contract is discharged.

2. By conduct of creditor

By conduct
of the
creditor

Variance in terms of
contract sec(133)

Arrangement creditor act or

Release of the
between principal omission impairing Loss of security
principal debtor
debtor and creditor surety eventual sec(141)
sec(134)
sec(135) remedy sec(139)

A. By variance in the terms of contract (Section 133)

When the surety has undertaken liability on certain terms, it is expected that they will remain
unchanged during the whole period of guarantee. If there is any variance in the terms of the contract
between the principal debtor and the creditor, without the consent of the surety, the surety gets
discharged as regards transactions subsequent to such a change. The reason for such a discharge is
that the surety agreed to be liable for a contract which is no more there, and he is not liable on the
altered contract because it is different from the contract made by him. Section 133, which makes a
provision in this regard, is as follows:“Any variance, made without the surety’s consent, in the terms
of the contract between the principal debtor and the creditor discharges the surety as to transactions
subsequent to the variance.”
Section 133 has been explained with the help of the following illustrations:
(a) A, becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract,
without A’s consent that B’s salary shall be raised and that he shall become liable for one-fourth of
the loses on overdrafts, B allows a customer to overdraft and the bank loses a sum of money. A is
discharged from his surety ship by the variance made without his consent, and is not liable to make
good this loss.
(b) By release or discharge of the principal debtor (Section 134)
The provision concerning the discharge of the surety on the release or discharge of the principal
debtor as contained in Section 134 and its
Illustrations, is as under:
Section134. Discharge of surety by release or discharge of principal debtor.- The surety is discharged
by any contract between the creditor and the principal debtor, by which the principal debtor is
released, or by any act or omission of the creditor, the legal consequence of which is the discharge of
the principal debtor.
Example
A Contract with B for a fixed price to build a house for B within a stipulated time, B supplying the
necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber, C is
discharged from his surety ship.”
(c) By Arrangement
Section 135 mentions further circumstances when a contract between the creditor and the principal
debtor can result in the discharge of the surety. The Section is as under:
“135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor. – A contract between the creditor and the principal debtor by which the creditor
makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges
the surety, unless the surety assents to such contract.”
According to this Section, a contract between the creditor and the principal debtor discharges the
surety in the following three circumstances:-
(i) When the creditor makes composition with the principal debtor,
(ii) When the creditor promises to give time to the principal debtor, and
(iii)When the creditor promises not to sue the principal debtor.
“137 Creditor’s forbearance to sue does not discharge surety.- Mere forbearance on the part of the
creditor to sue the principal debtor, or to enforce any other remedy against him does not, in the
absence of any provision in the guarantee to the contrary, discharge the surety.
Illustration
B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the
debt has become payable. A is not discharged from his surety ship.”
(d) By creditor’s act or omission impairing surety’s eventual remedy (Section 139)
Section 139 incorporates the rule that when the act or omission on the part of the creditor is
inconsistent with the interest of the surety, and the same results in impairing surety’s eventual remedy
against the principal debtor, the surety is discharged thereby. Section 139 is as follows:
“139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy. If the
creditor does any act which is inconsistent with the right of the surety, or omits to do an act which
his duty to the surety requires him to do, and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged.”
(e) By loss of the security by the creditor (Section 141)
According to Section 141, the surety is entitled to all the securities which the creditor has against
the principal debtor at the time when the contract of surety ship is entered into. If the creditor loses,
or, without the consent of the surety, parts with such security, the surety is discharged to the extent
of the value of the security. For instance, the seller of the goods allows the buyer to take away the
goods without insisting for the payment of the price for the same the surety who guarantees the
payment of the price by the buyer, is discharged from his liability.

3. By invalidation of Contract

Gurantee obtained
by concealment
Gurantee obtain by sec(143)
By invalidation misrepresentation
of contract sec(142) Failure of co-
surety to join
surety sec(144)
(a) Guarantee obtain by misrepresentation Sec(142)
Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.

(b) Guarantee obtained by concealment invalid Sec (143)

Any guarantee which the creditor has obtained by means of keeping silence as to material
circumstances is invalid. Illustrations
(a) A engages B as clerk to collect money for him. B fails to account for some of his receipts,
and A in consequence calls upon him to furnish security for his duly accounting. C gives his
guarantee for B' s duly accounting. A does not acquaint C with B’s previous conduct. B
afterwards makes default. The guarantee is invalid.
(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2, 000 tons.
B and C have privately agreed that B should pay five rupees per ton beyond the market price,
such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is
not liable as a surety.

(c) Failure of co-surety to join surety Sec(144)

Guarantee on contract that creditor shall not act on it until co- suret y joins.- Where a person gives a
guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-
surety, the guarantee is not valid if that other person does not join.

RIGHTS OF A SURETY AGAINST THE PRINCIPAL DEBTOR, AND CO-

SURETIES
A. Against principal debtor

Against
principal
debtor

Right to Right to
subrogatio Indeminity
n Sec(145) Sec (145)
 (a) Right of subrogation
After paying the guaranteed debt, the surety steps into the shoes of the creditor and acquires
all the rights which the latter had against the principal debtor (i.e., he gets subrogated to all
the rights and remedies available to the creditor) (Sec. 140). If the creditor has the right to
stop goods in transit or has a lien, the surety, on payment of all he is liable for, will be
entitled to exercise these rights.

(b) Right of indemnity

The surety is entitled to be indemnified by the principal debtor for all payments rightfully
made by him (Sec. 145).

2. Right against the creditor

Right to
securities
Sec(141)

Rights against
the creditor

Right to claim
set off

(a) Right to securities Sec(141)

The surety can, after paying the guaranteed debt, compel the creditor to assign to him all
the securities taken by the creditor either before or at the time of the contract of guarantee,
whether the surety was aware of them or not.

(b) Claim to any set off

The surety on being called upon to pay can claim any set-off to which the principal debtor
is entitled from the creditor.
3. Right against co-sureties

(a) Right to ask for Contribution

Surety can ask his co-sureties to contribute the amount when principal debtor comes across default.
If they have given guarantee for equal amounts, they have to contribute equally. In case where
guarantee is given for in equal amounts, the mode of contribution differs from England law to
Indian law. As per England law contribution is to be made in the ratio of guarantee amounts. But
as per Indian law the deficit amount is to be distributed to all sureties equally and every surety will
contribute share of deficit or guarantee amount whichever is less.

DIFFERENCE BETWEEN THE CONTRACT OF INDEMNITY

AND CONTRACT OF GUARANTEE

Contract of Indemnity Contract of Guarantee

Meaning In the contract of indemnity one person In the contract of guarantee

promises to save the other from any loss. one person gives guarantee
for the performance of the
contract.

Number of Under the contract of indemnity there are Under the contract of
Parties two parties. guarantee there are three
parties.

Liability Under the indemnity contract the basic In case of guarantee contract
liability falls on the indemnifies. surety has the secondary
liability.

Number of Under the indemnity contract there is one Under the contract of
contracts contract only. guarantee there must be at
least three contracts.

Nature of In case of indemnity contract, In case of guarantor he has no

interest indemnifies has the interest in earning any other interest except
commission and premium. guarantee.

Right of claim
 The indemnifies cannot sue the third Guarantor is entitled to
party. proceed against the principal
debtor in his own name. if he
has paid the debt.

Performance of contract of indemnity depends upon the In case of guarantee there is

contract possibility of risk or loss. an existing debt or duty
performance about which
guarantee is given.
BAILMENT
Meaning : Bailment is a kind of activity in which the property of one person temporarily
goes into the possession of another. The ownership of the property remains with the giver,
while only the possession goes to another. Several situations in day to day life such as giving
a vehicle for repair, or parking a scooter in a parking lot, giving a cloth to a tailor for stitching,
are examples of bailment.

Section 148 of Indian Contract Act 1872, defines bailment as follows - Section 148 - A
bailment is the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person delivering the goods is
called the bailor and the person to whom they are delivered is called the bailee. Explanation
- If a person is already in possession of the goods of another contracts to hold them as a
baliee, he thereby becomes the bailee and the bailor becomes the bailor of such goods
although they may not have been delivered by way of bailment.

According to this definition the following are the essential elements of

bailment -

1. Delivery of goods

The possession of goods must transfer from one person to another. Delivery is not same as
custody. For example, a servant holding his master's umbrella is not a bailee but only a
custodian. The goods must be handed over to the bailee for whatever is the purpose of the
bailment.

In Ultzen vs Nicols 1894, the plaintiff went to a restaurant for dining. When he entered the
room, the waiter took his coat and hung it on a hook behind him. When the plaintiff arose to
leave, the coat was gone. It was held that the waiter voluntarily took the responsibility of
keeping the coat while the customer was dining and was thus a bailee. Therefore, he was liable
to return it. Contrasting this case with Kaliaperumal Pillai vs Visalakshmi AIR 1938, we can
see the meaning of delivery. In this case, a woman gave some gold to a jeweler to make
jewelery. Every evening she used to take the unfinished jewels, put it in a box, lock the box
and take the keys of the box with her while leaving the box at the goldsmith. One morning,
when the opened the box the gold was gone. It was held that, in the night, the possession of the
gold was not with the jeweler but with the plaintiff because she locked the box and kept the
keys with her. As the explanation to section 148 says, even if a person already has the
possession of goods that he does not own, he can become a bailee by entering into a contract
with the bailor. In such a case, the actual act of delivery is not done but is considered to be
valid for bailment.

Types of Delivery - As per section 149, the delivery to the bailee may be made by doing
anything which has the effect of putting the goods in the possession of the intended bailee or
of any person authorized to hold them on his behalf. This means that the delivery can be made
to either the bailee or to any other person whom the baliee authorizes. This person can be the
bailor himself. This gives us two types of delivery - Actual and Constructive. In actual
delivery, the physical possession of the goods is handed over to the bailee while in constructive
delivery the possession of the goods remains with the bailor upon authorization of the bailee.
In other words, the bailee authorizes the person to keep possession of the goods.

In Bank of Chittor vs Narsimbulu AIR 1966, a person pledged cinema projector with the
bank but the bank allowed him to keep the projector so as to keep the cinema hall running.
AP HC held that this was constructive delivery because something was done that changed the
legal possession of the projector. Even though the physical possession was with the person,
the legal possession was with the bank.

2. Delivery upon contract

For a valid bailment, the delivery must be done upon a contract that the goods will be
returned when the purpose is accomplished. If the goods are given without any contract, there
is no bailment. In Ram Gulam vs Govt. of UP AIR 1950, plaintiffs ornaments were seized
by police on the suspicion that they were stolen. The ornaments were later on stolen from the
custody or police and the plaintiff sued the govt. for returning the ornaments. It was held that
the goods were not given to the police under any contract and thus there was no bailment.

However, this decision was criticized and finally, in State of Gujarat vs Menon
Mohammad AIR 1967, SC held that bailment can happen even without an explicit contract.
In this case, certain motor vehicles were seized by the State under Sea Customs Act, which
were then damaged. SC held that the govt. was indeed the bailee and the State was
responsible for proper care of the goods.

3. Conditional Delivery
The delivery of goods is not permanent. The possession is given to the bailee only on the
condition that he will either return the goods or dispose them according to the wishes of the
bailer after the purpose for which the goods were given. For example, when the stitching is
complete, the tailor is supposed to return the garment to the bailor. If the bailee is not bound
to return the goods to the bailor, then the relationship between them is not of bailment. This
is a key feature of bailment that distinguishes it from other type of relations such as agency. J
Shetty of SC in U Co. Bank vs Hem Chandra Sarkar 1990, observed that the
distinguishing feature between a bailment and an agency is that the bailee does not represent
the bailor. He merely exercises some rights of the bailor over the bailed property. The bailee
cannot bind the bailor by his acts. Thus, a banker who was holding the goods on behalf of its
account holder for the purpose of delivering them to his customers against payment, was only
a bailee and not an agent.

Duties of a Bailor
A bailor may give his property to the bailee either without any consideration or reward or for
a consideration or reward. In the former case, he is called a gratuitous bailor, while in the
latter, a bailor for reward. The duties in both the cases are slightly different. Section
150 specifies the duties for both kinds of bailor. It says that the bailor is bound to disclose
any faults in the goods bailed that the bailor is aware of, and which materially interfere with
the use of them or which expose the bailee to extraordinary risk. This means that if there is a
fault with the goods which may cause harm to the bailee, the bailor must tell it to the bailee.
For example, if a person bails his scooter to his friend and if the person knows that the brakes
are loose, then he must tell this to the friend. Otherwise, the bailor will be responsible for
damages arising directly out of the faults to the bailee. But the bailor is not bound to tell the
bailee about the fault if the bailor himself does not know about it.

Section 150 imposes a bigger responsibility to the non-gratuitous bailor since he is making a
profit out of the bailment. A non gratuitous bailor is responsible for any damage that happens
to the bailee directly because of the fault of the goods irrespective of whether the bailor knew
about it or not.
In Hyman and Wife vs Nye & Sons 1881, the plaintiff hired a carriage from the defendant.
During the journey, a bolt in the under part of carriage broke, causing an accident in which
the plaintiff was injured. The defendants were held liable even though they did not know
about the condition of the bolt.

Duties/Responsibilities of a Bailee
1. Duty to take reasonable care
In English law the duties of a gratuitous and non-gratuitous bailee are different. However, in
Indian law, Section 151 treats all kinds of bailees the same with respect to the duty. It says
that in all cases of bailment, the bailee is bound to take as much care of the goods bailed to
him as a man of ordinary prudence would, under similar circumstances take, of his own
goods of the same bulk, quality, and value as the goods bailed. The bailee must treat the
goods as his own in terms of care. However, this does not mean that if the bailor is generally
careless about his own goods, he can be careless about the bailed goods as well. He must take
care of the goods as any person of ordinary prudence would of his things.

In Blount vs War Office 1953, a house belonging to the plaintiff was requisitioned by the
War Office. He was allowed to keep his certain articles in a room of the house, which he
locked. The troops who occupied the house were not well controlled and broke into the room
causing damage and theft of the articles. It was held that War office did not take care of the
house as an owner would and held the War Office liable for the loss.
Bailee, when not liable for loss etc. for thing bailed -
As per section 152, in absence of a special contract, the bailee is not responsible for loss,
destruction, or deterioration of the thing bailed, if he has taken the amount of care as
described in section 151. This means that if the bailee has taken as much care of the goods as
any owner of ordinary prudence would take of his goods, then the bailee will not be liable for
the loss, destruction, or deterioration of the goods. No fixed rule regarding how much care is
sufficient can be laid down and the nature, quality, and bulk of goods will be taken into
consideration to find out if proper care was taken or not. In Gopal Singh vs Punjab
National Bank, AIR 1976, Delhi HC held that on the account of partition of the country,
when a bank had to flee along with mass exodus from Pakistan to India, the bank was not
liable for the goods bailed to it in Pakistan.

If the bailee has taken sufficient care in the security of the goods, then he will not be liable if
they are stolen. However, negligence in security, for example leaving a bicycle unlocked on
the street, would cause the bailee to be liable. In Join & Son vs Comeron 1922, the plaintiff
stayed in a hotel and kept his belonging in his room, which were stolen. The hotel was held
liable because they did not take care of its security as an owner would.

If loss is caused due to the servant of the bailee, the bailee would be liable if the servant's act
is within the scope of his employment.

Special Contract
The extent of this responsibility can be changed by a contract between the bailor and the
bailee. However, it is still debatable whether the responsibility can be reduce or it can be
increased by a contract. Section 152 opens with, "In absence of special contract", which is
interpreted by Punjab and Haryana HC, as the bailee can escape his responsibility by way of
a contract with the bailor. However, in another case Gujarat HC held that the bank was liable
for loss of bales of cotton kept in its custody irrespective of the clause that absolved the bank
of all liability. This seems to be fair because no one can get a license to be negligent and a
minimum standard of care is expected from everybody.

2. Duty not to make unauthorized use (Section 154)

Section 154 says that if the bailee makes any use of the goods bailed which is not according
to the conditions of the bailment, he is liable to make compensation to the bailor for any
damage arising to the goods from or during such use of them.
Illustration - A lends horse to B for his own riding only. B allows C, a member of his family,
to ride the horse. C rides with care but the horse is injured. B is liable to compensate A for
the injury to the horse.
A hires a horse in Calcutta from B expressly to march to Benares. A rides with care but
marches to Cuttack instead. The horse accidentally falls and is injured. A is liable to make
compensation to B.

Thus, we can see that bailee is supposed to use the goods only as per the purpose of the
bailment. If the bailee makes any unauthorized use of the goods, he will be held absolutely
liable for any damages.
3. Duty not to mix (Section 155-157)
The bailee should maintain the separate identity of the bailor's goods. He should not mix his
goods with bailor's good without bailor's consent. If he does so, and if the goods are
separable, he is responsible for separating them and if they are not separable, he will be liable
to compensate the bailor for his loss. For example, A bails 100 bales of cotton with a
particular mark to B. B, without A's consent, mixes them with his own. A is entitled to have
his 100 bales returned and B is bound to bear all expenses for separation. But if A bails a
barrel of Cape flour worth Rs 45 to B and B mixes it with country flour worth Rs 25, B is
liable to A for the loss of his flour.

4. Duty to return (Section 160)

Section 160 - It is the duty of the bailee to return or deliver according to the bailor's
directions, the goods bailed, without demand, as soon as the time for which they were bailed
has expired or the purpose for which they were bailed has been accomplished.

If the bailee keeps the goods after the expiry of the time for which they were bailed or after
the purpose for which they were bailed has been accomplished, it will be at bailee's risk and
he will be responsible for any loss or damage to the goods arising howsoever.
In Shaw & Co vs Symmons & Sons 1971, the plaintiff gave certain books to the defendant
to be bound. The defendant bound them but did not return them within reasonable time.
Subsequently, the books were burnt in an accidental file. The defendants were held liable for
the loss of books.

5. Duty to return increase (Section 163)

As per Section 163, in absence of any contract to the contrary, the bailee is bound to deliver
to the bailor, or according to his directions, any increase of profit which may have accrued
from the goods bailed.
Illustration - A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is
bound to deliver the calf as well as the cow to B.

6. Duty not to set up jus tertii (Section 166)

As per Section 166 if the bailor has no title and the bailee, in good faith returns the goods
back to the bailor or as per the directions of the bailor, he is not responsible to the owner in
respect of such delivery. Thus, once the bailee takes the goods from the bailor, he agrees that
the goods belong to the bailor and he must return them only to the bailor. He cannot deny
redelivery to the bailor on the ground that the bailor is not the owner.

If there is true owner of the goods, he can apply to the court to stop the delivery of the goods
from the bailee to the bailor. This right is given to the true owner in section 167.

Rights of a Bailee
1. Right to necessary expenses (Section 158)
The bailee is entitled to lawful charges for providing his service. As per Section 158 says
that where by conditions of the bailment, the goods are to be kept or to be carried or to have
work done upon them by the bailee for the bailor and the bailee is to receive no
remuneration, the bailor shall repay to the bailee the necessary expenses incurred by him for
the purpose of bailment. Thus, a bailee is entitled to recover the charges as agreed upon, or if
there is no such agreement, the bailee is entitled to all lawful expenses according to this
section.

In Surya Investment Co vs STC AIR 1987, STC hired a storage tank from the plaintiff. On
account of a dispute, STC appointed a special officer to take charge of the tank, who
delivered the contents as per directions of STC. Thus, the plaintiff lost his possession and
with it, his right of lien. SC held that the plaintiff is entitled to the charges even if he loses his
right of lien because the bailor has enjoyed bailee's services.

2. Right to compensation (Section 164)

As per section 164, the bailor is responsible to the bailee for any loss which the bailee may
sustain by reason that the bailor was not entitled to make the bailment, or to receive back the
goods, or to give directions respecting them. This means that if the bailor had no right to bail
the goods and if still bails them, he will be responsible for any loss that the bailee may incur
because of this.

3. Right of Lien (Section 170-171)

In general, Lien means the right to keep the possession of the property of a person until that
person clear the debts. In case of bailment, the bailee has the right to keep the possession of
the property of the bailor until the bailor pays lawful charges to the bailee. Thus, right of
Lien is probably the most important of rights of a bailee because it gives the bailee the power
to get paid for his services.

Lien is of two kinds - Particular and General.

Particular Lien
This means that the lien holder has a right to keep possession of only that particular property
for which the charges are owed. For example, A gives a horse and a bicycle to B. A agrees to
pay B charges for training the horse and no charges for keeping the bicycle. Now, if A fails
to pay charges for the horse, B is entitled to keep possession only of the horse and not of
the bicycle. He must return the bicycle.
Section 170 gives this right to the bailee. It says that where the bailee has, in accordance with
the purpose of the bailment, rendered any service involving the exercise of labor or skill in
respect of the goods bailed, he has, in absense of a contract to the contrary, a right to retain
such goods until he receives due remuneration for the services he has rendered in respect of
them.

Illustrations - A delivers a rough diamond to B to be cut and polished, which is accordingly

done. B is entitled to keep the diamond until charges for his services are paid.
A gives cloth to B, a tailor, to make into a cloth. B promises to deliver the coat as soon as it
is done and also to give 3 months credit for the price. B is not entitled to keep the coat until
he is paid.

Conditions for Particular Lien -

 1. Exercise of labor or skill - This right is subject to the condition that the bailee has
exercised labor or skill in respect of the goods. Further, it has been frequently pointed out
that the labor or skill must be such as improves the goods. This, in Hutton vs Car
Maintenance Co 1915, it was held that a job master has no lien for feeding and keeping
the horse in his stable but a horse trainer does get a lien upon the horse.
2. Labor or skill exercised must be for the purpose of the bailment - Any services rendered
that are beyond the purpose of the bailment do not give a right of lien. For example, A
bails his car to B to repair Engine. But B repairs tires instead. B will not get the right of
lien.
3. Labor or skill exercised must be in respect of the goods - As mentioned before, the bailee
gets a right of lien only upon the goods upon which the service was performed.

General Lien -
As opposed to Particular Lien, General Lien gives a right to the bailee to keep the possession of
any goods for any amount due in respect of any goods. Section 171 says that, bankers, factors,
wharfingers, attorneys of a High Court, and policy brokers may, in the absence of a contract to
the contrary, retain as a security for a general balance of account, any goods bailed to them; but
no other persons have a right to retain, as a security for such balance, goods bailed to them,
unless there is an express contract to that effect.
Thus, this right is only available to bankers, factors, wharfingers, attorneys of high court, and
policy brokers. However, this right can be given to the bailee by making an express contract
between the bailor and the bailee.

4. Right to Sue (Section 180-181)

Section 180 enables a bailee to sue any person who has wrongfully deprived him of the use or
possession of the goods bailed or has done them any injury. The bailee's rights and remedies
against the wrong doer are same as those of the owner. An action may be brought either by the
bailor or the bailee.

Thus, in Umarani Sen vs Sudhir Kumar AIR 1984, a firm which had consigned the goods, of
which it was a bailee, with a carrier, was allowed to sue the carrier for loss of the goods.

Rights of finder of goods

If a person finds something, he does not automatically become the owner of that thing. He, in
fact, becomes a special kind of a baliee in the sense that he has to keep the thing until the owner
is found. He should take care of the thing just like a bailee. Section 168 and 169 describe the
rights of such finder of goods.

Section 168 - The finder of goods has no right to sue the owner for compensation for trouble
and expense voluntarily incurred by him to preserve the goods and to find out the owner; but he
may retain the goods against the owner until he receives such compensation; and where the
owner has offered a specific reward for the return of goods lost, the finder may sue for such
reward, and may retain the goods until he receives it.
Thus, if the finder has incurred expenses in finding the owner and/or in maintaining the goods
voluntarily, he can retain the possession of the goods until the owner pays the expense to him,
though the finder cannot sue the owner for the expense. His only remedy is to keep the goods.
Further, if the owner has promised a reward for the return of the goods, the finder is entitled to
the rewards, and he can even sue the owner for the reward. He can retain the goods as well until
the reward is received.

As per Section 169, the finder of the goods can even sell the goods if they are of common
objects of sale, in the following conditions -

1. the finder of goods was not able to find the owner after good faith efforts.
2. the owner is found but the owner refuses to pay lawful expenses and
1. either the goods are in danger of perishing or of losing greater part of the value
2. or the lawful charges of the finder amount to two third of the value of the goods.

PLEDGE
Meaning: Pledge is a special kind of bailment in which a person transfers the possession of
his property to another for securing the loan taken from the other. It only differs from bailment
in the matter of purpose. When the purpose of the bailment is to secure a loan or a promise, it is
called a pledge. Section 172 of Indian Contract Act 1872 defines Pledge as follows -
Section 172 - The bailment of goods as a security for the payment of a debt or performance of a
promise is called Pledge. The bailor in this case is called a Pawnor and the bailee is called
Pawnee.

J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 observed that Pawn or pledge is a bailment
of personal property as a security for some debt or engagement.

The following are essential ingredients of a pledge -

1. Delivery of possession - As in bailment, the delivery of possession is essential in a

pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film producer
borrowed a sum of money from a financier and agreed to deliver the final prints of the film when
ready. This was held not to be a pledge because there was no delivery of possession at the time
of the agreement.
It is possible to do delivery by atonement in which case a third person who has the possession of
the property agrees to hold it on behalf of the pledgee upon direction of the pledger.

2. In return of a loan or a promise - The delivery must be in return of a loan or of acceptance

of a promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a
pledge but a simple bailment. However, if A gives his bicycle to B as a security for a debt of
100Rs it will be a pledge.

3. In pursuance of a contract - The delivery must be done under a contract though it is not
necessary that the delivery and the payment of loan be at the same time. Delivery can be made
even after the loan is received.

Rights of a Pawnee
1. Right of retainer (Section 173- 174) - As per section 173, the pawnee may retain the goods
pledged, not only for a payment of a debt or the performance of the promise, but also for the
interest of the debt, and all necessary expenses incurred by him in respect of the possession or for
the preservation of the goods pledged. Further, as per section 174, in absence of any contract to
the contrary, the pawner shall not retain the goods pledged for debt or promise other than the
debt or promise for which they have been pledged. However, such contract shall be presumed in
absence of any contract to the contrary with respect to any subsequent advances made by the
pawnee. This means that if A pledges his gold watch with B for 1000 Rs and later on he
promises to teach B's son for a month and takes for 500Rs for this promise , and if he does not
teach B's son, B cannot retain A's gold watch after A pays 1000Rs. Thus, the right of retainer is
a sort of particular lien. The difference was pointed out in Bank of Bihar vs State of Bihar
1972 by SC. It observed that a pawnee obtains a special interest in the pledged goods in the
sense that he can transfer or pledge that special interest to somebody else. The lien only gives the
right to detain the goods but not transfer. Thus, a pledgee get the first right to claim the goods
before any other creditor can get them. The pledgee's loan is secured by the goods.

2. Right to extra ordinary expenses (Section 175) - As per section 175, the pawnee is entitled
to receive from the pawner extra ordinary expenses incurred by him for the preservation of the
goods pledged. For such expenses, however, he does not have right to detain the goods. Section
175 says that the pawnee is entitled to receive from the pawner extraordinary expenses incurred
by him for the preservation of the goods pledged.

3. Right of sale (Section 176) - As per section 176 (Pawnee's right where pawnor makes
default) - If the pawnor makes default in payment of the debt or performance at the stipulated
time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit
against the pawnor upon the debt or the promise and retain the goods pledged as a collateral
security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.
This right secures the debt for the pawnee up to the value of the goods pledged because it allows
the pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the
goods pledged. If the value received after selling the goods, the pawner is still liable for the
difference and if the value of the sale is more than the amount of debt, the pawnee is supposed to
give the difference to the pawnor. However, if the pawnee has sold the goods, he cannot sue for
the debt.
The pawner is required to give a reasonable notice to the pawnee about the sale. The notice is not
a mere notice but reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an
agreement of a loan enabled the bank to sell the securities upon default without notice. The
pawnor defaulted in payment. The bank sent a reminder upon which the pawnor asked for more
time. The bank sold the securities. SC held that this was bad in law. The bank is required to give
a clear and specific notice of the impending sale. Pawner's request for more time cannot be
interpreted as a notice of sale. When the goods are lost due to pawnee's negligence, the liability
of the pawnor is reduced to the extent of value of the goods.

Pawnor's Right to Redeem (Section 177)

Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his
property even if he has defaulted. It says that if a time is stipulated for the payment of a debt or
performance of the promise for which the pledge is made, and the pawnor make default in
payment of the debt or performance of the promise at the stipulated time, he may redeem the
goods pledged at any subsequent time before the actual sale of them; but he must, in that case,
pay, in addition, any expense which have arisen from his default.

The pawnor also has a right to take back any increase in the property. In M R Dhawan vs
Madan Mohan AIR 1969, certain shares of a company were pledged. During the period of the
pledge, the company issued bonus and rights shares. Delhi HC held that the pawnor was entitled
to those at the time of redemption.

Pledge made by non-owner of the goods

Ordinarily goods may be pledged by the owner or by any person with the consent of the owner.
A pledge made by any other person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it was
held that a pledge made by the servant who was holding the goods of his master was not valid.
This is important to protect the interests of the owners. However, in many situations it is equally
important to allow trade and commerces and so there are some situations where a person having
the possession of the goods by owner's consent, is entitled to pledge those goods even without
owner's consent for the pledge. These situations are discussed below -

1. Pledge by Mercantile agent (Section 178)

When a mercantile agent is in possession of the goods with consent of the owner, any pledge
made by him in ordinary course of business will be valid, provided that the pawnee acts in good
faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods.
The essential conditions of this rule are - he must be a mercantile agent, he must have possession
of the goods by consent of the owner, and it must be done in ordinary course of business.
Further, the pawnee should act in good faith and he must not have notice that the pawnor has no
authority to pledge.
2. Pledge by a person in possession under voidable contract (Section 178 A)
When the goods are obtained by a person under a contract that is voidable under section 19 or 19
A, he can pledge the goods if the contract is not avoided at the time of the pledge. Thus,
in Phillips vs Brooks Ltd 1919, a fraudulent person pretending to be a man of credit induced the
plaintiff to give him a valuable ring in return for his cheque which proved worthless. Before the
fraud could be discovered, he pledged the ring with the defendants. The pledge was held to be
valid.

3. Pledge by person with limited interest (Section 179)

Section 179 says that where a person pledges goods in which he has only a limited interest, the
pledge is valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly
by A and B both having 50% interest in the car, and if A pledges the car for 60000Rs, the value
of the pledge that the pledgee can receive upon default is only 50% of the value received bysale.

Distinction between Bailment and Pledge

Basis For Comparison Bailment Pledge

Meaning When the goods are
temporarily handed over from
one person to another person
for a specific purpose, it is
known as bailment.
Defined in Section 148 of the Indian
Contract Act, 1872.
Parties The person who delivers the
goods is known as the bailor
while the person to whom the
goods are delivered is known
as bailee.
Consideration May or may not be present.
Right to sell the goods the party whom goods are
being delivered has no right
to sell the goods.
Use of Goods The party whom goods are
being delivered can use the
goods only, for the specified
purpose.
Purpose Safe keeping or repairs, etc.
When the goods he are
delivered to act as security
against the debt owed by one
person to another person, it
is known as the pledge.
Section 172 of the Indian
Contract Act, 1872.
The person who delivers the
goods is known as pawnor
while the person to whom the
goods are delivered is known
as pawnee.
Always present.
The party whom goods are
being delivered as security
has the right to sell the goods
if the party who delivers the
goods fails to pay the debt.
The party whom goods are
being delivered has no right
to use the goods.
As security against payment
of debt.
Relevant Questions:
1. What is pledge? What are the essential of pledge? Can a pledge be made by a person who
is not the owner of goods?
2. What is the difference between the bailment and pledge?
3. Explain Pawner’s right to redeem?
4. Define Bailment. What are the rights, duties, and liabilities of a bailee? When is the
responsible for loss, destruction, or deterioration of the things bailed?
5. What do you mean by the contract of Indemnity? What are the essential element of a
contract of Indemnity? What are the rights of Indemnity holder or Indemnified?
6. Define the contract of guarantee. What are the rights of surety? When is surety discharged
of guarantee?
7. What is a continuing guarantee and what are their modes of revocation?
8. Distinguish between Guarantee and Indemnity?

UNIT- II
AGENCY
Introduction

The law of agency governs situations where one person (agent) is appointed to act as the
representative of another (principal) in the context of contractual negotiations. Generally, this
system will be adopted for a number of reasons, for example it may not be practical for one person
to personally enter into all the contracts he/she would wish. Moreover, where a company enters
into contractual negotiations, it is important that someone be appointed as an agent to act on behalf
of that entity. Section 182 of the Indian Contract Act defines an agent as person employed to do
any act for another or to represent another in dealings with third persons. The person for whom
such act is done, or who is so represented is called the “principal”.

Kinds of Agents
The term agent applies to anyone who by authority performs an act for another, and includes a
great many classes of persons to whom distinctive names are given. There may be various types
of agents whose powers and duties are settled by usage and custom of trade recognized by the
courts of law. The important one are classified as under:

1. Express or Implied Agents:

An express agent is one who is appointed verbally or by writing. An implied agent is one whose
appointment is to be inferred from the conduct of the parties.

2. General, Special or Universal Agents:

A general agent is one who is employed to transact generally all the business of the principal in
regard to which he is employed. A special agent has only authority to do some particular act or
represent his principal in some particular transaction. A universal agent is one who is authorized
to transact all the business of his principal of every kind and to do all the acts which the principal
can lawfully do and can delegate.

3. Agent or Sub-agent:
An agent derives his authority directly from the principal. A sub-agent derives his authority from
the agent who has been appointed to do the act. One broad classification of agents is mercantile
or commercial agents and non-mercantile or non-commercial agents.

4. Mercantile Agents:
The following are some of the important mercantile agents:-

a) Factor
A factor is a mercantile agent to whom possession of goods is given for sale. Generally
speaking, he is a person to whom goods are consigned for sale by a merchant residing
abroad, or at a distance from the point of sale. He usually sells the goods in his own name.
He has ostensible authority to dispose of the goods or to do such things as are usual in the
conduct of his business. He cannot barter or pledge the goods. He has a general lien for the
balance of account as between himself and the principal.
b) Auctioneer
An auctioneer is an agent who is appointed to sell goods at a public auction for
remuneration. He may or may not be entrusted with the possession or control of the goods
which he sells. He may be agent both for the seller and buyer. The auctioneer can sue for
the purchase price in his own name. An auctioneer has implied authority to sell the goods
without any restriction. Hence a sale by him in violation of the instruction is binding on
the owner. If the owner directs the auctioneer not to sell below a reserve price and the
auctioneer sells it below that price, the sale is even then binding on the owner except in
cases where the buyer knew that there was limitation on the auctioneer’s authority.

c) Broker:

A broker is a mercantile agent who is employed to make contracts for the purchase and
sale of goods for a commission called brokerage. A broker unlike a factor is not entrusted
with the possession of the goods. Even the documents of title are not made over to him.
His business is to find purchasers for those who wish to sell, and sellers for those who wish
to buy. His duty is to bring parties together to bargain for them in various matters. He
makes contracts in the name of his principal and not in his own name. He is a mere
negotiator or in senses a middleman.

d) Commission Agent:

A commission agent is a mercantile agent who in consideration of a certain commission

engages to purchase or sell goods for his principal. He buys and sells goods in the market
on the best terms and in his own name. His only interest in the transaction is his
commission. All profits and losses accrue to the principal. A commission agent may or
may not be in actual possession of the goods. His position is very similar to that of the
broker.
 e) Del Credere Agent:

A Del credere agent is an agent who is in consideration of a extra remuneration guarantees

to his principal the performance of the contract by the other party. This Del Credere
commission is a higher reward than is usually given in the form of commission. He
occupies the position of a guarantor as well as of an agent. But his liability is secondary
and arises only on the insolvency or failure of the other party. A Del Credere agent is
appointed generally when the principal deals with persons about whom he knows nothing.
A Del Credere agent is the person who is not dropped out after establishing the link between
principal and third person.

f) Banker:

The relation between a banker and a customer is either that of debtor and creditor or of an
agent and principal. When the banker advances money to this customer as a loan, banker
is the creditor and customer the debtor. But the banker acts as agent of his customer when
he buys or sells securities, collects cheques, dividends, bills, etc. on behalf of his customer.

g) General Agent and Particular Agent:

A general agent is one who represents the principal in all matters concerning a particular
business. A particular agent is one who is appointed for a specific purpose e.g. to sell a
particular article. Factors and commission agents are usually general agents. When general
agents are appointed it is usual to execute a general power of attorney by which the agent
is given authority to do certain things. A particular agent may be appointed by executing a
special power of attorney by which the agent is authorized to do a specific thing. A power
of attorney must be written and stamped. A man dealing with a particular agent is bound
to find out the limits of the authority of the act and act accordingly.

NON-MERCANTILE AGENTS
Non-mercantile agents include counsel, solicitor, guardian, promoters, wife, receiver, insurance
agent etc.

Essentials of a Contract of Agency

1. There should be an agreement between the principal and the agent:

It is an essential element of a valid agency. According to this element, the agency must be
created by an agreement between the principal and the agent. Thus, there must be an agreement
by which a person is appointed as an agent by the other. The agreement may be express (i.e., by
words of mouth or of the case.

2. The agent must act in the representative capacity:

It is the most important essential element of a valid agency. The agent must act in the representative
capacity, i.e., he must represent his relationship of his principal with the third persons. Thus the
true nature of the relationship should be seen if the agent acts in representative capacity and had
the power to bind his principal with the third persons, the relationship is that of ‘agency’.

3. The principal must be competent to contract (Sec 183)

It is another important essential element of a valid agency. The principal must be competent to
enter into a valid contract, i.e., he must be of sound mind, and have attained the age of majority
(i.e., he should have completed 18 years of age). Thus, a minor or a person of unsound mind (i.e.,
insane person) cannot appoint an agent to act on his behalf [Section 183]. An appointment of an
agent, made by an incompetent person is void. It may be noted that an agent acting on behalf of an
incompetent principal will be personally liable, for his acts, to third persons with whom be
contracts.

4. The agent need not be competent to contract (sec: - 184)

Generally, an agent incurs no personal liability while contracting on behalf of his principal.
Therefore, it is not necessary that he should be competent to contract. Thus any person may become
an agent and he need not be competent to contract [Section 184]. Even a minor can be appointed
as agent, and the principal shall be bound by the acts of such an agent. It may, however, be noted
that such an incompetent agent shall not be liable to the principal. Thus, the principal cannot
recover any compensation from an incompetent agent for losses caused by misconduct or
unauthorized acts of such agent. It is, therefore, in the interest of the principal to appoint a
competent person as his agent.

5. The consideration is not necessary (sec: - 185)

An agency is valid even without consideration. Thus, no consideration is required for the
creation of a valid agency relationship [Section 185]. Generally, an agent is remunerated by way
of commission for the services rendered by him. However, no consideration is necessary for the
validity of the appointment of the agent

Creation of Agency

An agency may be created in the following ways:

a. By Express Authority:
The authority of any agency may be expressed in words spoken or written. For example, a
contract of agency can be written by means of power of attorney.
b. By Implied Authority:
The authority of an agent can be interred from the circumstances of the case. Illustration:
A living in Bombay, owns a shop in Madras and he occasionally visits it. B is managing
the shop and is in the habit of ordering goods from C in the name of A for the purpose of
the shop and of paying to them out of A’s funds with A’s knowledge. B has an implied
authority from A to order goods from C in the name of A for the purpose of the shop.
c. By Necessity:
Sometimes, exigencies of circumstances require a man to act for another as an agent,
though not appointed as such. Illustration: A horse was sent by rail. The owner had not
taken delivery of the same at the destination. So, the station master had to feed it. It was
held that the station master had become an agent by necessity and was therefore entitled to
recover the charges incurred by him.

d. By Holding Out:
 Where a master usually sends his servant to pledge his credit for certain mangdfgfd he is
bound by the acts of the servant for similar purposes though done without his consent.

e. By Estoppel:
When one man by words or conduct causes another to believe that some other person is his
agent and that another person had acted on that belief, he would be stopped from denying
the authority of that another person to act on his behalf. Illustration: a tells B in the
presence and within the hearing of P that he (A) is P’s agent and P does not contradict this
statement B, on the faith of this statement, subsequently enters into a contract with A,
taking him to be P’s agent. P is bound by that contract.

f. By Ratification or Expost Eacto Agency:

Section 196 of the Indian Contract Act lays down that where acts are done by one person
on behalf of another, but without his knowledge of authority, he may elect to ratify or to
disown such acts. If he ratifies them the same effects will follow as if they had been
performed by his authority. Thus ratification relates back to the date of the original contract
and binds the principal as if he has expressly authorized it.

g. Agency in husband wife relation:

(i) Agency by co- habitation.
(ii) Agency of Necessity.
(iii) Relations of Principal and Agent Inter Se.

TERMINATION OF CONTRACT OF AGENCY

Termination of agency may take place in two ways either by the operation of law or by the act of
parties.
 Termination
of Agency
Contract By
operation of
Law

By act of
parties

Termination of agency by the operation of law.

The following are the situations where the agency is terminated by the operation of law.

• Expiry of time: At times contract of agency may get formed for a particular period. In such
a case after expiry of that agreed period, termination of agency takes place.
• Fulfillment of object: At times the contract of agency may be found for a particular
objective or to do a particular venture. In such a case termination of agency takes place
after completion of that venture.
• Death or lunacy of either party (sec:-209) whenever principal or agent come across death
or lunacy, agency contract gets terminated.
• Insolvency of Principal: Principal should have capacity to contract. When principal
becomes insolvent, He foregoes capacity to contract and termination of agency takes place.
But the act is silent with regard to insolvency of agent. As minor also can act as agent, it
can be conformed that insolvent person may act as agent.
• Destruction of subject matter: When subject matter of contract gets destructed, agency
contract comes to an end.
• Principal – Alien Enemy: When principal is alien and war breaks out between the
countries, then principal becomes alien enemy and agency contract gets terminated.
• Liquidation of company: On account of legal entity company may act either as principal
or agent. Whatever the status may be, if company enters into liquidation, termination of
agency takes place.
 • Termination of Sub-agency (sec:-210) When ever man agency gets terminated on account
of any reason, sub-agency also goes off.

Termination of agency by the act of Parties.

The following are the situations where the agency is terminated by the act of parties.

• Termination of agency by the Principal: Principal can terminate the contract of agency by
giving notice to agent. By doing so if agent comes across any suffering. Principal has to
compensate the agent.
• Termination of agency by the Agent: Agent also can terminate the agency contract by
giving notice to principal but by doing so if principal comes across any suffering, agent has
to compensate.
• Termination of agency by both the parties to the contract: By means of mutual
understanding between principal and agent, the contract of agency may come to an end.

Rights of an Agent

a. He is entitled to remuneration and other expenses properly incurred by him in the agency.
But if he is guilty of misconduct, he is not entitled to receive the remuneration. Illustration:
A employs B to recover Rs. 1000 from C. Through B’s misconduct, the money is not
recovered. B is entitled to no remuneration for his services and must make good the loss.
b. He is entitled to retain the goods, papers and other property, movable on immovable, of the
principal for his claims.
c. The agent has a right to be indemnified by the principal for all lawful acts. Illustration: B
at Singapore under instructions from A of Calcutta, contracts with C to deliver goods. A
does not send the goods to B and C sues B breach of contract. B informs A of the suit and
A authorizes him to defend the suit. B defends and is compelled to pay damages etc. A is
liable to B for such damages etc.
d. The agent is entitled to be indemnified for the injury caused to him by the principal’s
neglect or want of skill. Illustration: A employs B as a brick-layer in building in a house
 and puts a scaffolding himself unskillfully and B is in consequence, hurt. A must
compensate B.
e. When an agent acts in good faith, the employer must indemnify him for the consequence
of that act, through it causes an injury to the rights of third parties. Illustration: B, at the
request of A, sells goods in the possession of A, but which A had no right to dispose of B
does not know this and hands over the sale proceeds to A. afterwards C the true owner sues
A and recovers the value of goods and costs. A must indemnify B for what he has paid and
for B’s own expenses.

Duties of An Agent

a. He should act according to the directions of the principal and in default, indemnify the
principal for the loss, if any
b. In the absence of instructions, he must act according to the trade custom. Illustration: A,
an agent engaged in carrying on for B, a business, in which it is the custom, to invest from
time to time, at interest the monies which may be in hand, omits to make such investment.
A, must make good to B the interest usually obtained by such investment.
c. In case of difficulty, he must be diligent in communicating with the principal and obtaining
his instruction.
d. He must conduct the business of agency with as much skill as is generally possessed by
persons engaged in similar business, unless the principal has notice of want of skill.
Illustration: A, having authority to sell on credit, sells goods to B without enquiring about
his solvency, B at the time of sale, is bankrupt. A must make good the loss.
e. He must render proper accounts on demand.
f. He must not delegate his authority without the consent of the principal.
g. He must deliver all monies including secret commission, to the principal. He can deduct
his remuneration and other lawful expenses spent by him.
h. He should not set up his own title or title of third parties to the goods of the principal in hi
hands.
i. If, by the nature of profession, an agent is purported to have special skill, he must exercise
that degree of skill ordinarily expected from the members of the profession. Illustration: A
 solicitor, who started the proceedings under a wrong section or field a suit in a court having
no jurisdiction, is liable.
j. He should not disclose confidential information.
k. His interest should not conflict with his duty.

Relevant Questions:
(1.) Define Agency? Explain the various ways an agency can be created?
(2.) Describe the rights and duties of an agent towards his principal?
(3.) Describe the modes of termination?
(4.) What are the various kind of an agent?

UNIT- III

THE INDIAN PARTNERSHIP ACT, 1932

INTRODUCTION

Fredrick Pollock defined,” Partnership is the relationship between persons who have agreed to
share the profits of a business that is carried on by one of them or all of them”. The Act came into
force on the 1st day of October 1932. The Act is not applicable to Jammu and Kashmir.

In common parlance, partnership is a business owned and managed by two or more people. To
form a partnership, each partner normally contributes money, valuable property or labor in
exchange for a partnership share, which reflects the amount contributed. Section 4 of Indian
Partnership Act 1932 defines Partnership as follows -

Section 4 - Partnership is the relationship between persons who have agreed to share the profits of
a business carried on by all or any of them acting for all. Persons who have entered into partnership
with one another are individually called partners and collectively called a firm and the name under
which their business is carried on is called firm name.

Examples -

1. A and B buy 100 bales of cotton to sell later on profit which they agree to share equally.
A and B are partners in respect of such cotton.
 2. A and B buy 100 bales of cotton together for personal use. There is no partnership
between A and B.
3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament and
to sell and that they shall share the profit. A and B are partners.
4. A and B are carpenters working together. They agree that A will keep all the profits and
will pay B a wage. They are not partners.
5. A and B jointly own a ship. This circumstance does not make them partners.

Section 5 of IPA 1932 says that the relation of partnership arises from contract and not from
status. Thus, if there is no specific contract, there can be no partnership.

As per Section 6, to determine whether a partnership exists between a group of persons, we have
to look at the real relation between them as shown by all relevant facts taken together. It further
says that sharing of profits or of gross returns arising from a property owned jointly by them
does not by itself makes them partners.

Based on these definitions, in Helper Girdharbhai vs Saiyed M Kadri and others AIR 1987, J
Sabyasachi of SC identified that the following elements must be there in order to establish a
partnership - there must be an agreement entered into by all the parties concerned, the agreement
must be to share profits of the business, and the business must be carried on by all or any of the
person concerned for all.

Essential of Partnership:
1. Agreement - There has to be an agreement between two or more people to enter into
partnership. The agreement is the source of the partnership. It is not necessary that the
agreement be formal or written. An agreement can be express or implied. Further, such
agreement must follow all the requirements of a valid contract given by Indian Contract
Act 1872. This includes the parties must be competent to contract and the object of the
agreement should be legal.
2. Business - They must intend to start or do a business. A business is a very wide term and
includes any trade, occupation, or profession. Business may not be of long duration or
permanent and even a single activity may be considered a business. Thus, if two persons
are not partners, they can engage is a transaction with an intention to share profits and can
become partners in respect of that transaction. For example, if two advocates are appointed
to jointly plead a case and if they agree to divide the profits, they are partners in respect to
that case. Section 8 also mentions that a person may become partner with another in
particular adventures of undertaking..
3. Sharing of profits - Normally, an activity is done in partnership with a goal to make
profits. Thus, for a valid partnership to exist, the partners must agree to share the profits
according to their investment. Here, profits include losses as well.
4. Mutual Agency - The firm must be managed by the partners and thus when any partner
acts, he acts on behalf of the firm and thus on behalf of other partners. Therefore, a partner
is considered an agent of others. In absence of such mutual right of agency, a partnership
cannot exist. This was held in Cox vs Hickman 1860. In this case, two person carried on
 business in partnership. Due to financial crisis they obtained loans. Having unable to repay
the loans they executed a trust deed of properties in favor of the creditors. Some of the
creditors were made trustees of the business. This included Cox and Wheat croft. They
were empowered to enter into contracts and execute instruments to carry on business and
to divide the profits among the creditors. After the recovery of debts, the property was to
be restored to the two original partners. Cox never acted as trustee and retired, while Wheat
croft acted as a trustee for some time and retired. Other trustee then became indebted to
Hickman and executed a bill of exchange, which was not accepted and paid. Hickman sued
the trustees for recovery of the money for materials supplied. The trustees could be held
liable if they were partners. However, it was held that they were not partners. They
observed that in partnership every partner is an agent of another and in this case this
element was absent.

As we can see, a partnership requires all the above ingredients to have legal validity, and so a mere
sharing of profits is not a conclusive proof of a partnership. It must have the other three elements
also. As mentioned in Section 6, merely sharing of profits arising out of a jointly owned property
does not necessarily create a partnership. For example, if two persons own a house and give it on
rent, the sharing of the rent does not create a partnership. Similarly, a payment to a person
contingent upon profits also does not necessarily create a partnership until the element of mutual
agency is not present. This is the case when profits is shared with the lender of money for business.
In case of Mollow March Co vs The Court of Wards 1872, a Hindu Raja loaned some money to
Watson & Co. In return, he was to get a % of profit and was to exercise control on some aspects
of the business. He was not empowered to direct the transactions of the company. It was held that
although sharing of profits is a very strong test, yet whether a relation of partnership exists depends
on the real intention and conduct of the parties.

Duty/Liabilities of the partners

1. General Duties - According to section 9, every partner is liable to carry on the business in
the best interest of the firm, to be just and faithful to each other, and to render true accounts
and full information affecting the firm to any partner or his legal representative. During the
course of business no partner can do any act which may be against his duty to work to
greatest common advantage.
In Bentlay vs Craven 1853, it was held that if a partner was authorized to purchase goods
for the firm and if he supplies the goods from his own stock and makes a profit, he is liable
to give the profit to the firm. This matter is further clarified in section 16 which says that
subject to contract between the partners, if a partner derives any profit for himself from
any transaction of the firm or from the use of the property or business connection of the
firm, he shall pay that profit to the firm. Further, if a partner carries on any business of the
same nature as and competing with that of the firm, he shall pay all such profit to the firm.
Subject to contract means, partners can choose to modify this rule while entering into
partnership. For example, the partnership contract may specify that a partner may be
allowed to use firm's property for personal use.
2. Duty to indemnify for loss caused by fraud - According to section 10, every partner shall
indemnify the firm for any loss caused to it by his fraud in the conduct of the business of
 the firm. For example, a firm of A and B enter into a contract with the government. Later
on, due to B's conduct, the govt. cancels the contract and gives it to B. Here, the contract
obtained by B in his own name will be for the benefit of the partnership. Further, if the
second contract is of the lesser value, B is personally liable to the firm for the difference.
3. Duties imposed by contract - As per Section11 any special rights and duties may be given
or imposed by the contract between the partners.
4. Duty relating to the conduct of business - According to section 12, every partner is
bound to attend to his duties diligently. Thus, if a partner is assigned some task, he must
do it to the best of his abilities. Further, if any difference arises in respect of ordinary
business matter, it may be decided by majority. However, no change in the nature of
business can be made without the consent of all the partners.
In Suresh Kumar vs Amrit Kumar AIR 1982, Delhi HC held that majority cannot
trample on the opinion of minority in the key matters of the partnership. Thus, majority
cannot replace the managing director of the firm because it is a key business decision. It
can be done only with the consent of all the partners.
5. Duty to contribute equally to the losses - According to section 13(b), partners shall
contribute equally to the losses sustained by the firm.
6. Duty to indemnify for loss caused by his willful neglect - According to section 13 (f), if
a partner neglects the business activity willfully, he must compensate the firm for the loss
caused. It has been long held that if a partner during the course of business commits breach
of duty, or fraud, or culpable negligence and causes harm to the firm, even if he is not liable
in law, he must be held liable to indemnify the firm in equity. This does not mean that a
partner, when acting in good faith, makes an error in judgment and causes loss to the firm,
is liable. However, this is subject to the contract among the partners. This means that the
contract may specify that a partner is a sleeping partner and may excuse him from doing
any work.
7. Duty in respect of application of property of the firm - According to section 15, the
property of the firm shall be held and used exclusively for the purposes of the business. If
a partner uses it for personal benefits, he shall account for and pay such profits to the firm.
8. Duty in respect of personal profits - According to section 16(a), if a partner derives any
profit for himself from any transaction of the firm or from any property or business
connection of the firm, he shall account for that profit and pay it to the firm, subject to the
contract.
9. Duty not to compete with the firm - According to section 16(b), if a partner engages in
a business in competition of the firm, he should pay the profits to the firm. But if a partner
does a private act, which is not in the scope of the business of the firm, he is not liable to
the firm for the profits.

Rights of the partners

1. Rights given by contract - As per Section11 any special rights, such as right to
remuneration may be given by the contract between the partners.
2. Right to take part in the conduct of business - As per section 12(a), subject to the
contract between them, a partner has a right to take part in the conduct of business. Only
 way to restrain a partner from getting involved in the business is to specify it in the contract
of partnership. Even courts cannot, through an injunction, restrain a partner.
3. Right to have access to and inspect and copy books of the firm - As per section 12,
every partner has a right to inspect the books and make a copy if he wants.
4. Right to share in profit - As per section 13, subject to contract, a partner is entitled to an
equal share of the profit.
5. Right to receive interest on the capital subscribed - As per section 13, subject to
contract, where a partner is entitled to interest on the capital subscribed by him, such
interest shall be payable only out of profits. Further, if a partner pays any money to the
firm, beyond the amount of capital, he is entitled to 6% interest.
6. Right to indemnity in respect of payments made and liabilities incurred - According
to section 13, the firm shall indemnify a partner in respect of payments made and liabilities
incurred by him in the ordinary and proper conduct of business or in doing such act, in an
emergency, for the purposes of protecting firm from loss as would be done by a person of
ordinary prudence in his own case under similar circumstance.

Implied authority of a partner

As held in Cox vs Hickman 1860, if two or more agree to carry on a business, each of them is a
principal and each is an agent for the other. Further, each is bound by the other's contract in
carrying on the trade as much as a single principal would be bound by the act of an agent. This
principle has been incorporated in section 18 of IPA 1932. It says that a partner is the agent of the
firm for the purposes of the firm. Its complimentary principle is incorporated in section 25 which
says that every partner is liable jointly with all other partners and also severally for all acts of the
firm done while he is a partner. This brings us to the implied authority of the partners. Since, a
partner is an agent of the firm; his act binds every other partner and the firm.
For example, if a partner A gives a check in the firm's name to a creditor and if the check is
unpaid, partner B is equally liable even though B's signature does not appear on the check. This
authority to bind the firm is called "implied authority". It has been incorporated in section 19 of
IPA 1932, which says that the act of the partner which is done to carry on, in the usual way,
business of the kind carried on by the firm, binds the firm.

The following essential conditions are required for the exercise of Implied Authority to bind the
firm -

1. Usual way - The act must be done to carry on the business in the usual way. Any drastic
action, which is out of ordinary, requires the consent of all the partners. For example, if a
firm deals in coal, a partner has the implied authority to enter into a contract to buy and
sell coal, but not gold. The implied authority of partners is limited to only those acts which
are done in usual way and related to the business of the kind carried on by the firm.
2. Mode of doing act to bind firm - Section 22 specifies that in order to bind the firm, the
act must be done in firm's name or in any manner expressing or implying the intention to
bind the firm. For example, if a partner A obtains a loan in his name without mentioning
anything about the firm, it will not bind the firm. It must be clear from the action that it is
intended as being done by the firm. In Devji vs Magan Lal AIR 1965, a partner had taken
 a sublease in his own name instead of the firm's name. Further, there did not seem to be
any intention to bind the firm. SC held that the firm was not bound by the lease as the
parties did not intend to bind the firm by this transaction.

Admission of Partners (Section 23)

Since a partner is an agent of the firm and can bind the firm by his acts, an admission or
representation by him concerning the affairs of the firm, is evidence against the firm. This is
incorporated in section 23, which says that an admission or representation made by a partner
concerning the affairs of the firm is evidence against the firm if it is made in ordinary course of
business.
The key factor in this is that the admission or representation must be made in ordinary course of
business. This will also not include the representation by which a partner increases his scope of
authority. For example, if a partner executes a bill of exchange for payment of his personal debts
and on inquiry he makes a false statement that the other partners have authorized him, the said
bill of exchange will not bind the firm.

Incoming partners

The mutual relations of the partners is based on the principle that they have to be just and fair to
each other and are bound to carry on the business of the firm to the greatest common advantage.
Thus, it is important for each partner to have trust in each other. Therefore, section 31 lays down
a general principle that a partner cannot be introduced into a firm without the consent of all the
existing partners. However, the existing partners may, by contract, authorize a partner to
introduce a new partner. A contract may also be made that upon death of a partner, a new partner
may be nominated in his place. If there are only two partners and one of them dies, there is no
question of nominating a new partner because the partnership ends as soon as the partner dies.
Also, a new partner is not liable for any act of the firm done before he became a partner.

In many situations, a partner may have to leave the partnership. A partner

may leave in the following ways -

1. With the consent of all other partners - According to section 32(1) (a), a partner may
retire with he consent of all the other partners.
2. With an express agreement by partners - Section 32 (1)(b) provides that a partner may
retire with an express agreement by partners. This means that if there is a provision in the
contract deed of partnership that allows a partner to retire, a partner can retire using that
agreement.
In Vishnu Chandra vs Chandrika Prasad Agarwal AIR 1983, the question before SC
was whether a partner was entitled to retire on the basis of partnership deed. The deed
provided that a partner may retire by giving one month notice and that a partner cannot
retire within one year of commencement of business and if he does so, his capital will not
be returned. SC held that it is consistent with the provisions of section 31(1)(b) and the
partner can retire according to the deed.
 3. By giving notice to all other partners in case of partnership at will - According to
section 32(1)(c), a partner may retire where the partnership is at will, by giving notice in
writing to all the other partners of his intention to retire.
4. By Expulsion (Can a partner be removed? How?) - According to section 33 (1) a partner
may not be expelled by any majority of the partners, save in exercise of good faith of
powers conferred by contract between the partners. Thus, to expel a partner by majority of
the partners, the following two conditions must be satisfied -
1. Such a power must be conferred by contract between the partners. This means, the
contract of partnership must clearly give this power to the partners otherwise, a
partner cannot be expelled.
2. The power to expel a partner conferred under the contract must be exercised in good
faith. Thus, if majority of the partners try to expel a partner with evil intention and
without any reasonable cause, it is not possible.

On insolvency of a partner - According to section 34(1), where a partner in a firm is

adjudicated an insolvent he ceases to be a partner on the date on which the order of
adjudication is made, whether or not firm is thereby dissolved.

5. By Death - Upon death of a partner, his association with the firm ends and he ceases to be
a partner. His estate will not be liable for the acts of the firm after his death. According to
section 42(c), subject to the contract between the partners, a firm is dissolved by the death
of a partner. This means that partners may by contract that by death of a partner the firm
will not be dissolved but if there is no such contract, the firm will be dissolved.

Liability of a retired partner

The liability of a retired partner may be of two types - For acts done before retirement and for acts
done after retirement.

1. Acts before retirement - The general rule is that a partner is liable for all acts done before
retirement even after he is retired. However, a retiring partner may be discharged of his
liabilities for act before retirement by an agreement between the retiring partner and the
remaining partners. The agreement should specify that all such liabilities will be borne by
the remaining partners. A notice to this effect must also be given to the creditors.
2. Acts after retirement - The general principle is that a retired partner is not liable for the
acts of the firm done after his retirement. However, he must give a public notice of his
retirement to escape liabilities.

Partnership with a minor

By virtue of section 10 and 11 of Indian Contract Act 1872, a minor is not considered capable of
giving consent and thus any contract with a minor is void ab initio. Therefore, a contract of
partnership with a minor is also void. In other words, a partnership cannot be done with a minor
and a minor cannot become a partner of a firm. However, a minor can be admitted to the benefits
of the partnership as per section 30 (1), by the consent of all the partners. In Venkatarama Iyer
vs Balayya AIR 1936, it was held that there must be some positive act of the partners so that the
court may infer that the minors have been admitted to the benefits of the partnership. Merely
assuming that the minors were admitted would be an error in law and is not sufficient.

Rights and Liabilities of a minor

He has the following rights -

1. to such share of the property and of the profits of the the firm as may be agreed upon.
2. to access, copy, and inspect the records of the firm.
3. his share is liable for the acts of the firm but he is not personally liable for them.
4. may sue the partners for his share of profits of the firms when severing his connection
with the firm.
5. As per Section 30(5), he has a right of election to become or not to become the partner of
the firm after becoming a major. Upon attaining the age of majority, the minor can,
within six months , give public notice that he has elected to become or not to become a
partner of the firm. If he fails to give such notice, he will be become partner of the firm at
the expiry of six months.

Registration of a firm
Chapter 7 of IPA 1932 deals with the registration of firms. Under this act, registration of firms is
not compulsory. There is no penalty for not registering. However, the effects of non-registration
are so severe that usually firms opt to register.

Consequences of not registering

1. Suits between partners and Firm - A per Section 69 (1) unless a firm is registered and
the party is shown as a partner, no suit can be filed by or on behalf of any partner against
the firm. In Loonkaran Sethia vs Mr Ivan E John AIR 1977, the firm was not registered
and the plaintiff filed the suit to enforce an agreement entered into by a partner of the firm.
The suit was filed on behalf of the firm and was for its benefit. SC observed that a partner
of an unregistered firm cannot bring a suit to enforce a right arising out of a contract falling
within the ambit of section 69. It held that the suit was unmaintainable.
2. Suit between firm and third parties - Until the firm is registered, no suit can be filed by
the firm against third parties. In Ram Adhar vs Rama Kirat Tiwary AIR 1981, the
plaintiff sold bricks to the defendant. The defendant did not pay the price to the partnership
firm and so the firm filed the suit. It was held that since the firm was not registered the suit
was unmaintainable.
3. Bar to claim set off and other proceedings - According to section 69(3), suit cannot be
filed for claim of set off or other proceedings to enforce a right arising from a contract.

Exception
According to section 69(3)(a), the provisions of section 61(1) and (2) shall not affect the
enforcement of any right to sue for the dissolution of the firm, or for accounts of the dissolved
firm or any right or power to realize the property of dissolved firm. Thus, a partner of a
dissolved firm can sue a third party for releasing the property of the firm.

Procedure for registration

As per section 58, registration of a firm can be done any time by sending a statement in prescribed
form by post or delivering to the registrar of the area in which any place of business of the firm is
situated or proposed to be situated. The form should also be accompanied with the prescribed fee.
The form must contain -

1. the firm name

2. place or principal place of the business of the firm.
3. the names of any places where the firm carries on business.
4. the date when each partner joined the firm.
5. the names in full and permanent address of the partners.
6. the duration of the firm.

The statement must be signed by all of the partners or by their agents specially authorized in this
behalf. Each person signing the statement shall also verify it in the manner prescribed. There is a
restriction on the name of the firm that it cannot contain certain words such as Crown, Emperor,
Empress, King etc. that give an impression that the firm is associated with the govt. When the
registrar is satisfied that the provisions of section 58 have been fulfilled, he shall record an entry
in the Register of Firms and shall file the statement.

Dissolution of the firm

As per section 39, the dissolution of the partnership between all the partners of a firm is called the
dissolution of the firm. The firm is dissolved when all the partners stop carrying on the partnership
business. It is possible that some partners may decide to disassociate from the firm while others
carry on the business. In this case the partnership is not dissolved.
After dissolution of the firm, the partnership between the partners does not completely end. It
continues for the purpose of realization of assets or properties of the firm. Also, after the
dissolution, the right and power of the partners of the firm to bind the firm exists as is necessary
to wind up the operation and for the acts that started before the dissolution but have not yet ended.

Modes of dissolution
Dissolution by agreement - According to section 40, a firm may be dissolved either with the
consent of all the partners or in accordance with a contract between the partners.

1. Compulsory Dissolution - According to section 41, a firm will be compulsorily dissolved

if
1. all the partners or all but one of the partners become insolvent - This happens
because if a partner becomes insolvent, he becomes incompetent to contract and so
he ceases to be a partner as per section 34(1). Thus, if all or all but one partners
become insolvent the firm will compulsorily dissolved because for a partnership, at
least two partners are required.
2. If the business of the firm becomes unlawful - It is possible that due to legislation,
the business may become unlawful. For example, liquor sales may become
unlawful in a particular state. In such a case, a partnership that sells liquor will be
dissolved.
2. Dissolution upon contingencies - According to section 42, subject to the contract, a firm
is dissolved on the happening of following contingencies -
1. By Expiry of fixed term - A firm is dissolved, if it is constituted for a fixed term,
which that term expires.
2. On completion of adventures or undertakings - In many cases, a partnership is
started with a specific goal to accomplish or for a particular task. Upon completion
of such task, the partnership gets dissolved.
3. By the death of a partner - Subject to the contract between the partners,a
partnership gets dissolved if a partner dies.
4. By the adjudication of a partner as an insolvent - If a partner becomes insolvent
and if there is no provision in the contract to keep the partnership alive in such case
between the solvent partners, the partnership is dissolved.
 3. Dissolution by notice of partnership at will - According to section 43, a partnership at
will can be dissolved any time by any partner by giving a notice of such intention to other
partners.
4. Dissolution by court - According to section 44, the court may dissolve a partnership if -
1. a partner becomes of unsound mind - In such a case, the next friend of the person
with unsound mind may request the court to dissolve the firm.
2. a partner becomes permanently incapable - At the suit of a partner, the court
may dissolve the firm on the ground that a partner other than the one suing has
become permanently incapable of performing the duties of partnership.
3. a partner is guilty of conduct likely to affect prejudicially the carrying on of
business - At the suit of a partner the court may dissolve a firm on the ground that
a partner other than the one suing, is guilty of conduct which is likely to affect the
business prejudicially. For example, in partnership of doctors, if one doctor is guilty
of immorality towards some patients, it is possible for the court to dissolve the
partnership upon suit of other partners.
In Carmichael vs Evans 1856, a partner was convicted of traveling without ticket
and the court dissolved the firm on this ground.
4. willful or persistent breach of agreements relating to the business or
management of the affairs of the firm - If a partner willfully or persistently
commits breach of the agreements related to the firm, or the conduct of its business,
or conducts such that it is not reasonably practical for other partners to carry on the
business, the court may dissolve the firm upon suit by other partners.
5. transfer of the whole interest in the firm by a partner to a third party - At the
suit of a partner the court may dissolve a firm on the ground that a partner other
than the one suing, has in any way transferred the whole of his interest in the firm
to a third party.
6. perpetual loss - At the suit of a partner, the court may dissolve the firm on the
ground that the business of a firm cannot be carried on without incurring loss. It is
indeed impractical to run a business that is continuously going in the loss. Thus, if
a partner of such a business desires, he can request the court to dissolve the firm.
7. Just and Equitable cause - As per section 44(g), the court may dissolve the firm
on any just and equitable ground upon request by a partner. This gives very wide
powers to the court because the court has to decide whether there is a just and
equitable ground for dissolving a firm.

Consequences of Dissolution

1. Liabilities of the partners for acts done after dissolution - As per section 45, until public
notice is given of the dissolution, partners remain liable for their acts as they were before
dissolution. It is therefore essential to give notice of dissolution if the partners want to
escape liability for the acts of the firm.
2. Right of partners to have business wound up after dissolutions - Upon dissolution of
the firm, every partner is entitled, as against other partners, to have the property of the firm
applied in payments of debts and other liabilities of the firm and to have the surplus
distributed to the partners as per the contract.
 3. Continuing authority of partners for purpose of winding - Each partner continues to
enjoy implied authority but for the acts done in the process of winding up of the business.
4. Settlement of accounts - Upon dissolution, the accounts of the firm will be settled as per
the agreement of the partners.
5. Payment of debts - where there are any joint debts, the property of the firm will be first
applied to clear those debts and then it will be applied to any separate debts due to a partner.
6. Restrain the use of name of the firm - Every partner has a right to restrain another from
using the name of the firm, subject to any contract between them. However, if the goodwill
of the firm is sold, the buyer may use the name of the firm for his business.
7. Restrain in trade - Subject to contract, the partners of the firm may be restrained from
doing the same business as the firm after the dissolution as long as the conditions of the
restrain do not violate section 27 of ICA 1872.

Relevant Questions:
(1.) Define partnership. Is sharing of profit conclusive proof of partnership? Explain
“partners are agents of each other”.
(2.) What are the mutual rights and liabilities of the partners?
(3.) What is implied authority of partners? Can it be restricted?
(4.) Is the registration of a partnership firm compulsory? What are the consequences of
non- registration ? can a partner of an unregistered firm bring a suit against a third
party to release the property of dissolved firm?
(5.) What is the procedure for registration? explain various modes of dissolution of the
firm ? What are the liabilities of the partners after dissolution?

UNIT IV

SALE OF GOODS ACT,1930

FORMATION OF THE CONTRACT

Definition of Contract of Sale
Section 4(1) defines a Contract of sale as under:

“A Contract of Sale of goods is a contract whereby the seller transfer or agrees to transfer the
property in the goods to buyer for a price”.

The essential of a Contract of Sale :

(i) Contract between the seller and buyer: it is contract between a seller and a
buyer. The seller means a person who sells or agrees to sell and the buyer means
a person who buys or agrees to buy the goods.
(ii) Goods : Goods means every kind of movable property other than actionable
claims and money; and includes stock and share, growing crops, grass, and
things attached to or forming part of the land which are agreed to be severed
before sale or under the contract of sale.
(iii) Transfer of property (ownership) in the Goods: In every contract of sale
there is to be transfer of property in the goods from the seller to buyer.
(iv) Price : price is the money consideration for a sale of goods. The price must be
paid or promised to be paid in money. Money means and includes not only coin
but also bank notes, govt. promissory notes, bank deposits and otherwise
generally any paper, obligation or security that is immediately and certainly
convertible into cash so that nothing can interfere with or prevent such
conversion.
(v) Absolute or Conditional : A Contract of sale may be absolute or conditional.
A contract of sale is absolute when it is a sale pure and simple; where the
property in the goods is transferred absolutely to the buyer. It is conditional
where the transfer of property in the goods is dependent upon the fulfillment of
some conditions precedent or subsequent. Condition precedent is a condition
which must be fulfilled before any contract of sale is concluded.

Sale and Agreement to sell

The term ‘contract of Sale’ includes both an actual sale and an agreement to sell.
Section 4(3) of the sale of goods act, 1930 provides as follows:

“Where under a contract of sale the property in the goods is transferred from the seller
to the buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be
fulfilled, the contract is called an agreement to sell”.

Goods perishing before making the contract (Section 7)

Where there is a contract for the sale of specific goods, and the goods without the
knowledge of the seller have perished or become so damaged as no longer to answer to
their description in the contract, at the time when the contract was made, the contract
is void. In a contract of sale of goods where the terms of the contract indicate that the
parties intended to take effect only if the goods were in existence, the non-existence of
the goods will produce a situation not contemplated by the contract and to which it
cannot apply.
Goods perishing before sale but after Agreement to sell (Section8)
“Where there is an agreement to sell specific goods, and subsequently the goods
without any fault on the part of the seller or buyer perish or become so damaged as no
longer to answer to their description in the agreement before risk passes to the buyer,
the agreement is thereby avoided .”

Difference between Contract of Sale and Agreement to sell

BASIS FOR CONTRACT OF SALE AGREEMENT TO SELL
COMPRISON
Meaning When in a contract of sale, When in a contract of sale the
the exchange of goods for parties to contract agree to
money consideration takes exchange the goods for a price
place immediately, it is at a future specified date is
known as sale. known as an Agreement to
sell.
Nature Absolute Conditional

Types of Executed contract Executor contract

contract
Transfer of risk Yes No

Title In Sale, the title of goods In an agreement to sell, the

transfers to the buyer with the title of goods remains with the
transfer of goods. seller as there is no transfer is
no transfer of goods.
Right to sell Buyer Seller

Consequences of Responsibility of buyer. Responsibility of seller.

subsequent loss
or damage to the
goods
Tax Vat is charged at the time of No tax is levied.
sale.

Suit for breach The buyer can claim damages Here the buyer has the right to
of contract by from the seller and claim damages only.
the seller proprietary remedy from the
party to whom the goods are
sold.
Right of unpaid Right to sue for the price. Right to sue for damages.
seller
 CONDITIONS AND WARRANTIES
The Parties are at liberty to enter into a contract with any terms they please. As a rule, before a
contract of sale is concluded, certain statements are made by the parties to each other. The
statement may amount to a stipulation, forming part of the contract or a mere expression of opinion
which is not part of the contract. If it is a statement by the seller on the reliance of which the buyer
makes the contract, it will amount to a stipulation. If it is a mere commendation by the seller of his
goods it does not amount to a stipulation and does not give the right of action.

The stipulation may either be a condition or a warranty. Section 12 draws a clear distinction
between a condition and a warranty. Whether a stipulation is a condition or only a warranty is a
matter of substance rather than the form of the words used. A stipulation may be a condition though
called a warranty and vice versa.

1. Conditions
If the stipulation forms the very basis of the contract or is essential to the main purpose of the
contract. it is a condition. The breach of the condition gives the aggrieved party a right to treat the
contract as repudiated. Thus, if the seller fails to fulfill a condition, the buyer may treat the contract
as repudiated, refuse the goods and. if he has already paid for them, and recover the price. He can
also claim damages for the breach of contract.

2. Warranties
If the stipulation is collateral to the main purpose of the contract, i.e.. Is a subsidiary promise, it is
a warranty. The effect of a breach of a warranty is that the aggrieved party cannot repudiate the
contract but can only claim damages. Thus, if the seller does not fulfill a warranty. The buyer must
accept the goods and claim damages for breach of warranty.
Implied Warranties/Conditions
Even where no definite representations have been made, the law implies certain representations as
having been made which may be warranties or conditions. An express warranty or condition does
not negative an implied warranty or condition unless inconsistent therewith. There are two implied
warranties:
Implied Warranties [Section 14(b), 14(c) and 16(3)]

a) Implied warranty of quiet possession: If the circumstances of the contract are such as there
is an implied warranty that the buyer shall have and enjoy quiet possession of the goods.

b) Implied warranty against encumbrances: There is a further warranty that the goods are not
subject to any right in favour of a third-party, or the buyer's possession shall not be
disturbed by reason of the existence of encumbrances.
This means that if the buyer is required to, and does discharge the amount of the encumbrance,
there is breach of warranty, and he is entitled to claim damages from the seller.

Implied Conditions [Sections 14(a), 15(1), (2), 16(1) and Proviso 16(2), and Proviso 16(3) and
12(b) and 12(c)].

Different implied conditions apply under different types of contracts of sale of goods, such as sale
by description, or sale by sample, or sale by description as well as sample. The condition, as to
title to goods applies to all types of contracts, subject to that there is apparently no other intention.
A. Implied Conditions as to title

There is an implied condition that the seller, in an actual sale, has the right to sell the goods, and,
in an agreement to sell, he will have to it when property is to pass. As a result, if the title of the
seller turns out to be defective, the buyer is entitled to reject the goods and can recover the full
price paid by him.

In Rowland v. Divali (1923) 2 K.B. SOD, 'A' had bought a second hand motor car from 'B' and
paid for it. After he had used it for six months, he was deprived of it because the seller had no title
to it. It was held that 'A' could recover the full price from 'B' even though he had used the car for
six months, as the consideration had totally failed.
A. Implied conditions under a sale by description
In a sale by description there are the following implied conditions:

(a) Goods must correspond with description: Under Section 15, when there is a sale of
goods by description, there is an implied condition that the goods shall correspond
with description.

In a sale by description, the buyer relies for his information on the description of the goods given
by the seller, e.g. in the contract or in the preliminary negotiations.
Where 'A' buys goods which he has not seen, it must be sale by description, e.g., where he buys a
'new Fiat car' from 'B' and the car is not new, he can reject the car.

(b) Goods must also be of merchantable quality: If they are bought by description from dealer
of goods of that description. [Section 16(2)].Merchantable quality means that the goods must be
such as would be acceptable to a reasonable person, having regard to prevailing conditions. They
are not merchantable if they have defects which make them unfit for ordinary use, or are such that
a reasonable person knowing of their condition would not buy them. 'P' bought black yarn from'
'0' and, when delivered, found it damaged by the white ants. The condition of merchantability was
broken.

But, if the buyer has examined the goods, there is no implied condition as regards defects which
such examination ought to have revealed. If, however, examination by the buyer does not reveal
the defect, and he approves and accepts the goods, but when put to work, the goods are found to
be defective, there is a breach of condition of merchantable quality.

The buyer is given a right to examine the goods before accepting them. But a mere opportunity
without an actual examination, however, cursory, would not suffice to deprive him of this right.

(c) Condition as to wholesomeness: The provisions, (i.e., eatables) supplied must not only
answer the description, but they must also be merchantable and wholesome or sound. 'F' bought
milk from 'A' and the milk contained typhoid. germs. 'F's wife became infected and died. 'A' was
liable for damages. Again, 'C' bought a bun at 'M's bakery, and broke one of his teeth by biting on
a stone present in the bun. 'M' was held liable.

(d) Condition as to fitness for a particular purpose: Ordinarily, in a contract of sale, there is
no implied warranty or condition as to the quality of fitness for any particular purpose of goods
supplied.

But there is an implied condition that the goods are reasonably fit for the purpose for which they
are required if:
(i) the buyer expressly or impliedly makes known the intended purpose, so as
to show that he relies on the seller's skill and judgment, and
(ii) the goods are of a description which it is in the course of the seller's business
to supply (whether he be the manufacturer or not). There is no such condition
if the goods are bought under a patent or trade name.
In Priest v. Last (1903) 2 K.B. 148, a hot water bottle was bought by the plaintiff, a draper, who
could not be expected to have special skill knowledge with regard to hot water bottles, from a
chemist, who sold such articles. While being used by the plaintiff's wife, the bottle busted and
injured her. Held, the seller was responsible for damages.

In Grant v. Australian Knitting Mills (1936) 70 MLJ 513, 'G' purchased woolen underpants from
'M' a retailer whose business was to sell goods of that description. After wearing the underpants,
G developed some skin diseases. Held, the goods were not fit for their only use and 'G' was entitled
to avoid the contract and claim damages.

B. Implied conditions under a sale by sample (Section 15)

In a sale by sample:

(a) There is an implied condition that the bulk shall correspond with the sample in quality;
(b) There is another implied condition that the buyer shall have a reasonable opportunity of
comparing the bulk with the sample;
(c) It is further an implied condition of merchantability, as regards latent or hidden defects in the
goods which would not be apparent on reasonable examination of the sample. "Worsted coating"
quality equal to sample was sold to tailors, the cloth was found to have a defect in the fixture
rendering 'the same unfit for stitching into coats. The seller was held liable even though the same
defect existed in the sample, which was examined.

C. Implied conditions in sale by sample as well as by description

In a sale by sample as well as by description, the goods supplied must correspond both with the
samples as well as with the description. Thus, in Nichol v. Godis (1854) 158 E.R. 426, there was
a sale of "foreign refined rape-oil has warranty only equal to sample". The oil tendered was the
same as the sample, but it was not "foreign refined rape-oil" having a mixture. of it and other oil.
It was held that the seller was liable, and the buyer could refuse to accept.

Implied Warranties
Implied warranties are those which the law presumes to have been incorporated in the contract of
sale inspite of the fact that the parties have not expressly included them in a contract of sale.
Subject to the contract to the contrary, the fol!owing are the implied warranties in the contract of
sale:

(i) Warranty as to quite possession: Section 14(b) provides that there is an implied' warranty
that the buyer shall have and enjoy quiet possession of goods'. If the buyer's possession is
disturbed by anyone having superior title than that of the seller, the buyer is entitled to
hold the seller liable for breach of warranty.

(ii) Warranty as to freedom from encumbrances: Section 14(c) states that in a

contract for sale, there is an implied warranty that the goods shall be so free from any
charge or encumbrances of any third party not declared or Known to the buyer before or
at the time when the contract is made'. But. if the buyer is aware of any encumbrance on
the goods at the time of entering into the contract, he will not be entitled to any
compensation from the seller for discharging the encumbrance.

(iii) Warranty to disclose dangerous nature of goods: If the goods are inherently dangerous
or likely to be dangerous and the buyer is ignorant of the danger, the seller must warn the
buyer of the probable danger:
(iv) Warranties implied by the custom or usage of trade: Section 16(3) provides that an
implied warranty or conditions as to quality or fitness for a particular purpose may be
annexed by the usage of trade.
Doctrine of Caveat Emptor

The term caveat emptor is a Latin word which means "let the buyer beware". This principle
states that it is for the buyer to satisfy himself that the goods which he is purchasing are of the
quality which he requires. If he buys goods for a particular purpose, he must satisfy himself that
they are fit for that purpose. Section 6 provides that "subject to the provisions of this Act and of
any other law for the time being in force, there is no implied warranty or condition as to the quality
or fitness for any particular purpose of goods supplied under a contract of sale". In simple words,
it is not the seller's duty to give to the buyer the goods which are fit for a suitable purpose of the
buyer. If he makes a wrong selection, he cannot blame the seller if the goods turn out to be
defective or do not serve his purpose. The principle was applied in the case of Ward v. Hobbs.
(1878) 4 A.C. 13, where certain pigs were sold by auction and no warranty was given by seller in
respect of any fault or error of description. The buyer paid the price for healthy pigs. But they were
ill and all but one died of typhoid fever. They also infected some of the buyer's own pigs. It was
held that there was no implied condition or warranty that the pigs were of good health. It was the
buyer's duty to satisfy him regarding the health of the pigs.
Exceptions to the doctrine of Caveat Emptor:
(1) Where the seller makes a false representation and the buyer relies on it.

(2) When the seller actively conceals a defect in the goods which is not visible on a reasonable
examination of the same.

(3) When the buyer, relying upon the skill and judgment of the seller, has expressly or impliedly
communicated to him the purpose for which the goods are required.

(4) Where goods are bought by description from a seller who deals in goods of that description.

Relevant Questions:
(1.) When does an agreement to sell become a sale? What are the essential elements of a
valid contract of sale?

(2.) Distinguish between a sale and an agreement to sell?

(3.) Define the term ‘warranty’. What are the kinds of implied warranties under the
provision of the Sale of Goods Act,1930?

(4.) What do you understand by an implied condition? State the condition implied in a
contract of sale of goods?

(5.) Explain the doctrine of caveat emptor and explain the exception to this doctrine.

UNIT -V
Transfer of Title by Person not the Owner (Section 27-30)

The general rule is that only the owner of goods. can sell the goods. Conversely, the sale of an
article by a person who is not or who has not the authority of the owner, gives no title to buyer.
The rule is expressed by the maxim; "Nemo dot quod non habet" Le. no one can pass a better
title than what he himself has. As applied to the sale of goods, the rule means that a seller of
goods cannot give a better title to the buyer than he himself possess. Thus, even bona fide buyer
who buys stolen goods from a thief or from a transfree from such a thief can get no valid title to
them, since the thief has no title, nor could he give one to any transferee.
Example:

1. A, the hirer of goods under a hire purchase agreement, sells them to B, then B though, a
bonafide purchaser, does not acquire the property in the goods. At most he can acquire
such an interest as the hirer had.
2. A finds a ring of B and sells it to a third person who purchases it for value and in good
faith. The true owner, . B can recover from that person, for A having no title to the ring
could pass none the better.

Exception to the General Rule

The Act while recognizing the general rule that no one can give a better title than what he
himself has, laid down important exceptions to it. Under the exceptions the. Buyer gets a better
title of the goods than the seller himself. These exceptions are given below:
(a) Sale by a mercantile agent: A buyer will get a good title if he buys in good faith from a
mercantile agent who is in posession either of the goods or' documents of title of goods
with the consent of the owner, and who sells the goods in the ordinary course of his
business.
(b) Sale by a co-owner: A buyer who bllYs in good faith from one of the several joint owners
who is in sale possession of the goodo with the permission of his co-owners will get
good title to the goods.
(c) Sale by a person in possession under a voidable contract: A buyer buys in good faith
from a person in possession of goods under a contract which is voidable, but has not been.
rescinded at the time of the sale.
(d) Sale by seller in possession after sale: Where a seller, after having sold the goods,
continues in possession of goods, or documents of title to the goods and again sells them by
himself or through his mercantile agent to a person who buys in good faith and without notice
of the previous sale, such a buyer gets a good title to the goods.
(e) Sale by buyer in possession: If a person has brought or agreed to buy goods obtains, with
 the seller's consent, possession of the goods or of the documents of title to them, any sale
by him or by his mercantile agent to a buyer who takes in good faith without notice of
any lien or other claim of the original seller against the goods, will give a good title to the
buyer. In any of the above cases, if the transfer is by way of pledge or pawn only, it will
be valid as a pledge or pawn.
(f) Estoppel: If the true owner stands by and allows an innocent buyer to pay over money to
a third-party, who professes to have the right to sell an article, the true owner will be
estopped from denying the third-party's right to sell.
(g) Sale by an unpaid seller: Where an unpaid seller has exercised his right of
lien or stoppage in transit and is in possession of the goods, he may resell them and the
second buyer will get absolute right to the goods.
(h) Sale by person under other laws: A pawnee, on default of the pawnee to repay, has a right
to sell the goods, pawned and the buyer gets a good title to the goods. The finder of lost
goods can also sell under certain circumstances. The Official Assignee or Official
Receiver, Liquidator, Officers of Court selling under a decree, Executors, and
Administrators, all these persons are not owners, but they can convey better title than they
have.
Performance of the Contract of Sale

It is the duty of the seller and buyer that the contract is performed. The duty of the sellers is to
deliver the goods and that of the buyer to accept the goods and pay for them in accordance with
the contract of sale.

Unless otherwise agreed, payment of the price and the delivery of the goods and concurrent
conditions, i.e., they both take place at the same time as in a cash sale over a shop counter.,

Delivery (Sections 33-39)

Delivery is the voluntary transfer of possession from one person to another. Delivery may be
actual, constructive or symbolic. Actual or physical delivery takes place where the goods are
handed over by the seller to the buyer or his agent authorised to take possession of the goods.
Constructive delivery takes place when the person in possession of the goods acknowledges that
he holds the goods on behalf of and at the disposal of the buyer. For example, where the seller,
after having sold the goods, may hold them as bailee for the buyer, there is constructive delivery.
Symbolic delivery is made by indicating or giving a symbol. Here the goods themselves are not
delivered. but the "means of obtaining possession" of goods is delivered, e.g, by delivering the
key of the warehouse where the goods are stored, bill of lading which will entitle the holder to
receive the goods on the arrival of the ship.

Rules as to delivery
The following rules apply regarding delivery of goods:
(a) Delivery should have the effect of putting the buyer in possession.
(b) The seller must deliver the goods according to the contract.
(c) The seller is to deliver the goods when the buyer applies for delivery; it is the duty of the
buyer to claim delivery.
(d) Where the goods at the time of the sale are in the possession of a third person, there will
be delivery only when that person acknowledges to the buyer that he holds the goods on his.
behalf. .
(e) The seller should tender delivery so that the buyer ca~ take the goods. It is no duty of the
seller to send or carry the goods to the buyer unless the contract so provides. But the
goods must be in a deliverable state at the time of delivery or tender of delivery. If by the
contract the seller is bound to send the goods to the buyer, but no time is fixed, the seller
is bound to send them within a reas9nable time.
(f) The place of delivery is usually stated in the contract. Where it is so stated, the goods must
be delivered at the specified place during working hours on a working day. Where no
place is mentioned, the goods are to be delivered at a place at which they happen to be at
the time of the contract. of sale and if not then in existence they are to be delivered at the
price they are produced.
(g) The seller has to bear the cost of delivery u~less the contract otherwise provides. While
the cost of obtaining delivery is said to be of the buyer, the cost of the putting the goods
into deliverable state must be borne by thee seller. In other words. in the absence of an
agreement to the contrary, the expenses of and incidental to making delivery of the goods
must be borne by the seller, the expenses of and incidental to receiving delivery must be
borne by the buyer.
 (h) If the goods are to be delivered at a place other than where they are, the risk of deterioration
in transit will, unless otherwise agreed, be borne by the buyer.
(i) Unless otherwise agreed, the buyer is not bound to accept delivery in instalments.

Unpaid Seller (Sections 45-54)

Who is an unpaid seller? (Section 45)
The seller of goods is deemed to be unpaid seller:
a. When the whole of the price has not been paid or tendered; or

b. When a conditional payment was made by a bill of exchange or other negotiable

instrument, and the instrument has been dishonored.

Rights of an Unpaid Seller against the Goods

An unpaid seller's right against the goods is:
a. A lien or right of retention
b. The right of stoppage in transit.
c. The right of resale.
d. The right to withhold delivery.

(a) Lien (Sections 47-49 and 54): An unpaid seller in possession of goods sold, may exercise his
lien on the goods, i.e., keep the goods in his possession and refuse to deliver them to the buyer
until the fulfillment or tender of the price in cases .

(b) Stoppage in transit (Sections 50-52): The right of stoppage in transit is a right of stopping
the goods while they are in transit, resuming possession of them and retaining possession until
payment of the price. The right to stop goods is available to an unpaid seller
(i) when the buyer becomes insolvent; and
(ii) the goods are in transit.

The buyer is insolvent if he has ceased to pay his debts in the ordinary course of business, or
cannot pay his debts as they become due. It is not necessary that he has actually been declared
insolvent by the Court. The goods are in transit from the time they are delivered to a carrier or
other bailee like a wharfinger or warehousekeeper for the purpose of transmission to the buyer
and until the buyer takes delivery of them. The transit comes to an end in the following cases:
 (i) If the buyer obtains delivery before the arrival of the goods at their destination;

(ii) If, after the arrival of the goods at their destination, the carrier acknowledges to the
buyer that he holds the goods on his behalf, even if further destination of the goods
is indicated by the buyer.
(iii) If the carrier wrongfully refuses to deliver the goods to the buyer.

If the goods are rejected by the buyer and the carrier or other bailee holds them, the transit will
be deemed to continue even if the seller has refused to receive them back.The right to stop in
transit may be exercised by the unpaid seller either by taking actual possession of the goods or
by giving notice of the seller's claim to the carrier or other person having control of the goods.
On notice being given to the carrier hemust redeliver the goods to the seller, who must pay the
e~penses of the redelivery. The seller's right of lien or stoppage ,in transit is not affected by any
sale on the part of the buyer unless the seller has assented to it. A transfer, however, of the bill
of lading or other document of seller to a bona fide purchaser for value is valid against the seller's
right.
(c) Right of re-sale (Section 54): The unpaid seller may re-sell:

a. where the goods are perishable;

b. where the right is expressly reserved in the contract;

c. Where in exercise of right of lien or stoppage in transit, the seller gives notice to the buyer
of his intention to re-sell, and the buyer, does not payor tender the price within a
reasonable time.
If on a re-sale, there is a deficiency between the price due and amount realised, the re-seller
is entitled to recover it from the buyer. If there is a surplus, he can keep it. He will not have
these rights if he has not given any notice and he will have to pay the buyer any profits.

(d) Rights to withhold delivery: If the property in the goods has passed, the unpaid seller has right
as described above. If, however, the property has not passed, the unpaid seller has a right of
withholding.

Rights of an unpaid seller against the buyer (Sections 55 and 56)

An unpaid seller may sue the buyer for the price of the goods in case of breach of contract where
the property in the goods has passed to the buyer or he has wrongfully refused to pay the price
according to the terms of the contract.

The seller may sue the buyer even if the property in the goods has not passed where the price is
payable on a certain day.

Under Section 56, the seller may sue the buyer for damages or breach of contract where the buyer
wrongfully neglects or refuses to accept and pay for the goods. Thus unpaid sellers rights against
the buyer personally are:
(a) a suit for the price.
(b) a :suit for damages.

Suits for Breach of the Contract

(A). Seller’s Remedies

(B). Buyer’s Remedies

(A). Seller’s Remedies:

(i). A suit for the price by the seller against the buyer (section 55):

(a). where under a contract of sale the property in the goods has passed to the buyer and the buyer
wrongfully neglects or refuses to pay for the goods according to the term of the contract, the seller
may sue him for the price of the goods.

(b). where under a contract of sale the price is payable on a day certain irrespective of delivery and
the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price
although the property in the goods have not been appropriated to the contract.

(ii). A suit for damages by the seller against the buyer for non- acceptance (section 56): the
section lays down that when the buyer wrongfully neglects or refuses to accept or pay for the
goods, the seller may sue him for damages for non- acceptance.

Measure of Damages: The Act does not specifically provide for rules as regards the measure of
damages except stating that nothing in the Act shall affect the right of the seller or the buyer to
recover interest or special damages in any case were by law they are entitled to the same. The
inference is that the rules laid down in Section 73 of the Indian Contract Act will apply.

(iii). A suit for damages by the seller for anticipatory breach of contract (section 60): Where
either party to a contract of sale repudiates the contract before the date of
delivery, the other party may, either treat the contract as still subsisting and wait till the date of
delivery, or he may treat the contract as rescinded and sue for damages for the breach. In case the
contract is treated as still subsisting it would be for the benefit of both the parties and the party
who had originally repudiated will not be deprived of:
• his right of performance on the due date in spite of his prior repudiation or

• his rights to set up any defense for non-performance which might have actually arisen after
the date of the prior repudiation.

(B). Buyer’s Remedies:

(i). A suit for damages by the buyer against the seller for non- delivery of the goods (section
57) : where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer
may sue the seller for damages for non- delivery.

(ii). A suit for specific performance by the buyer against the seller (section 58): it provides a
remedy to the buyer and applies to all cases where goods are specific and ascertained, whether the
property therein has passed to the buyer or not, but unless the goods are specific or ascertained
there can be no decree of specific performance.

(iii). A suit by the buyer against the seller for breach of warranty; (section 59)

(iv). A suit for damages by the buyer for anticipatory breach of contract; (section 60)

Relevant Questions:
1. Explain the doctrine “namo dat quod non habet” and its exceptions.
2. What is rules regarding the delivery of goods?
3. Who is an Unpaid seller? Explain the rights of an unpaid seller against the goods?
4. What is remedies for the breach of contract of sale?